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Audit of Not-for-Profit

Entities October 2021

Presenter – Richard CollinsRichard Collins has been involved in auditing since 1970 and continued with this discipline over his professional life.

During this period of time he has had extensive experience in auditing of a variety of entities including Listed and Non listed entities, Associations, Sporting groups, Schools and Aboriginal Organisations .

Since 1984 his audit experiences have focused on the not-for profit entities.

Copyright

© 2021 – Institute of Public Accountants. Apart from any fair dealing for the purposes of private study, research or as permitted under the Copyright Act, no part of this handout material may be reproduced or copied in any form or by any means without the written permission of the Institute of Public Accountants.

Disclaimer

The contents of this paper are for general information only. They are not intended as professional advice, for this you should consult a suitably qualified accountant or other professional. The Institute of Public Accountants expressly disclaims all liability for any loss or damage arising from reliance upon any information in this paper.

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Covered Part 1▪ Common issues in NFP audits

▪ Australian Professional Ethical Standards

▪ Acts & Regulations

▪ What’s involved in an audit?

▪ Documentation and Communication

▪ Efficiency / Compliance / Risk mix❖Independence❖APES 320 Quality Control❖Accounting standards❖Auditing standards

▪ Understanding of the Business

▪ Terms of Engagement

▪ Audit Plan

The audit of a small entity is not necessarily a small audit

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Common features of small entities?

▪ “Ownership” and management linked to small number of people.

▪ Operations are not complex - few sources of revenue.

▪ Lack of formality - procedures and accounting records.

▪ Possibly limited financial / accounting expertise.

▪ Reporting requirements not understood.

▪ Audit not understood.

What is the definition of a Assurance Engagement?Assurance engagement means an engagement in which an assurance practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users, other than the responsible party, about the outcome of the evaluation or measurement of a subject matter against criteria.

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What is the definition of a Assurance Practitioner?

Assurance practitioner means an individual, firm, or other organisation, whether in public practice, industry and commerce, or the public sector conducting assurance engagements, or related services engagements (including engagements to perform agreed-upon procedures).

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Audit Review

▪ Clients: Are accounting records adequate?

▪ Is integrity questionable?

❖Communication with previous auditor.

❖Opening Balances.

▪ Auditors Requirements.

❖Legal, constitution, auditing standards.

▪ Is there independence?

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Non Audit Services

▪ Maintenance of records.

▪ Preparation of financial statements, cash flows and management information.

▪ Advice on transactions (taxation, planning, accounting policy).

▪ Computer systems advice.

▪ Governance (e.g. constitution, meetings).

▪ Investment decisions.

▪ Recruitment, training and knowledge.

Types of NFP’s to be audited

▪ Clubs and Associations.

▪ Kindergartens.

▪ Church Entities.

▪ Indigenous and Torres Island Entities.

▪ Grant Acquittal Statements.

▪ Unincorporated Organization.

▪ Companies Limited by Guarantee.

▪ Co-operatives.

▪ Membership-based Entities.

▪ Trusts.

▪ Trust Accounts.

Private Ancillary Funds

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APES

The Accounting Professional Ethical Standards Board.

APES 110 Code Prohibitions Applicable to Auditors for all Audit and Review Engagements.

August 2020.

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APES 110

▪ Revision effective 1 July 2014 – Code of Ethics for Professional Accountants 2013.

▪ Revision to incorporated NOCLAR and NAS amendments effective 1 January 2018 – Code of Ethics for Professional Accountants 2013.

APES 110 - Code of ethics for professional accountants (Including independence standards).

▪ Issue Date was Nov 2018, effective 1 January 2020 - which supersedes the previous standards.

▪ Amended APES 110 September 2020 effective July 2021

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Strictly Prohibited Services

▪ Assuming management responsibility for a client. To avoid assuming management responsibility when providing any non- assurance service, the firm must be satisfied that client management makes all judgements and decisions that are the proper responsibility of management.

▪ Accounting and Bookkeeping services, including preparing accounting records and financial statements subject to limited exceptions.

