Understanding When Your Charity Needs an Independent Examination or an Audit: Thresholds and Legal Framework in England and Wales
This blog is specifically for charities in England & Wales.
If your charity is in Scotland click here and for charities in Northern Ireland click here
For charities in England and Wales, complying with financial reporting requirements is not just a matter of good governance but also a legal necessity. Whether your charity requires an Independent Examination or an Audit depends on your charity's income, gross assets, and the governing document. In this blog, we’ll break down the thresholds, explain the differences, and reference the legal framework that underpins your charity’s obligations.
Independent Examination or Audit: What’s the Difference?
- Independent Examination: A simpler review of a charity’s financial records by an independent person, providing limited assurance that the accounts are free from obvious errors or issues.
- Audit: A more thorough and detailed examination of your charity’s accounts conducted by a registered auditor. It provides a higher level of assurance to stakeholders and an opinion on the True and Fair View of the accounts.
When Is an Independent Examination Required?
- An Independent Examination is required if your charity’s gross income is more than £25,000 but does not meet the thresholds for a full audit.
- The person conducting the examination must be independent and, if your charity’s income is over £250,000, appropriately qualified (e.g., a member of a recognized accountancy body). The examination will focus on whether the accounts comply with accounting standards and charity law, using the Charity Commission’s 13 Directives.
When Is an Audit Required?
An audit is required if your charity:
1. Exceeds the statutory thresholds, which are:
- Gross income over £1 million, or
- Gross assets over £3.26 million.
2. Your governing document mandates an audit, regardless of income levels. Always check your governing document.
3. Funder agreements stipulate an audit is required – although check they really mean an audit and not just an Independent Examination (many people use the term audit for an external accountant looking at the figures).
4. Charity Commission intervention: The Commission may require an audit if there are regulatory concerns.
In these cases, the audit must be conducted by a registered auditor who is regulated under the Companies Act 2006.
Legal Framework
The requirements for Independent Examination and Audit are defined under the following statutes:
1. Charities Act 2011:
- Sets out the statutory thresholds for Independent Examinations and audits.
- Requires charities with gross income over £25,000 to have their accounts externally reviewed.
2. The Charities (Accounts and Reports) Regulations 2008:
- Details accounting and reporting standards for charities.
3. Charity Commission for England and Wales Guidance:
- Explains practical application and expectations for charity trustees, especially in CC15d ("Charity reporting and accounting: the essentials").
Additional Considerations
- Smaller Charities (Income under £25,000): No external scrutiny of accounts is required by law, but trustees must still maintain proper records and prepare accounts.
- Group Structures: If your charity is part of a group or umbrella organization, consolidated accounts may trigger audit requirements.
- Good Practice: Even if your charity doesn’t meet the legal thresholds, trustees may opt for an Independent Examination or Audit to enhance transparency and stakeholder confidence.
Conclusion
Determining whether your charity requires an Independent Examination or an Audit is critical for compliance and good governance. Trustees must stay informed of the legal thresholds and ensure timely action to meet their obligations, and make sure that the correct scrutiny is applied.
Ensuring compliance not only protects your charity but also builds trust with your beneficiaries, funders, and stakeholders.
For tailored advice and services for charities, reach out to us! We’re here to help you navigate financial scrutiny and focus on achieving your charitable goals.