3. External scrutiny

3.1 What type of external scrutiny should be carried out?

This depends on its gross income and net assets or whether or not the charity is also a company. See Part 1: The Overview to check the type of scrutiny to which a charity must subject its statement of account.

3.2 External scrutiny of fully accrued accounts for charities that are not companies

All charities must have their accounts externally scrutinised in either the form of an independent examination or an audit. 

Under charity law a charity preparing fully accrued accounts can have an Independent Examination where:

• gross income is under £500,000, and
• gross assets are £3,260,000 or less

Unless:

• the governing document of the charity requires the accounts to be audited, or
• the charity trustees have decided to have the accounts audited, or
• any enactment requires the accounts to be audited.

Where the thresholds are exceeded then an audit must be carried out by a registered auditor, or in the case of public bodies the Auditor General for Scotland or an auditor appointed by the Accounts Commission for Scotland. 

Where a charity prepares consolidated accounts as the income of the group (after consolidation adjustments) is £500,000 or more, then these consolidated accounts must be audited. 

Where the charity is a company then the requirements of the Companies Act 2006 also apply.  If the charitable company does not meet the conditions for audit exemption under company law and therefore requires an audit under the Companies Act 2006, an audit is required under both the 2006 Regulations and the Companies Act 2006.

For further information about the requirements of the Companies Act 2006 you should contact your accountant. 

3.3 External scrutiny of charitable companies

For charities which produce fully accrued accounts, the independent examination must be carried out by a member of one of the following professional bodies:

• The Institute of Chartered Accountants of Scotland
• The Institute of Chartered Accountants in England and Wales
• Chartered Accountants Ireland
• The Association of Chartered Certified Accountants
• The Association of Authorised Public Accountants
• The Association of Accounting Technicians
• The Association of International Accountants
• The Chartered Institute of Management Accountants
• The Institute of Chartered Secretaries and Administrators
• The Chartered Institute of Public Finance and Accountancy
• The Institute of Financial Accountants    
• a full member of The Association of Charity Independent Examiners
• the Auditor General for Scotland
• a person appointed by the Accounts Commission for Scotland.

See section 4 in Part 1: The Overview for guidance on deciding who to appoint as an independent examiner.

3.4 Independent examination

After completing the independent examination of a charity’s accounts the examiner must make a report to the charity trustees which:

• states the name and address of the independent examiner and the name of the charity concerned
  
  
• is signed and dated by the independent examiner and states any relevant professional qualifications they may have or of which professional body they are a member. The independent examiner must sign and date their report at the same time as or shortly after, but not before, the charity trustees approve the accounts
  
  
• specifies the financial year of the accounts to which the report relates
  
  
• specifies that the report is an examination carried out under section 44(1)(c) of the Charities and Trustee Investment (Scotland) Act 2005
  
  
• states whether or not anything has come to the attention of the independent examiner which gives them reasonable cause to believe that:
  
  
• proper accounting records have not been kept
• the accounts do not agree with the records
• the accounts do not comply with Regulation 8
  
  
• states whether or not the independent examiner believes there is anything that should be drawn to the attention of readers to help them understand the accounts
  
  
• states if any of the following matters have become apparent to the independent examiner:
  
  
• that there has been any material expenditure or action not in accordance with the purposes of the charity
• that information to which they are entitled has been withheld
• that there is a material difference between the accounts and the annual report prepared by the charity trustees.

Click here to see an example independent examiner’s report.

3.5 Audit

Where a charity has prepared accrued accounts and requires an audit, the audit must be carried out by a registered auditor or by the Auditor General for Scotland or by an auditor appointed by the Accounts Commission for Scotland following UK auditing standards.

The auditor must prepare a report on the accounts for the charity trustees that:

• states the name and address of the auditor and the name of the charity
• is signed by the auditor or someone authorised to sign on behalf of a company
• states that the auditor is a person who is eligible to act as an auditor in terms of section 1212 of the Companies Act 2006
• states the date of the report and specifies the financial year of the accounts to which the report relates
• specifies that it is a report carried out under section 44(1)(c) of the Charities and Trustee Investment (Scotland) Act 2005
• states whether, in the opinion of the auditor:
• the statement of account complies with Regulation 8 dealing with fully accrued accounts and
• gives a true and fair view of the financial affairs of the charity at the end of the financial year, and of the incoming resources and their application in that financial year
• contains a statement where the auditor has formed the opinion with regard to the following that:
• proper accounting records have not been kept
• the accounts do not agree with the records
• there is a material inconsistency between the accounts and the annual report prepared by the charity trustees
• information to which they are entitled has been withheld.

The statement must contain the grounds for forming any of the above opinions.

In preparing the audit report the auditor must carry out such investigations as are necessary to enable an audit opinion be formed.

Where an auditor appointed by charity trustees resigns he or she must send to the charity trustees:

• a statement of any circumstances connected with the auditor ceasing to hold that office that they feel should be brought to the attention of the charity trustees, or
  
  
• if the auditor considers there are no circumstances that need to be reported to the charity trustees, a statement that there are none.

The auditor must also send to OSCR a copy of any statement he or she has sent to the charity trustees containing circumstances connected with the auditor ceasing to hold that office that he or she feels should be brought to the attention of the charity trustees.

Further detailed guidance on audit requirements can be found in Practice Note 11 – The Audit of Charities in the United Kingdom, produced by the Financial Reporting Council.

3.6 Duty to report matters to OSCR

See section 4.3 of Part 1: The Overview for guidance on the independent examiners and auditors duty to report matters to OSCR under the 2005 Act.

More detail relating to this can be found within our guidance ‘Matters of Material Significance reportable to UK charity regulators’. 

In addition to the reportable matters set out above auditors and independent examiners are may report any other matter which may be of significance to us in exercising our functions.  Further information is available in our guidance – ‘Reporting of relevant matters of interest to UK charity regulators’.