▪ Serving as General Council.

▪ Performing Negotiations for a client as part of a recruiting service.

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Strictly Prohibited Services (Cont.)

▪ Recruiting services relating to positions as director or officer, or for a senior management position that can exert significant influence over accounting records or the financial statements.

▪ Promoting, dealing in or underwriting a client’s shares.

▪ Compensating or evaluating a key audit partner based on that partner’s success in selling non-assurance services to their audit client.

▪ Serving as a company secretary.

▪ Managing the administration of a insolvent Client.

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▪ Tax planning or other tax advisory services where the effectiveness of the advice requires a particular accounting treatment or presentation in the financial statements and the audit team has reasonable doubts as to its appropriateness.

▪ Acting as an advocate for a client in resolution of tax disputes before a public tribunal or court.

▪ Acting as an advocate for a client in resolving a dispute or litigation.

▪ Corporate finance advisory services where the effectiveness of the advice requires a particular accounting treatment or presentation in the financial statements and the audit team has reasonable doubts as to its appropriateness.

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Services Prohibited based on Materiality

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Services Prohibited - Public Interest Entities Audit Clients

▪ Valuation Services.

▪ Litigation support services involving estimating damages or other amounts that affect the financial statements.

▪ Calculating current and deferred tax liabilities (or assets).

▪ Internal audit services relating to a significant part of internal controls over the financial reporting, financial accounting systems or amounts/disclosures in the financial statements.

▪ Designing or implementing IT systems that are significant part of internal control over financial reporting or that generate information significant to accounting records or financial statements.

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APES

APES 305

▪ Terms of Engagement. Effective 1 January 2016.

▪ Revised in 2019, becomes. Effective 1 January 2020.

▪ Revised in December 2020. Effective 1 July 2021

APES 320

▪ Quality Control for Firms. Effective 1 April 2016.

▪ Revised in 2019. Effective 1 January 2020.

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Standard on Quality Control

Firm Level

Engagement Level

Policies and Procedures

Inspection

Control and Follow-up

File File File File

Understanding the Business

▪ Industry Classification.

▪ Those in Charge of Governance.

▪ Laws and Regulations.

▪ Membership.

▪ Operations.

▪ Employees.

▪ Locations.

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Legal Structures

There are several types of legal structures used by charities with different obligations that apply to each type.

The charities legal structure affects things, such as:

▪ Its reporting and governance requirements to the government agency that incorporated (registered) it.

▪ Its ability to operate outside the state it is register in without further registration, or

▪ Its eligibility for certain tax concessions.

The types listed here are examples for the most common legal structures, but there are others, such as trusts and unincorporated associations.

Laws & Regulations.

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Commonwealth Legislation

▪ Corporations Act 2001.

▪ Australian Charities and Not-for-Profits Commission Act 2012.

▪ Australian Charities and Not-for-Profits Commission Regulations 2013.

▪ A New tax System (Goods and Services Tax) Act 1999.

▪ Fringe Benefits Assessment Tax Act 1986.

▪ Superannuation Guarantee (Administration) Act 2014.

▪ Corporations (Aboriginal and Torres Strait Islander) Act 2006.

State and Territory Acts and Regulations

New South Wales❖Associations Incorporation Act 2009 No 7.

❖Associations Incorporation Regulations 2016.

❖Co-Operatives (Adoption of National Law) Act 2012 No 29.

Queensland❖Associations Incorporation Act 1981.

❖Association Incorporation Regulation 1999.

❖Associations Incorporation and Other Legislation Amendment Act 2020.

❖Co-Operatives National Law Act 2020

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State and Territory Acts and Regulations

Tasmania❖Associations Incorporation Act 1964.

❖Associations Incorporation (Model Rules) Regulation 2017.

❖Co-Operatives National Law (Tasmania) Act 2015.

Victoria❖Association Incorporation Reform Act 2012 (VIC).

❖Association Incorporation Reform Regulations 2012 No 128.

❖Co-Operatives National Law (CNL).

