The Auditing Practices Board (APB) issued its revised Practice Note (PN) 11 in March which supersedes the December 2008 guidance. Amongst other things, the new guidance takes account of the new International Auditing Standards (ISAs) issued in October 2009 and the Charities Accounts (Scotland) Amendment Regulations 2010.

One of the main changes is in the areas of related party transactions. Of particular interest to charities is the level of controls that auditors will expect to find in relation to related party transactions. Controls which management might put in place, as suggested in PN11, include:-

• A register of interests being maintained by the charity, which clearly sets out the people and organisations connected with each trustee;
• Clear procedures being in place for trustees to declare any potential conflict during the relevant part of a trustee meeting, and for trustees to withdraw from the meeting while the relevant topic is being discussed;
• Procedures to ensure that all transactions and payments to a related party can only be authorised by the Board of Trustees; and
• Procedures to ensure annual declarations are being obtained from all trustees where they set out all related party transactions of which they are aware.

One area which has not changed is the guidance on auditing the appropriateness of the going concern concept, however this is an area in which auditors need to consider in more detail. Auditors need to focus on the level of unrestricted funds held by the charity and consider their liquidity.

The level of free reserves reported in a trustees’ report is one of the best measures of measuring a charity’s ability to remain a going concern. If the free reserves figure is negative or very small then the charity must manage its working capital very carefully to ensure that it remains solvent. It should be noted that it is illegal for the trustees to utilise the charity’s restricted reserves to bolster its free reserves in the hope that finances will improve.