What an Independent Examination Is and Why It Is Not an Audit

There is a settled way of talking about levels of external scrutiny on charity accounts. It is worth asking how much of it survives contact with the detail.

Two different jobs

An audit tests whether the financial statements give a true and fair view, using sampling, verification against evidence and assessment of internal controls. An independent examination is a narrower review checking that the accounts agree with the records and comply with the applicable framework. The examiner is generally not required to test whether the underlying records are themselves accurate, which is the crucial difference.

The wording of the report is the giveaway, since an examiner's report describes what was not done as explicitly as what was. Reading that paragraph takes thirty seconds and tells you how much weight the document can carry.

Which one applies

Most jurisdictions set thresholds, usually based on income and sometimes on assets, above which a full audit becomes mandatory. Below those thresholds a lighter examination is permitted, and many charities take it because an audit costs considerably more.

On the shop floor, the thresholds, the terminology and the qualifications required of an examiner differ substantially between countries and change periodically. Some funders require an audit regardless of size as a condition of a grant, which overrides the statutory position. A charity's governing document can also require an audit even where the law would not, which trustees sometimes forget.

What an audit does not prove

An audit is not a fraud investigation and is not designed to detect every misstatement, which is a point auditors state explicitly in their reports. It is a sampling exercise against materiality thresholds, so small irregularities can pass through an entirely clean audit.

Bought used, it says nothing at all about whether the money was spent well, only about whether the accounts represent what happened. Reading a clean audit opinion as a verdict on effectiveness is the most common misreading of the document. Its value is in the discipline it imposes on record keeping throughout the year rather than in the certificate at the end.

Reading the report itself

Look for whether the opinion is unqualified, qualified, or accompanied by any emphasis of matter drawing attention to something specific. A going concern paragraph is worth reading carefully, since it signals that the auditor considered whether the organisation can continue operating. Late filing is visible on most public registers and is a reasonable indicator of administrative capacity rather than of wrongdoing.

Repeated late filing across several years is a stronger signal and is one of the few things a regulator will act on routinely.

These are all visible from outside the organisation and take a few minutes to check.

The examiner's independence

Independence means no involvement in the charity's management or administration, which excludes trustees and staff from taking the role. Requirements about qualifications vary: some jurisdictions require professional membership above a certain income and allow a competent lay person below it. A friendly local accountant doing the examination free is common in small charities and is legitimate provided the independence test is met.

Problems arise where the person preparing the accounts also examines them, which defeats the purpose entirely. Trustees should confirm the appointment meets local requirements rather than assuming that any accountant will do.

Volunteers cost an organisation time to train, so short-term help is not always help.

What to do with all this as an outsider

Do not treat the absence of an audit as suspicious, since most charities are below the threshold and are complying correctly. Do treat a qualified opinion, a going concern paragraph or years of late filing as worth asking about. Remember that scrutiny confirms the accounts describe what happened and says nothing about whether it was worth doing.

Over a funding cycle, for questions about effectiveness, the impact reporting and the trustees' narrative are the relevant documents rather than the auditor's page. Use the audit report for what it covers and stop expecting it to answer questions it never addressed.

The takeaway

Read the paragraph saying what the examiner did not do; it defines what the document proves.

Give the boring thing they asked for rather than the interesting thing you have.