State and Territory Acts and Regulations

South Australia❖Associations Incorporation Act 1985 (SA).❖Associations Incorporation Regulations 2008.❖Co-Operatives National Law (South Australia) Act 2013.

Western Australia❖Associations Incorporation Act 2015.❖Associations Incorporation Act 2016 (WA).❖Co-Operatives Act 2009 (WA).❖Co-Operatives Regulations 2010.❖Co-Operatives National Law (CNL).

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State and Territory Acts and Regulations

Australian Capital Territory❖Association Incorporation Act 1991 – Republication No 34.

Northern Territory❖Associations Act 2003 (NT).

❖Associations Regulations 2004 (NT).

❖Associations Regulations 2003 (NT).

❖The Education Act 2015 (NT).

Laws and Regulations

▪Other State Legislation

▪Payroll Tax Acts

▪ Land Tax

▪Fringe Benefits Tax

▪Superannuation Guarantee

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List of Regulators that may affect Charities and NFP EntitiesCommonwealth:▪ Legal structure (incorporation):

❖Australian Securities and Investments Commission (ASIC).❖Office of the Register of Indigenous Corporations (ORIC)

regulates, Aboriginal and Torres Strait Islander corporations.

▪ Fundraising:❖Australian Securities and Investments Commission (ASIC)

regulates, companies seeking funds from the public and requires fundraising disclosure documents.

❖Australian Competition and Consumer Commission (ACCC) regulates, on consumer law for example, misleading and deceptive conduct.

List of Regulators that may affect Charities and NFP EntitiesCommonwealth (Cont).▪ Tax Concessions

❖Australian Taxation Office (ATO) for all charity tax concessions and other NFP benefits and rebates, as well as all other Commonwealth (including income, business and GST) tax queries.

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ASIC, ORIC and Other RegulationsObligations to other Government Regulators.

▪ If the Charity is registered with ACNC, it has ongoing obligations to the ACNC to maintain it’s registration.

▪ In Addition, may also have obligations to other Commonwealth, state, or local government agencies due to benefits received, their legal structure, how they fundraise, or their specific sector.

Tax Concessions, exemptions and other benefits.Commonwealth Taxes

The Australian Taxation Office (ATO) is responsible for deciding eligibility for Commonwealth charity tax benefits, Charities may be eligible for tax benefits including:

❖Income tax exemption and franking credits.

❖Goods and services tax (FBT) rebates and exemptions, and

❖Deductible gift recipients (DGR) status.

The ATO decided which concession and benefits a charity is eligible to receive.

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Tax Concessions, exemptions and other benefits (Cont.)Common Reporting Standard (CRS)

▪ The CRS is the Single global standard for the collection, reporting and exchange of financial account information on foreign tax residents, and is designed to reduce tax evasion.

▪ The Standard affects some charities.

▪ The ATO provides information to selected overseas tax authorities, and in exchange will receive financial account information on Australian residents from those overseas tax authorities.

Tax Concessions, exemptions and other benefits (Cont.)

State/Territory Taxes

▪ Charities may be eligible to receive exemptions from taxes collected by state and territory government such as payroll tax, land tax and stamp duty.

Local Government Concession

▪ Some local government authorities may offer concessions to charities. For more information, contact the local government authority in the areas where the charity operates.

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Tax Concessions, Exemptions and Other Benefits (Cont.)Companies

▪ Charities incorporated as companies, registered Australian bodies and foreign companies are registered under the Corporations Act 2001 (Cth) and are regulated by the Australian Securities and Investment Commission (ASIC).

Co-operatives

▪ Some charities are incorporated using legal structure of ‘co-operative’ and are regulated by state and territory governments.

▪ A Co-operative is a type of organisation that is owned, controlled and used by its members.

▪ There are different kinds of co-operative.

Tax Concessions, Exemptions and Other Benefits (Cont.)Incorporated associations

▪ Most Charities are incorporated associations and are regulated by state and territory governments.

▪ Incorporation is a voluntary, simple and inexpensive means of establishing a legal entity.

▪ It is particularly suitable from small, community- based organisations.

