Audits can feel like an overwhelming process for charities, especially when you’re faced with a barrage of technical jargon. But fear not! This guide is here to demystify common audit terms and help you navigate the process with confidence.
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Audit Opinion
What it means: The conclusion reached by the auditor giving reasonable assurance about whether your financial statements provide a true and fair view of your charity’s financial performance and position.
In plain English: Think of it as a report card for your charity’s accounts, stating whether everything looks accurate and above board based on the work the auditor has performed. An audit can never give absolute assurance, but it does give a high level of comfort.
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Materiality
What it means: A threshold used by auditors to determine the significance of financial misstatements. If something is “material,” it’s big enough to influence decisions made by those reading the accounts.
In plain English: It’s the line between what matters and what doesn’t when it comes to errors in your financial statements.
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Going Concern
What it means: An assessment of whether your charity is financially stable and able to continue its operations for ‘the foreseeable future’ (this is a period of no less than 12 months from the date of approval of the financial statements).
In plain English: It’s a check to see if your charity is likely to stay up and running in the near future.
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Internal Controls
What it means: Processes and procedures put in place to ensure your charity’s financial activities are accurate and secure.
In plain English: These are the safety nets and critical checks and balances that help catch mistakes and prevent fraud.
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Unrestricted and Restricted Funds
What it means:
- Unrestricted funds can be used for any purpose that furthers your charity’s goals.
- Restricted funds must be used for specific purposes as determined by donors or funders.
In plain English:
- Unrestricted funds = money you can spend as needed.
- Restricted funds = money with conditions attached.
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Accruals Basis
What it means: An accounting method where income and expenses are recorded when they are earned or incurred, not when cash is received or paid.
In plain English: It’s about matching income and expenses to the time they happen, not when the money actually changes hands.
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Independent Examination
What it means: An alternative to an audit for smaller charities, where someone reviews the accounts to ensure they comply with relevant laws and regulations.
In plain English: For smaller charities, this is a lighter version of an audit. Whereas an audit gives high levels of assurance that the accounts are materially correct, an independent examination gives a lower level assurance and the report says that they do not look incorrect. Far less work is required to reach this opinion, and it can be a more cost-effective approach for smaller charities (where income is below £1m).
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Trustees’ Annual Report (TAR)
What it means: A report prepared by the trustees that explains what the charity has done during the year, its achievements, and its financial performance.
In plain English: It’s your charity’s yearly storybook detailing your accomplishments and how you’ve managed your finances.
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SORP (Statement of Recommended Practice)
What it means: Guidelines that set out how charities should prepare their accounts and annual reports.
In plain English: These are the charity accounting rulebooks.
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Audit Trail
What it means: A clear and documented record of financial transactions, from start to finish.
In plain English: It’s the breadcrumb trail that shows where your money came from and where it went.
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Related Party Transactions
What it means: Transactions between the charity and individuals or organisations closely connected to it, such as trustees or their family members.
In plain English: It’s any financial dealing with people or entities that have a close link to your charity.
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Substantive Testing
What it means: Detailed checks performed by auditors to verify the accuracy of specific financial transactions or balances.
In plain English: It’s the auditor double-checking your numbers and underlying transactions.
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Fraud Risk Assessment
What it means: An evaluation of the likelihood that fraud could occur within your charity.
In plain English: It’s about spotting areas where things could go wrong and ensuring safeguards are in place.
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Audit Adjustments
What it means: Changes made to the financial statements based on findings during the audit.
In plain English: It’s the tweaks your auditor makes to fix any errors they find.
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Letter of Representation
What it means: A letter from the charity’s trustees to the auditor confirming that the financial statements are accurate and complete.
In plain English: It’s the trustees’ written promise that everything in the accounts is correct to the best of their knowledge.
By breaking down these terms, we hope to make the audit process less intimidating and more transparent for charities. If you’re ever unsure, don’t hesitate to ask your audit contact for clarification—we are happy to help in any way we can.
