To audit or not to audit – that is the question…

Posted on 26 July 2016 - Updated 20 January 2022

At the same time that the new financial reporting standards came into effect, there was also a change in assurance* requirements. The combination of these two has meant that some people are getting confused about what they have to do, and some people are experiencing more difficulty in finding a suitably qualified person to carry out their audit or review.

So let’s get some clarity to start with and explain what the rules** are:

1. Section 42C of the Charities Act 2005 sets out when a registered charity must have an audit or review. In a nutshell, charities with annual operating expenditure of greater than $550k in the prior two financial years must have a review, and charities with greater than $1.1m annual operating expenditure in the prior two financial years must have an audit. Audits and Reviews required by law must be carried out by a qualified auditor.
2. A charity’s own rules may also state that the charity’s accounts must be subject to a review or audit. A charity’s rules still must be followed even if the law does not require a review or audit.
3. Some funders require charities to have their accounts audited or reviewed in order to secure funding or fulfil accountability obligations.

We are in a process of change, and that means that we, as a sector,  are still figuring things out. For registered charities, part of this may mean having a think about what is required of you by law or other externally imposed obligations, compared to any obligations you have imposed on yourself. Then in areas where you have discretion,  you need to consider what the best option is for your charity?

Audits are really valuable because they provide a higher level of assurance, but this does make them more expensive. This is why the Charities Act 2005 only requires the largest entities to have audits. In order to properly carry out an audit, a practitioner has to comply with 36 International Standards on Auditing.  A review, on the other hand, only has one standard that must be complied with. Therefore the level of assurance gained from a review is rightly lower than an audit. Audits and reviews take skill, expertise and time to perform.

Many older rules documents specify the need for an audit, but this is not necessarily the best bang for buck for smaller charities. Contrary to popular belief, the main purpose of an audit is actually not to detect fraud. The main purpose is to express an opinion over the financial accounts of an organisation as to whether the accounts present a true and fair view of the organisation as a whole. It is up to the organisation itself to design internal procedures that would make it hard for fraud to be committed, although it is possible that an audit may pick up some fraud.

So this begs the question – does your charity really need an audit? If it is required by law, then yes you definitely do, but where the requirement is self-imposed, it might be worth investigating whether a review would satisfy the need for assurance just as well.

Additionally, some funders may just be interested to know that the money they have granted your organisation has been spent for the correct purpose. They may be satisfied with something more specific than an audit or review called “agreed upon procedures”. This is where an accounting practitioner would agree some detailed procedures they would carry out over certain transactions. For example, examining the payments made for a specific project to ensure that the money had been spent in accordance with its stated purposes. It may be worth having that conversation with your funders.

Another useful point to remember is that for Tier 3 and Tier 4 entities that do not have a statutory requirement to review or audit (but choose to anyway) there is the option to exclude the non-financial information from the engagement. Of course assurance over the non-financial information is better than no assurance, but in this period where we are all coming to grips with the new accounting standards, it is an option to consider until everyone is really comfortable with what they have to do.

As always, we are really interested to hear your feedback about experiences you have had in this area as the more we know, the more we can try to make things better for charities in New Zealand. Please call us on 0508 CHARITIES or e-mail us at info@charities.govt.nz

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