▪ These charities have ‘Inc’ or ‘Incorporated’ at the end of the entities name.

▪ Incorporated associations may have obligations to State/territory government regulators, such as providing annual reports, or keeping financial records.

▪ Charities must meets these obligations.

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Tax Concessions, Exemptions and Other Benefits (Cont.)Indigenous Corporations

▪ Charities registered as Aboriginal and Torres Strait Islander Corporations are regulated by the Office of the Registrar of Indigenous Corporations (ORIC).

▪ Aboriginal and Torres Strait Islander corporations are a particular type of corporation registered according to the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth)(CATSI Act).

▪ These corporations are controlled by Aboriginal and Torres Strait Islander people.

▪ The ACNC and ORIC are working together to try and reduce the number of times Indigenous Corporations must report.

▪ Annual reports lodged with ORIC will satisfy your corporations reporting obligations to the ACNC.

Tax Concessions, exemptions and other benefits (Cont.)Trusts

▪ Many different types of Trusts.

▪ Only trusts supporting a charitable purpose that meet legal meaning of charity and our requirements for registration can register as charities with the ACNC.

Unincorporated Associations

▪ An unincorporated association is a type of organisation structure for a charity. Unlike an incorporated structure, an unincorporated association is not a separate legal entity from its members.

▪ It is a simply the group itself, of people who have agreed to come together to pursue a common purpose, such as to establish a faith community.

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Tax Concessions, exemptions and other benefits (Cont.)

Fundraising

▪ Charities that undertake activities to raise money (fundraising) may be required to meet obligations (such as applying for a permit or license to fundraise) to a fundraising regulator in the state or territory in which they operate.

▪ Charities that conduct fundraising through gaming activities (such as lotteries or raffles) may have obligations to the gaming regulator in the state or territory they are conducting the activity.

▪ State and territory regulators are working together to harmonise reporting requirements for charities.

Tax Concessions, exemptions and other benefits (Cont.)

Other laws and obligations

▪ There are other laws that affect the operation of charities covering areas such as employment, trading, occupational health and safety, workers compensation and anti-discrimination. For example, Charities are required to meet obligations under work health and safety legislation and worker’s compensation legislation in very state and territory. It is important to note that your obligations may vary between states and territories, if your charity works in more than one.

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Tax Concessions, exemptions and other benefits (Cont.)Other laws and obligations

▪ Some charities may have responsibilities that are specific to their area of work. For example, charities that provide aged care services may need to meet other obligations or hold accreditation as part of working in this field, and charities that work with young people may require their staff and volunteers to undertake a working with children check or police check.

▪ Failing to comply with relevant laws in your state or territory can have serious consequences for the charity.

ACNC

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Financial report requirements for Incorporated associations

There may be charities that currently do not meet these standards. To support these charities, the ACNC has established a two-year transitional period that will help them work towards meeting requirements.

Financial Statements ▪ Profit and Loss Statement.

▪ Balance Sheet.

▪ Notes to the Financials.

▪ Comparison against previous year figures.

▪ A signed committee statement or separate report of the management committee.

▪ Audit Opinion.

▪ Although not specified in the Act, a Statement Regarding: Independence of Auditor.

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Separate Report of the Management CommitteeMust submit a signed report on all of the following for the financial year:

▪ Management committee members.

▪ Principal Activities of the association and any significant change in the nature of those activities.

▪ Net profit and loss.

ACNC – Auditor Qualifications

▪ Small charity optional to submit finance report, No requirement for review on audit.

▪ Medium charities annual revenue more than $250,000 but less than $1 Million are required to submit either reviewed or auditors financial Statements.

▪ Large Charities annual revenue more than $1 Million must submit auditors financial reports.

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ACNC Act Review:

▪ Registered Company Auditors.

▪ Audit Firm.

▪ Authorised Audit Company.

▪ Current Member of relevant professional body CPA Australian (CPA OR CPAA).

▪ Institute of Public Accountants (IPA).

