Guidance notesWhat do you need to know about this manual?The academies guidance notes and programmes have been developed to enable the auditor to:

• satisfy the accounting, assurance and auditing requirements relating to academy trusts (academies); and• provide academies with a comprehensive but cost-effective service.

What does this manual include?The manual consists of seven main sections as detailed on the contents page:

• The guidance notes provide useful background information including the key aspects of the accounting and reporting requirements for academies. Getting started guidance for new users of the manual, how to use the Creator option to the manual and a cold file review checklist are also included in this section.

• Example engagement letters are included covering audit, Accounts Return, Teachers’ Pensions audit work and the regularity assurance engagement. We have also provided some suggested wording for possible letters of representation: for the statutory audit, for the regularity assurance engagement and for the Teachers’ Pensions EOYC review.

• This section includes example audit reports for both a standalone academy and for an academy group. An example independent reporting accountant’s assurance report on regularity is also provided.

• Proforma accounts are provided. • Accounts disclosure checklists for an academy are included, which cover the requirements of the Charities SORP, Accounting Standards, the

Companies Act and the disclosures contained within the relevant annual Academies Accounts Direction and Academies Financial Handbook, both issued by the Education and Skills Funding Agency.

• The permanent documentation section contains information which is of continuing importance to the assignment over a number of years. • The detailed audit programmes include schedules to assist in the recording and carrying out of the necessary steps of the audit and regularity

assurance engagements. The programme incorporates planning, fieldwork and completion documentation, as well as a work programme that can be used for the Teachers’ Pension audit, if required. Lead schedules and file dividers are also provided.

What else do you need?As an auditor or accountant of an academy it is recommended to obtain a copy of, or have access to, each of the following:

• The Academies Act 2010 and relevant Statutory Instruments;• The Academies Financial Handbook (effective September 2019) issued by the Education and Skills Funding Agency;• Academies Accounts Direction 2019 to 2020 issued by the Education and Skills Funding Agency;• Statement of Recommended Practice (SORP) (FRS 102) - Accounting and Reporting by Charities (2019);• The FRC’s International Standards on Auditing (UK) and Ethical Standard.

Copyright© Mercia Group Ltd. The guidance notes and / or programmes can be printed or photocopied as many times as you like or installed on an intranet or network, provided they are used solely within the purchasing firm. Alternatively, additional copies are available from Mercia Group Ltd.Contains public sector information licensed under the Open Government Licence v3.0.

Audit, Accounting and Corporate Governance works printed and published by the Financial Reporting Council© Financial Reporting Council Ltd (FRC). Adapted and reproduced with the kind permission of the Financial Reporting Council. All rights reserved. For further information please visit www.frc.org.uk or call +44 (0)20 7492 2300.

UpdatingThis manual will be updated when changes are required as a result of new guidance specific to academies or to normal audit procedures. As a user of this manual you will automatically be notified of any update.

For information of usersThis manual should be read in conjunction with the detailed legislation or regulations. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this manual can be accepted by the authors or the firm.

Academies guidance notes1 Introduction

1.1 What are academies?

Academies are publicly funded independent schools. An academy has freedoms in excess of those granted to maintained schools. These include additional freedom from Local Authority (LA) control, the ability to set its own pay and conditions, curriculum and the length of terms and school days.

Academies receive funding direct from an executive agency of the Department for Education (DfE), the Education and Skills Funding Agency (ESFA), rather than through a LA as is the case with an equivalent maintained school. The ESFA incorporates the roles and responsibilities previously performed by the Education Funding Agency and Skills Funding Agency.

All academies approved by DfE are automatically deemed exempt charities by virtue of section 12 of the Academies Act 2010. The principal regulator for academies is the Secretary of State for Education. Academies are set up using agreed governing documents setting out the charitable objective of advancing education, however some academies may extend their objects to permit other types of income generation and expenditure.

Though academy status within the education sector has become more prominent following the introduction of the Academies Act 2010, some academies and other similar educational institutions have been in existence for a number of years.

The Academies Act 2010, which received Royal Assent on 27 July 2010, significantly changed the framework for academy schools and provided the opportunity for more schools to become academies. The sector has evolved significantly since 2010, with an increasing number of academies now being part of wider multi-academy trusts (a single trust containing more than one academy).

