4. External scrutiny

4.1 What type of external scrutiny should be carried out?

Non-company charities may prepare receipts and payments accounts where their gross income in a financial year is less than £250,000.

Charities that have prepared accounts on a receipts and payments basis can subject their accounts to an independent examination unless:

• the governing document of the charity requires the accounts to be audited
  
  
• the charity trustees have decided to have the accounts audited
  
  
• any enactment requires the accounts to have been subject to an audit.

If any of these requirements apply the charity must subject the accounts to an audit by a registered auditor. (Refer to Section 3 of Part 3: Fully Accrued Accounts.

4.2 Independent examination

Independent examination is a less onerous form of external scrutiny than an audit and is available, under the 2006 Regulations, for charities with a gross income under £500,000. This threshold has been set at a level where the more detailed audit scrutiny is not deemed essential as an independent examination is deemed rigorous enough for this size of charity.

An independent examiner reviews the accounting records kept by the charity and compares them with the accounts prepared from those records. The examiner then prepares a report which provides the information required by the 2006 Regulations and provides an assurance as to whether or not anything has been found that needs to be brought to the attention of readers of the accounts.

The independent examination of receipts and payments accounts must be carried out by someone independent of the management and administration of the charity and who the trustees believe has the required skills and experience to carry out a competent examination of the accounts.

See section 4.1 in Part 1: The Overview for an explanation of who would be considered independent of the management and administration of the charity.

In deciding who might have the required skills charity trustees should take into consideration the degree of complexity of the charity’s accounts. The more complex the accounts the more experience the independent examiner will require. The types of people who charity trustees could consider as having the required skills and experience might include for example:

• full or associate members of the Association of Charity Independent Examiners
• qualified accountants currently in employment
• retired accountants
• other people familiar with financial matters who can demonstrate familiarity with the current reporting requirements for Scottish charities.  

4.3 Content of the independent examination report

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 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 receipts and payments accounts do not comply with Regulation 9
  
  
• 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:
  
  
• there has been any material expenditure or action not in accordance with the purposes of the charity
• that information to which the examiner is entitled has been withheld
• that there is a material inconsistency between the accounts and the annual report prepared by the charity trustees.

An example independent examiner’s report is shown as part of the example accounts within Section 6 of this Guide.

4.4 Audit

Where a charity has prepared accounts on the receipts and payments basis and an audit is required, the audit must be carried out by a registered auditor. An audit report of receipts and payments accounts will not comment on whether the accounts provide a true and fair view of the financial affairs of the charity. However, the audit report will say whether or not the statement of account properly presents the receipts and payments of the charity.

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 or partnership
  
  
• 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 Regulations 9(1), (2) and (3) dealing with receipts and payments accounts, and
  
  
• properly presents the receipts and payments of the charity for the financial year, and the statement of balances at the year end
  
  
• 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
  
  
• that information to which the auditor is 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 he or she feels necessary to enable them to form an opinion regarding the matters above.

Where an auditor appointed by charity trustees ceases to act as the auditor he or she must send to the charity trustees:

• a statement of any 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, 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.

4.5 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 may also to 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’.