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(b) Inherent risks in charity
Area of inherent risk
Income is from voluntary donations only. There is a risk that donations will fall, especially where donors’ own income is limited by the ‘credit crunch’ etc.
Completeness of income – where there are no controls to ensure income is complete for example sales invoices are not raised to obtain donations and donations could be stolen by staff.
Funds can only be spent in accordance with the aims of the charity. There is a risk that funds are spent outside the aims of the charity.
Taxation rules relevant to charities. There is a risk that the rules will be broken due to lack of correct analysis of income/expenditure.
Requirement to report expenditure in accordance with the constitution – administration expenditure can be no more than 10% of total income. Risks here include income being overstated to allow expenditure to be overstated.
Donations to charity for specific activities for example provision of sports equipment. There is a risk that donations are not spent in accordance with donors’ instructions.
Effect on audit approach
It is difficult to estimate that income in the future will be sufficient to meet the expenditure of the charity.
Audit of the going concern concept (as in ensuring that the charity can still operate) will therefore be quite difficult.
Audit tests are unlikely to be effective to meet the assertion of completeness. The audit report may need to be modified and qualified to explain the lack of evidence stating that completeness of income cannot be confirmed.
Careful review of expenditure will be necessary to ensure that expenditure is not ‘ultra vires’ the objectives of the charity.
The auditor will need to review the constitution of the EuKaRe charity carefully in this respect.
The auditor will need to ensure that staff familiar with the taxation rules affecting the charity are on the audit team.
The trustees may attempt to hide ‘excessive’ expenditure on administration under other expense headings.
As the auditor has to report on the accuracy of income and expenditure then audit procedures must focus on the accuracy of recording of expenditure.
Documentation for any donation will need to be obtained and then expenditure agreed to the terms of the documentation. Any discrepancies will have to be reported to management.