Due to devolution of educational powers, the provisions of the Academies Act 2010 only permit an academy to be established in England.

1.2 Key features

Funding

The ESFA is responsible for funding academies and, under the terms of its remit from the Secretary of State for Education, for supporting the success of academies by funding them fairly; providing high quality support and offering rigorous challenge.

An academy receives funding directly from the ESFA, rather than from the LA as would be the case for a maintained school. In an LA maintained school, funding is given to the LA who use part of the gross funding to finance central services and distribute the net amounts accordingly.

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Although the academy will often receive more top line funding directly from the ESFA, it is required to pay for additional costs that would previously have been centrally procured by the LA. The direct receipt of funding gives the academy greater autonomy on how it spends the monies received.

The core funding for academies is subject to a funding agreement with the Secretary of State for Education. This contract outlines the framework within which the academy must operate. The funding agreement lays out a number of requirements in respect of application of funds, governance and reporting requirements.

Freedom from local authority (LA) control

The cited freedom from LA control is largely in relation to autonomy in respect of spending on central LA procured services. LA schools already have considerable autonomy in respect of finance and staffing and a majority of funding is formula driven. Academies do not have a requirement to consult with the LA in some areas, for example on exclusions, but have to ensure that appropriate policies, procedures and services are in place to cover areas previously dealt with by an LA.

National Curriculum and admissions

LA schools already have an element of freedom when it comes to national curriculum. An academy curriculum must be ‘broad and balanced’ including English, Maths and Science. The National Admissions Code of Practice applies to all schools and schools with existing selection arrangements in place, on conversion to an academy, can continue to select.

Length of terms and school days

Some LA maintained schools (eg. Foundation and Voluntary Aided schools) are permitted to change the length of school days and term dates, provided relevant LA regulations are met and approval is received. The process requires less external approval for an academy although consideration is still needed of the implications for families and school transport (which is still dealt with through the LA).

Employment

Transfer of Undertakings (Protection of Employment) Regulations (TUPE) applies for existing staff on conversion to an academy. This means that the same pay and conditions will apply initially for staff on conversion to an academy. Pay and conditions can subsequently change, although consultation with staff and unions would be likely.

Academies take on responsibilities in respect of the Teachers’ Pension Scheme and Local Government Pension Scheme, including payment of the employer contribution which must be remitted, with the employee contribution, to the relevant body. Whilst the school was maintained, the LA was responsible for such matters.

Premises responsibility

The property will either be owned or leased by the academy or occupied through some other arrangement. LA centrally funded repairs and maintenance are funded out of academy income, subject to availability of grant funding.

2 Types of Academy

2.1 ‘Sponsored’ academies

The sponsored academy programme saw the first academies set up in 2002. Initially, the academy sponsor, typically entrepreneurs, businesses, charities or other educational institutions, were required to put £2m (or 10% of the academy’s capital costs if lower) into an endowment fund and latterly directly into the academy.

Sponsored academies were, and still are, focussed on improving education in deprived areas and replacing existing underperforming schools.

Typically, these academies were subject to significant capital projects and often had subsidiary companies also set up to develop the premises to deal with VAT issues apparent for schools outside the LA umbrella at the time. Additional subsidiary companies could also be set up for activities outside the scope of the academy’s educational operations.

Sponsorship could be of a single academy or a network of academies. Since May 2011, sponsors have not been required to make a financial contribution or to establish or support an endowment fund, though they may still wish to do so.

2.2 ‘Convertor’ academies

Initially, only schools rated as outstanding by the Office for Standards in Education (Ofsted) could apply to become academies under the new (non-sponsor) regime. This was then extended to schools assessed as ‘good with one or more outstanding features’ in November 2010. Additionally less well performing schools, in partnership with a school that was performing well, were permitted to apply.

From 7 April 2011, eligibility to apply to become an academy was rolled out further to all schools which could evidence that they were ‘performing well’.

The DfE has issued guidance on the criteria to be taken into consideration when deciding whether a school applying to become an academy is ‘performing well’, which is available from the DfE website.

Nowadays, schools normally convert as part of a multi-academy trust containing more than one school as outlined further in paragraph 3.1.

2.3 Free schools

A free school is a school which is set up by any one or more of groups of parents, teachers, charities, trusts, universities and religious or voluntary groups. A free school is set up as an academy, although the application process will differ from that of a converting school as there are additional factors to consider such as facilities, partners and demand.

