ACCA F8 1 AUDIT AND ASSURANCE

Not For Profit Making Organisations Introduction

Examples of not-for-profit organisations include charities, clubs and societies. Their primary objective is not to generate profits. Such organisations may fall within the scope of statutory audit if the entities concerned are limited liability companies. Organisations not incorporated may require an assurance engagement due to the requirements of regulatory or governing bodies.

Planning the audit

The planning procedures undertaken for not-for-profit organisations will differ very little from those for profit making organisations. However, the auditor should have specific regard to any laws, regulations or guidelines imposed on the entity by any regulatory body. The scope of the auditor's work will be detailed in the engagement letter.

Risk assessment
The auditor should, during the planning stage, fully assess the risks associated with the not-for- profit organisation. INHERENT RISK Key factors to consider include: o The complexity and extent of regulation o The significance of donations and cash receipts o Restrictions imposed by the objectives and powers given by the entitys governing documents o The sensitivity of certain key statistics such as proportion of resources used in administration o The need to maintain adequate resources whilst avoiding the build up of resources which could appear excessive

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CONTROL RISK Key factors to consider include: Competence, training and qualification of paid staff and volunteers Segregation of duties Reliability of accounting systems / computer systems Controls over compliance with laws and regulations Power of trustees

Audit evidence
When designing substantive procedures for not-for-profit organisations, the auditor should give special attention to the possibility of: Understatement of income, including gifts in kind, cash donations and legacies Incorrect accounting treatment of lifetime subscriptions Overstatement of cash grants or expenses Misanalysis or misuse of funds Misstatement or omission of assets including donated properties Misallocation of expenses to disguise excessive administration expenditure

Reporting
For incorporated not-for-profit organisations, the reporting requirements of ISA 700 the independent auditor's report on a complete set of general purpose financial statements apply. Additionally, the reporting requirements of the governing body will need to be encompassed in the auditor's report. For organisations not incorporated under statute, the auditor or review report will be determined in accordance with the terms of appointment detailed in the letter of engagement.

Example 1
'Save the Accountants' is a charitable foundation set up to provide financial assistance to accountants who have fallen on hard times. Its principal sources of income are: Cash donations collected on the high streets of major towns Regular donations by the 'Big 4' accountancy firms Annual donations by wealthy individuals. Required What audit procedures would you do to test the completeness of income?

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Answer
Discuss procedures for cash collection with management and assess risk of fraud, loss, robbery or error Discuss selection criteria for collectors and collection procedures with management Shadow the cash collection, recording and banking process Follow through a sample of cash received control lists to cash records and bankings made Prepare a reconciliation of total cash received to income Obtain and compare analysis of major/regular contributions with previous year Send circularisation letters to confirm material amounts donated by Big 4 and wealthy individuals Perform an analytical review of cash donations per month vs previous year taking into account factors such as number of collectors and weather Circularise tax authorities to confirm contributions made where tax deductions have been claimed.