Understanding the audit threshold for charities

The financial landscape of the charity sector can sometimes be intricate and complicated to navigate, particularly when it comes to understanding the audit threshold.

The audit threshold determines whether a charity requires an audit or a simpler form of examination, such as an independent examination.

The current charity threshold

The audit threshold for charities in England and Wales is an income exceeding £1 million, or an income over £250,000 alongside total assets exceeding £3.26m.

Charities with an income of more than £25,000, meanwhile, must have their accounts reported on by someone external. This doesn’t have to be an audit, however – it could be through an independent examination.

Audit vs independent examination

An audit provides stakeholders, including donors and grant funders, with assurance regarding your charity’s financial integrity and management, which can influence funding and public trust.

On the other hand, for smaller charities not exceeding the threshold, a less intensive examination is more cost-effective and suitable.

What to expect from an audit

An audit delves deep into financial records, internal controls and governance processes, rendering an accurate and unbiased view of the charity’s financial health.

An auditor is required to give their opinion on whether your financial statements give a ‘true and fair view’ of your finances, and whether they comply with proper accounting practice and law.

While it can be time-consuming and may incur additional costs, the benefits of enhanced credibility and assurance can outweigh the inconveniences, especially for charities seeking substantial funding or partnerships.

What to expect from an independent examination

An independent examination is a simpler, less formal, and typically less costly alternative to a full audit.

This process involves reviewing financial statements and conducting inquiries to ascertain whether records are accurate and complete but does not necessitate the same depth of investigation as an audit.

An independent examiner will provide a statement detailing whether you have kept proper accounting records, and whether your financial statements comply with accounting requirements.

What kind of examination does your charity need?

This decision will be different for every charity, but a number of factors come into play.

The role of trustees

Trustees play a pivotal role in making astute decisions about whether to undergo an audit or an independent examination, even when your income falls below the threshold.

This decision should reflect the charity’s commitment to transparency, the demands of its stakeholders, and the necessity to maintain public confidence.

Seeking professional guidance

Determining the appropriate level of scrutiny for your charity’s accounts can be difficult.

Seeking advice from accounting professionals who specialise in charity finance can provide clarity and help navigate the regulatory environment, ensuring compliance and fostering sound financial health.

Impact on funding and support

By understanding and adhering to the audit threshold, charities can secure and maintain the support of donors, beneficiaries, and the wider community.

Demonstrating financial transparency, through either an audit or an independent examination, ensures the longevity of charitable organisations and their ability to make a meaningful impact.

Keeping abreast of changes

It’s paramount for charities to remain informed about any modifications to the audit threshold.

Regular consultation with professional advisors and keeping abreast of Charity Commission updates will equip charities with the knowledge to make informed decisions regarding their financial scrutiny.

Audit as a tool for improvement

While the concept of an audit may seem daunting, it should be viewed as a constructive tool. It can illuminate areas for improvement, enhance organisational effectiveness, and foster a culture of continuous improvement, thereby contributing to the overall success and sustainability of the charity.

Final thoughts

The audit threshold is an essential consideration for all charities, influencing the level of financial examination required.

While reaching the threshold requires an audit, charities below this limit may still opt to undergo one or choose a simpler independent examination, based on their individual needs and stakeholder expectations.

Regardless of the approach, maintaining financial transparency and integrity is crucial for sustaining public trust and support in the charitable sector.

Regular consultation with professionals and adherence to the latest regulatory updates are wise steps in navigating this aspect of charity governance effectively.

Remember, it’s imperative to consult with a qualified professional or refer to the latest Charity Commission guidelines for the most accurate and current information on audit thresholds and compliance requirements.

Get in touch with us to find out how our management accounting services can steer your charity in the right direction.

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