2.4 Other

A number of other types of educational institutions may also set up as academies. These include Technical Academies, University Technical Colleges, Studio Schools, Special Academies, 16-19 academies, alternative provision schools (such as Pupil Referral Units) and sixth form colleges.

3 Legal and Regulatory Framework

3.1 Corporate structure

The Academies Act 2010 deems a qualifying academy proprietor to be a charitable company:

• which is limited by guarantee;• whose registered office is situated in England and Wales;• which in pursuance of academy arrangements is the proprietor of an academy; and• whose objective as expressed in its articles or memorandum of association (or each of whose objects as so expressed) is a charitable purpose.

Therefore, academies are subject to the Companies Act 2006 and the Charities Act 2011 although, in the latter case, some important sections do not apply because academies have exempt status.

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Individual schools have the ability to convert and set up either as an individual academy, though more commonly nowadays will set up as a multi-academy trust or join an existing multi-academy trust. There would be one charitable company limited by guarantee in these instances. Within this manual, the term academy is used to describe both the trust and constituent academies, as applicable to the circumstances of the audited entity.

A federation of academies underneath an overarching academy trust or charity may also be formed, though in many regions this is less common.

It is also possible for academies to set up subsidiary companies, normally for reasons aligned with VAT and the tax treatment of income and expenditure of the academy.

3.2 Charitable status

Academies established prior to July 2010 were registered charities. However, a further provision in section 12(4) of the Academies Act has made academies exempt charities (under Part 3 of the Charities Act 2011) upon the appointment of a principal regulator.

In July 2011, legislation was passed to enable the Secretary of State for Education to be appointed as Principal Regulator, making all academies exempt charities from 1 August 2011.

The ESFA’s role lies in funding and regulating academies, dovetailing with the role of the Principal Regulator as set out within the terms of its remit.

3.3 The Academy’s Funding Agreement with the Secretary of State for Education

An academy will be party to a funding agreement with the Secretary of State for Education which is a contract outlining the framework within which the academy must operate.

In return for the academy undertaking to establish or maintain an independent school (with the qualities of an academy as laid out in the Academies Act), the Secretary of State will agree, through the funding agreement, to provide funding for payment of recurrent expenditure for at least seven years or indefinitely, terminable on seven years notice.

The funding agreement is seen as central to ensuring accountability and assurance over the use of public funds. The funding agreement sets out, amongst other items, the types of, and terms and conditions attaching to, grants paid by the Secretary of State. These terms and conditions include a number of operational, governance, financial, accounting and reporting requirements as set out elsewhere within these guidance notes.

3.4 The role of the Secretary of State for Education

The Secretary of State for Education (DfE) became the Principal Regulator of academies on 1 August 2011 making academies exempt charities under Part 3 of the Charities Act 2011.

3.5 The remit of the ESFA

The ESFA carries out a number of functions in its role of funding academies and supporting the DfE in its role as principal regulator in respect of academies. These functions include (though are not restricted to):

• policy advice to the DfE;• calculation and payment of grants to academies;• financial monitoring and assurance of open academies;• ensuring funding agreement and general funding compliance; and• investigation of suspected fraud or financial irregularity.

3.6 The role of the Charity Commission (CC)

The CC can still use its investigative and protective powers in respect of academies but only after consultation with DfE and, in some cases, only if the CC is requested to open an enquiry by DfE.

The CC will continue to work with DfE as principal regulator for academies, to ensure that:

• academies have exclusively charitable purposes, for the public benefit;• academies remain independent in their governance and operations;• academies comply with charity law;• academies remain accountable to the public; and• other charitable trusts connected with academies (and other charitable schools converting to academies) are properly protected and, where necessary,

the trusts can be updated so that the academy can benefit.

4 Governance in Academies

4.1 Governance structure

An academy, a charitable company limited by guarantee, will have been formed by a number of members (as determined by government policy at the time) who are nominated either by DfE or a sponsor (in the case of a sponsored academy). These members will sign the Articles of Association on formation of the academy.

The members will have a number of powers including those in relation to winding up an existing academy, amending the articles of association (the primary governing document of the academy), appointing member governors and removing governors.

The members are in place to take a broad overview of the academy and its activities and to hold the appointed governing body to account.

