Does your charity need an independent examination — or an audit?

Every year, somewhere around the annual return, a treasurer asks the same question: do we actually need an audit, or will an independent examination do — or do we need anything at all? The answer is set by thresholds in the Charities Act 2011, and for most small and medium charities it is more forgiving than trustees expect. But the thresholds are only half the answer, and the other half is where charities get caught.

The thresholds for England and Wales

Working up the scale by gross income for the financial year:

• £25,000 or below — no external scrutiny is required by the Act. Trustees still need to prepare accounts and, if registered, report to the Charity Commission as required for their size.
• Above £25,000 and up to £1 million — external scrutiny is required, and an independent examination is normally sufficient.
• Above £250,000 — an examination is still available (up to £1m), but two things change: the accounts must be prepared on the accruals basis under the Charities SORP rather than receipts and payments, and the examiner must be a member of one of the professional bodies listed in the Act — which includes, among others, the chartered accountancy bodies and CIMA.
• Above £1 million income — a full audit by a registered auditor is required. An audit is also required at lower income where the charity's gross assets exceed £3.26 million and income exceeds £250,000.

So a charity with £40,000 income needs an examination but can choose an examiner for competence rather than qualification; a charity with £300,000 income needs a professionally qualified examiner and SORP-compliant accruals accounts; and a charity with £1.2 million income, or £400,000 income sitting on £4 million of assets, needs an audit, full stop.

Trap one: the governing document

The Act sets the floor, not the ceiling. If the charity's governing document says the accounts "shall be audited", that requirement can bind even where the statutory thresholds would permit an examination — older trust deeds and constitutions say exactly this, written in an era when "audit" was used loosely. Some such requirements can be resolved or amended, but that is a decision to take deliberately, not a clause to discover after the examination has been done. The same applies to conditions attached to funding: some grant agreements require audited accounts regardless of size. Check both before booking anyone.

Trap two: "independent" means independent

The examiner must have no connection with the trustees that could compromise — or appear to compromise — an impartial view: not a trustee, not the person who kept the books, not the treasurer's spouse. In small charities where everyone knows everyone, this is the requirement that quietly fails. An examination signed by someone entangled with the administration of the charity is not worth the fee, because it does not do the one thing scrutiny exists to do: give the reader assurance from outside.

What an examination actually is

It is a review, materially lighter than an audit: the examiner checks that accounting records were kept, that the accounts agree to those records, that they are prepared on the right basis, and considers whether anything unusual demands explanation — and then reports on that limited basis. It is not an opinion that the accounts are "true and fair", and it is priced accordingly. For most charities under the audit thresholds it is the proportionate choice, and the Charity Commission's guidance for examiners (CC32) sets out exactly what the examiner must do, in published Directions the examiner is required to follow.

The practical sequence for trustees

Once a year, before year end rather than after: establish gross income and gross assets for the year; check the governing document and any funder conditions for a stricter requirement; conclude which regime applies and minute the conclusion; and appoint someone appropriately qualified and genuinely independent in good time. Treasurers who do this in month eleven avoid the January scramble in which an examiner is sought, a deed is read properly for the first time, and an audit requirement nobody remembered surfaces three weeks before the filing deadline.

Thresholds and requirements stated here are for England and Wales and are reviewed from time to time — Scotland and Northern Ireland differ — so always confirm against current Charity Commission guidance for the year in question.