ACNC – Report 2019 - 2020No of Registered Charities 58,844

Australian Charities Report 2019 issued▪ 2,568 charities registered

▪ 5,746 registration applications processed, 95% were determined in 15 business days

▪ 136 registration applications were refused

▪ 79 investigations resulting in a range of outcomes

▪ 18 charities registration were revoked due to serious and ongoing non-compliance

Key Findings:▪ Last year was particularly challenging for Australian charities from responding to the

bushfires to adapting operations in response to covid-19 Pandemic

▪ Many welfare charities experienced an increase in demand and smaller charities were hampered by the loss of volunteers, many in the higher risk category

▪ No grants were awarded in the 2019-20 financial year

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ACNC

Is the entity using the following documents provided by the ACNC:

▪ Governance Standard 1: Not-For-Profit and Working Towards Charitable Purpose.

❖Requires charities to demonstrate:

❖Set up a not-for-profit with a charitable purpose;

❖Run as a not-for-profit and work towards that charitable purpose.

ACNC

• Governance Standard 2: Accountability to Members;

• Governance Standard 3: Compliance with Australian Laws;

• Governance Standard 4: Suitability of Responsible Persons;

• Disqualification from being a Responsible Person;

• Governance Standard 5: Duties of Responsible Person

• Governance Standard 6: Maintaining Public Trust and Confidence in the Australian Not-For-Profit Sector

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APES 305:Terms of Engagement

APES 305: Terms of Engagement

Current APES 305:

Revised: October 2015

Operative Date: 1 January 2016

New Revision: August 2019

Operative Date : 1 January 2020

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APES 305Terms of EngagementChanges:

▪ Introduction Added.

▪ Amendments.

▪ Definition of Code – includes new code.

▪ Definition of Engagement Documentation written form deleted Written inserted.

▪ Definition of Firm –capitals deleted and replaced lower case.

▪ Definition of Member in Public Practice – e.g. replaced by for example.

▪ Definition of Professional Activity word taxation replaced by tax.

APES 305:Terms of Engagement▪Amended – Professional Standards Scheme paragraph

❖6.1 A Member in Public Practice who is participating in a Professional Standards Scheme that limits liability shall comply with the relevant Professional Standards Legislation and applicable regulations of the Professional Body.

▪New Definition.

❖Wording means a mode representing or reproducing words in a visible form and includes words in an electronic format capable of being converted to printed text.

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APES 305: Terms of Engagement General Contents

▪ Purpose;▪ Objective of Engagement;▪ Scope of the Engagement;▪ Engagement output;▪ Relative responsibilities;▪ Involvement of other Members in Public Practice;▪ Fee and Billing arrangements;▪ Ownership of documents;▪ Confirmation by the Client;

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APES 305: Terms of Engagement

Recurring Engagements

▪Usually exhibit following features;

❖Unchanged Professional Services;

❖Same or similar service being provided;

❖Defined or identifiable commencement and completion dates each time the Engagement is performed; and

❖Performance of the Engagement is on a regular periodic basis as agreed with the client, for example annually

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APES 320: Quality Control for Firms

Current APES 320:

Revised: December 2015

Operative Date: 1 April 2016

New Revision: September 2019

Operative Date : 1 January 2020

APES 320Quality Control for Firms▪Amendments.

▪ Introduction.

▪Definitions.

❖Engagement Team;

❖Network;

❖Relevant Ethical Requirements;

❖Code;

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APES 320Quality Control for Firms▪Amendments (Cont.)

▪Definitions (Cont.)❖Engagement;❖Engagement Partner;❖Independence;❖Key Audit Partner;❖Member in Public Practice;❖Professional Activity.

▪AUS 27.

▪AUS 38.

Audit Plan- ASA 300 Planning an Audit of a Financial Report

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Audit Plan

Understanding of the Business

▪ Industry.

▪ Regulatory.

▪ Other external factors.

▪ Objectives, strategies and related business risks.

▪ Measurement and review of performance.

▪ Information Systems.

▪ Control environment.

▪ Identification of critical audit objectives.