The articles of association will stipulate the number of governors (or in more recent articles ‘trustees’) to be responsible for the statutory and constitutional affairs of the academy. These parties, however defined within the articles, are also the directors and trustees of the trust from a company and charity law perspective. Within a multi-academy trust structure, it must also be considered whether other local governors will be trustees from a charity law perspective.

4.2 The Accounting Officer

The funding agreement requires that the academy appoints an Accounting Officer (AO). The AO should be the senior executive leader of the academy and is responsible to Parliament for the propriety and regularity of the public finances for which they are answerable. The AO is also responsible for the keeping of proper accounts; for prudent and economical administration; for the avoidance of waste and extravagance; and for the efficient and effective use of all the resources in their charge. The AO may delegate or appoint others to assist in these responsibilities (eg. to a Principal Finance Officer).

4.3 The Academies Financial Handbook

Requirements and guidance on the responsibilities of trustees and the AO are given in the Academies Financial Handbook which acts as the financial guide for governing bodies and senior leadership teams of academies, drawing upon the requirements specified in the academy’s funding agreement, company and charity law.

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The governing body is required to abide by the requirements of, and have regard to, the guidance in the Academies Financial Handbook as part of the terms of the funding agreement.

The Academies Financial Handbook is generally updated on an annual basis to reflect sector and legislative changes.

The trustees are now specifically required to have reviewed and taken account of the guidance in the DfE’s Governance Handbook and Competency Framework for governance, and to state their compliance in the Governance Statement included in the accounts. This guidance covers strategic leadership, accountability, people skills and experience, organisational structures, compliance with legislation and contracts and the evaluation of governance to improve performance.

The forms within the Mercia Academies Specialist Assignment Manual reflect arrangements in place for the 31 August 2021 period end and thus requirements as laid out within the Academies Financial Handbook 2020 (effective 1 September 2020).

4.4 Internal scrutiny

An academy must appoint an audit committee, either dedicated (mandatory if income over £50m) or combined with another committee, and should meet at least three times a year. The chair of trustees should not be chair of the audit committee. Further detail is provided in the Academies Financial Handbook – see paragraphs 3.6 to 3.23.

All academy trusts must have a programme of internal scrutiny, directed by the audit committee, to provide independent assurance to the board that its financial and other controls, and risk management procedures, are operating effectively.

A number of options are available to this committee in terms of how they deliver this programme of work, including:

• employing an in-house internal auditor;• a bought-in internal audit service;• appointment of a non-employed trustee; and• peer review.

The academy must maintain a risk register, and the internal scrutiny function must produce a report of the areas reviewed, key findings, recommendations and conclusions to each audit committee meeting, together with an annual summary which must also be submitted to the ESFA with the audited annual accounts.

Requirements in this area were significantly enhanced with effect from 1 September 2019. It is strongly recommended that auditors and reporting accountants review in detail the requirements of the Academies Financial Handbook 2020 in this area.

This process should provide an opportunity for the auditor to place reliance on this work in accordance with the requirements of ISA (UK) 610 Using the Work of Internal Auditors.

Relevant ethical issues are considered in section 7.4.

Further changes to these requirements become effective 1 September 2021. These changes are not reflected in this version of the Academies SAM.

4.5 Use of the terms ‘trustees’ and ‘governors’

The term ‘trustees’ has been used throughout the reports and letters section of the Academies Specialist Assignment Manual as consistent with wording adopted in the Academies Accounts Direction. The term ‘governors’ has been retained elsewhere to denote those charged with governance, and taken to be inclusive of directors and trustees. The most appropriate term should be used in the context of the academy that you are acting for. Where the constitution of the academy does not support this term, appropriate amendments should be made.

5 Funding

5.1 Revenue funding

The principal source of funding for an academy is grants received from the ESFA and the Local Authority (LA). The academy may be in receipt of a number of grants for both revenue and capital purposes.

Generally, funding for academies received from the ESFA runs from September to August to coincide with the academic year; and funding received directly from the LA relates to the financial year April to March.

The main grant received by the academy is the General Annual Grant (GAG) which is made up of a number of elements. The most significant element is known as the ‘school budget share’. This part of the GAG is calculated by the use of a funding formula which calculates funding on a comparable basis to the running costs of maintained schools in the same area.

