How to conduct a financial audit

Conducting a financial audit doesn’t lay squarely in the hands of an auditor. Charity finance managers have a big role to play.  By working with the investigator, they ensure that the audit confirms the strength of operations. The benefits include better transparency and control.

 

Here’s our step-by-step guide.

 

 

Check whether you need to perform one

 

According to the UK Government, you may not be required to do a financial audit. Only charities with an annual income over £25,000 need one produced by a third party (usually an accountancy firm).

 

For an independent audit, the government says that you can choose between a light-touch report or a more in-depth investigation. The latter produces an audit opinion. If income is above £1 million per annum, the government requires an independent audit.

 

Irrespective of legal obligations, it is important to assess whether finances and processes are up to scratch.

 

 

Define responsibilities

 

While trustees are ultimately responsible for the finances, they might not manage the day-to-day activities. Delegating who is doing what, including tasks ownership, will ensure that the audit goes smoothly.

 

 

Choosing an auditor or examiner

 

Working with an independent accountant or firm could be the start of a new partnership. Specialist accountancy firms provide services for both audits and examinations.

 

Crowe UK and Price Bailey are some of the larger firms providing services. For smaller charities, check out Charity Accountant – they do independent examinations.

 

 

Preparing for the audit

 

External accountants will need access to your policies, financial systems, results, and financial information. For large and complex projects, a full-time data room is useful. Companies like Intralinks, Sterling VDR, and Data Room provide cloud-based hosting for files.

 

The rooms are managed by the charity. Project leaders can ‘tier’ virtual guests and allow access to certain files but not others.

 

Our top tip here is to be wary of using free hosting services – you’ll need to upload financial and other sensitive data, so opt for services which have added security.

 

 

Accounting for the accounts

 

The meat of the matter is around whether there is a paper trail or evidence to support how the accounts are prepared. The job of the examiner is to investigate what’s there, what’s missing, and what can be improved.

 

Resource Centre, a digital repository for community groups, offers useful concepts around the process. They say: “The duty of the independent examiner is to give what is called ‘negative assurance’. After looking at the evidence the examiner reports whether or not certain matters ‘have come to my attention’.”

 

By going through the audit, charities gain a better understanding of how they are complying with financial standards. 

 

 

Scrutinise processes

 

Accounts are not the only items that independent auditors assess. Policies and processes are also part of an auditor’s scope. Graydon, a digital storage specialist, presses the point. They suggest preparing for questions like: “Which internal controls are currently in place to guard against financial risk? Where are the weak points, and how can these be dealt with?”

 

 

Preventing and dealing with fraud

 

Financial fraud prevention is one of the top policies and processes that auditors like to review. This translates into how charities can detect fraud and what procedures are in place. Fraud can come from employees, third parties, and from perpetrators using digital malware.

 

In our series around online fraud, we look at what charity finance managers can do to protect operations. These strategies are of interest for auditors to ensure that prevention is in place.

 

 

Understanding the results

 

An authority on the subject, ICAEW serves up the things to look for. The report is generally divided into sections, with one for Opinions and others for reporting on exceptions.

 

The Opinion statement refers to the financial analysis, with the auditor confirming that they are prepared according to certain accepted frameworks.

 

Exception reports detail what doesn’t make sense to the investigator. Anything in here is a big red flag. These sections could be around inconsistent financial information and/or poor record keeping.

 

To stave off any potential problems, work with the auditor to ensure that if they do see issues, that you have time to rectify before the audit report is finalised.