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Audit PlanPanning Activities

▪ Establish overall audit strategy;

❖Identify characteristics of engagement that define scope.

❖Ascertain reporting objectives to plan timing and nature of communications required.

❖Auditors’ professional judgement that are significant in directing engagement team’s effort.

Develop Audit Plan

▪ ASA 315 – Identifying and Assessing and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.

▪ Nature, timing and extent of planned risk assessment procedures.

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Audit Plan

Preliminary Audit Engagement Activities:

▪ ASA 220 - Quality Control for an Audit of a Financial Report and Other Historical Financial Information –requirements;

❖Document Continuance of continuance of client relationship and the specific audit engagement.

❖Evaluating compliance with ethical requirements, including independence.

▪ ASA 210 - Agreeing the Terms of Audit Engagement;

❖Establishing an understanding of the terms of engagement.

Audit Plan Requirements▪ Involvement of Key Engagement Team Members.

▪Preliminary Engagement Activities.

▪Planning Activities.

▪Documentation.

▪Additional Considerations in Initial Audit Engagements.

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Audit Plan

▪Establish scope by understanding:❖Type of entity.❖Compliance obligations.❖ABN Lookup.❖Users information needs.

▪ Identify who is involved - directors, committee persons, trustees, funding agency, suppliers and members.

▪What information would be helpful in planning the audit?

▪Does this information assist in assessing risks?

Audit PlanDevelop Audit Plan (Cont.)

▪ ASA 330 – The Auditor’s Reponses to Assessed Risks.▪ Audit procedures designed and performed, timing and extent

based on responses to assessed risk of material misstatement at assertion level.

▪ Audit Procedures to be designed and performed after giving consideration to risk of material misstatement due to particular characteristics of:❖Class of transaction;❖Account balance;❖Disclosure.

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Audit Plan

ASA 330 (Cont.)

▪ Evaluation of Operating Effectiveness of Controls.

▪ Substantive Procedures.

▪ Substantive Procedures Responses to Significant Risks.

▪ Adequacy of Presentation Disclosure of the Financial Report.

▪ Evaluating the Sufficiency and Appropriateness of Audit Evidence.

▪ Documentation.

Audit Plan

ASA 330 (Cont.)

▪ Audit Procedures designed for:

❖Test of Controls;

❖Nature and Extent of Controls;

❖Timing of Tests of Controls;

❖Use of Audit Evidence during Interim Period;

❖Use of Audit evidence obtained in previous audits;

❖Controls over Significant Risks/

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Audit PlanApplication and other Explanatory Material

❖Nature and Extent of Planning Activities will vary according to size and complexity;

❖Planning is continual throughout the audit until audit is completed.

Audit Plan

Application and other Explanatory Material (Cont.)

▪ Timing of activities is critical for certain activities and audit procedures such as risk assessment of material:

❖Analytical procedures;

❖Understanding legal and regulatory framework;

❖Determine Materiality;

❖Involvement of Experts;

❖Performance of other risk assessment procedures .

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Audit Plan

▪Reporting deadlines;

▪Preliminary Analytical Reviews;

▪Reliance on controls;

▪Materiality;

▪Sample size;

▪Documentation.

Other Audit Considerations

▪Notify ATO changes to authorised contacts.

▪Public Officer changes must be notified within 28 days of change.

▪ Income Tax Status of the Entity❖Has the entity performed the ATO Self-governance checklist for not-for-

profit organisations?

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Case Study 1

Happy Days Netball Club Inc

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Current details for ABN 99 999 999 888

Entity name: HAPPY DAYS NETBALL CLUB INC

ABN status: Active from 1 Jan 1995

Entity type: Other Unincorporated Entity

Goods & Services Tax (GST): Not currently registered for GST

Main business location: NT 0801

Deductible gift recipient status

Not entitled to receive tax deductible gifts

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Part 1 Exercise

• Review the documentation provided for your first time audit:

• Identify what further information and documentation you would require for this audit?

• What audit risk have you identified?

• How would you approach pre audit materiality?

• How would you communicate the issues you have identified with the Board?

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