The principal terms of the GAG are outlined in the academy’s funding agreement. The accounting requirements chapter of these guidance notes considers the treatment of the GAG.

Other revenue funding available to academies includes (but not limited to):

• Start-up grant;• Post opening grant; • Early years funding;• PE and Sports premium for primary schools; • Universal Infant Free School Meals; • High Needs top up funding;• Pupil premium;• Primary academy chain development grant;• Sixth form funding;• Funding for special academies;• Risk protection and insurance;• National non-domestic rates.

5.2 Capital Funding

Academies, like maintained schools, receive Devolved Formula Capital funding for capital maintenance and ICT projects. Academies that have urgent building repairs they are unable to fund themselves, or need to expand to take in more pupils may also apply for funding from the Condition Improvement Fund (CIF), previously called the Academies Capital Maintenance Fund. Further information on academy funding is available from the Department for Education section of the GOV.UK website.

5.3 Other Income

An academy may also be in receipt of a number of other sources of government grant funding (eg. teaching school funding). In addition to this, it may generate income from other activities (eg. supplies of staff, letting, room hire, conferencing, catering, and other fundraising).

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6 Accounting Requirements

6.1 Annual accounts requirements

An academy financial year runs to 31 August to be in line with the academic year. Statutory accounts are prepared up to this date each year.

The accounts must be filed at Companies House within nine months of the year end, however the Accounts Direction notes that academy trusts should consider filing their accounts at Companies House at the same time as they publish their accounts on their relevant website (see below). As exempt charities, there is no requirement to file an annual return and financial statements at the Charity Commission. The accounts and annual report must, however, also be filed with the Secretary of State for Education through the ESFA no later than four months after the accounting period end (eg. usually by 31 December). The accounts also have to be published on the academy’s website within five months of the year end (ie. the end of January the following year). The website should include at least the previous two years accounts and constituent academies within a multi-academy trust should include a prominent link on their website to the financial statements published on the multi-academy trust website.

6.2 Other financial reporting requirements

In addition to statutory accounts, an academy is required to make a number of other financial returns to the ESFA in respect of governance and grant funding. These include Budget Forecast Returns and an Accounts Return to provide the ESFA with consistent detailed income and expenditure data used for monitoring financial health, benchmarking and preparation of a Sector Annual Report and Accounts.

6.3 Annual accounts formats

An academy is a charitable company which is limited by guarantee. Its annual financial statements and reporting requirements are outlined in its funding agreement, which states that the accounts must comply with the Charities’ Statement of Recommended Practice (SORP) as if the academy were a non-exempt charity and Parts 15 and 16 of the Companies Act 2006. In preparing its accounts, an academy is also required to abide by the requirements of, and have regard to, information contained within the Academies Financial Handbook.

The Academies Financial Handbook refers to annual accounts requirements in an annual Accounts Direction, which acts as an adjunct to the handbook.

The applicable Academies Accounts Direction includes specific disclosure and accounting requirements relevant to academies and supplements the Charities SORP in order to provide a model for best practice and reduce potential diversity in accounting practice within the sector. The Accounts Direction includes a model annual report and financial statements (Coketown Academy Trust) and states that the direction and its associated guidance is mandatory for all academy trusts that have a signed funding agreement at any point in their accounting period. .

The pro-forma accounts included within this manual are based upon the financial statement requirements included within the Accounts Direction and there is also an academies accounts disclosure checklist that can be found in the relevant sections of this manual.

6.4 Accounts layout

The content of an academy’s annual report, as required by the Accounts Direction, is principally driven by the requirements of the Companies Act 2006 and the Charities SORP. There are, however, items which are specific to these types of entities and disclosures which are required by the Accounts Direction. The Accounts Direction also provides further guidance in respect of the content of the annual report of an academy which should include the following:

• Report of the trustees;• Governance statement;• Statement on regularity, propriety and compliance;• Statement of trustees’ responsibilities;• Independent auditor’s report to the members;• Report on regularity;• Statement of financial activities;• Balance sheet;• Statement of cash flows;• Statement of accounting policies; and• Other notes to the financial statements.

6.5 Treatment of grant income

The General Annual Grant (GAG)The GAG is paid for the purposes of recurrent expenditure of the academy. Recurrent expenditure is defined in the funding agreement as any expenditure on the establishment, conduct, administration and maintenance of the academy which does not fall within categories of capital expenditure covered by the capital grant funding (see below). The academy’s funding agreement states that ‘the GAG paid by the Secretary of State shall only be spent by the Academy Trust towards the normal running costs of the academy’. Within some academies there are restrictions upon amounts carried forward as a surplus from year to year.

The terms of the funding agreement are more restrictive than to allow for application of funds for the general purposes of the academy as set out within its governing document (ie. the charitable object of advancement of education) and must be applied for particular purposes. Therefore, the Accounts Direction deems that these and other grants received from the DfE/ESFA are treated as restricted funds in line with the Charities SORP.

For some older academies the funding agreement permits only up to 12% of the total GAG payable to be carried forward and restrictions detailing what this carry-forward amount could be spent on. The Accounts Direction requires separate disclosures relating to GAG carry-forward, where applicable.

Capital fundingThe Accounts Direction follows the Charities SORP in respect of the treatment of capital grants. Where capital grants are received to finance the purchase of tangible fixed assets the grant is credited to a restricted fixed asset fund and amortised in line with the expected useful life of the assets financed.

6.6 Accounting for transferred assets and premises

Guidance for the treatment of academy premises and assets transferred on conversion is provided in the Accounts Direction. This guidance applies principles in the Charities SORP in respect of the treatment of gifts in kind. Specifically, fixed assets recognised should be credited to the restricted fixed asset funds account in the Statement of Financial Activities (SOFA). The asset is then depreciated over its useful economic life.

Due to the significant collective value of academy land and buildings within the Sector Annual Report and Accounts, the ESFA normally centrally procure land and property valuations for new academies. Subject to availability within a suitable timeframe, these valuations may be used by the governors to estimate the value of transferred assets for inclusion within the financial statements. Alternatively, in the absence of an ESFA procured valuation, governors may use information obtained from a predecessor Local Authority or other information as the basis for their estimate. The valuation should be considered as an accounting estimate, and audited as such, within the financial statements.

The disclosures relating to transferred assets on conversion as well as transfers of academies between academy trusts are outlined in detail within paragraph 3.77 to 3.86 of the Accounts Direction.

School records of fixed assets prior to conversion can be inconsistent. They range from full registers, to rudimentary records, to non-existence. As such it is not uncommon that the value of assets transferred is estimated. Estimation may be based upon knowledge of other similar school asset values or physical inspection where records are not present.

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6.7 Academy pensions - Introduction

A converting academy is responsible for the pension arrangements for staff transferred, even where the LA is still acting as the payroll provider. There are two principal occupational pension schemes. The Teachers’ Pension Scheme is the statutory scheme for teaching staff, with non-teaching staff being subject to the Local Government Pension Scheme. The nature, practicalities and accounting treatment of each of these schemes is further detailed below.

6.8 Teachers’ Pension Scheme

BackgroundTeachers working in an academy fall within the scope of the Teachers' Pension Scheme (TPS), just as if they were employed in a LA maintained school. Staff transferring from a maintained predecessor would simply continue their membership of the Scheme. As the employer, the academy would be responsible for remitting contributions to the TPS and for all other administrative responsibilities that fall to employers who employ teachers who are subject to the teachers' pensions regulations.

Accounting treatmentThe Teachers’ Pension Scheme is an unfunded, statutory, contributory, multi-employer defined benefit (final salary) scheme. The underlying (notional) assets and liabilities attributable to any one employer cannot be identified. As such, contributions to the scheme are treated in the same manner as contributions to a defined contribution scheme with the cost recognised in the accounts being equal to the contributions payable to the scheme in the accounting period.

These pension costs should be allocated across the relevant resources expended categories in the Statement of Financial Activities (i.e. within the restricted general column of the ‘academies educational operations’ line within the SOFA).

DisclosuresA standard financial note disclosure is provided by Teachers’ Pensions which is updated, published annually and available in the Accounts Direction. The note gives sufficient detail to satisfy the requirements of accounting standards and as such should be included within an academy’s financial statements.

Other annual return requirementsThe employer is required to submit an End of Year Certificate (EOYC) each year. This certificate sets out the contributions made in the year to 31 March and requires population of additional information and certification by the employer. The return must be submitted by the end of May. Each year, Teachers’ Pensions publishes its guidance for reporting accountants (TP05) with respect to certification of the EOYC return. The report of factual findings in connection with this agreed-upon-procedures engagement is submitted in line with guidance included in TP05 no later than 30 September. This is further considered within the audit section of this guidance.

6.9 Local Government Pension Scheme (LGPS)

BackgroundNon-teaching staff within the academy fall within the remit of the LGPS. The LGPS is a nationwide scheme for employees working in local government. This multi-employer defined benefit pension scheme is administered locally for participating employers through regional pension funds.

An academy’s funding agreement requires the academy to offer LGPS membership to all non-teaching staff. Where maintained schools apply to convert to academies under section 3 of the Academies Act 2010 and an Academy order is made under section 4, those existing staff who are already members of the LGPS by virtue of the Administration Regulations would not be affected by the conversion. Their membership of the LGPS would continue unaffected. After conversion, new non-teaching staff will be eligible to join the LGPS and will automatically be enrolled in the Scheme when employed. However, such staff will have the option to opt out of the Scheme if they give notice within three months.

ContributionsContributions to the LGPS are calculated based on an actuarial assessment carried out by the relevant LGPS administering authority fund actuary (who may, but will not exclusively, be the part of the LA themselves). The contribution rates will differ from academy to academy and may be at a higher or lower rate than that paid prior to conversion due to the nature of the actuarial assessment performed though pooling arrangements may be made with the local authority which can help to ensure that contribution rates remain manageable.

Accounting treatmentUnlike the TPS, LGPS is a funded scheme and can be in surplus or deficit according to investment performance. Most pension funds are currently managing a deficit, and the deficit in respect of pensionable service prior to conversion transfers from a LA to the academy through the transfer agreement signed prior to conversion.

As the individual assets and liabilities attributable to the academy are normally identifiable, this results in the scheme being treated as a defined benefit pension scheme within the academy financial statements and therefore the recognition of a net liability (or asset) on the balance sheet.

On initial transfer of the scheme into the academy the amount will show with other assets and liabilities transferred and a pension reserve created within the restricted funds. Similarly, transfers between trusts will normally create a transfer of obligation to the new employer.

Changes in the LGPS surplus or deficit should be accounted for in line with the financial reporting and disclosure requirements of FRS 102, the Charities SORP and Accounts Direction.

Where, as may be the case for academies containing more than one school, there is more than one LGPS in operation, the financial statements can either make disclosures in total, separately for each scheme or in such groupings considered to be the most useful. Where the academy provides disclosures in total for all LGPSs (as will normally be the case), disclosures provided (eg. of assumptions) shall be provided in the form of weighted averages or relatively narrow ranges.

6.10 Consolidation

Where required under the charities SORP, consolidated financial statements will be required in addition to individual accounts.

Exemption from the requirement to produce consolidated accounts is usually only available where:

• the income of the group (net of any intra-group transactions) in the accounting period is no more than the audit threshold under the Charities Act (currently £1,000,000); or

• the subsidiary undertaking or undertakings results are not material to the group.

The Accounts Direction outlines the disclosures required when exemption from preparation of group accounts is taken.

Where a multi-academy trust exists within one charitable company, the academy will be required to produce one set of financial statements, though disclosures will be required for the DfE within the financial statements for each individual school as laid out in the Accounts Direction. As such, the financial reporting function will need sufficient resource, expertise and software to report to a number of levels, which culminate in a departmental (or school-plus-school) consolidation.

7 Audit and Assurance Requirements

7.1 Audit requirement and opinion

There is no provision for academy audit exemption as the requirement for audit is driven from the academy’s funding agreement with the Secretary of State for Education. As academies are exempt charitable companies, the academy requires a Companies Act audit (as opposed to an audit under the Charities Act).

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A continuing academy is required to electronically file its audited accounts and a copy of audit findings report (referred to as the management letter in this manual) issued by the auditor with the ESFA within four months of the accounting period end, usually by 31 December.

An overview of the general layout of an audit file using the Mercia methodology and where all the documents are located in the manual is included in the ‘Getting Started’ document in the guidance section of the manual.

An academy audit report is required to identify the financial reporting framework that the accounts have been prepared under, which will include specific reference to the Annual Accounts Direction 2019 to 2020 issued by the ESFA.

The audit reports included within the example reports section of this manual comply with the above requirements, in line with relevant ISAs (UK).

As the report is made to the members of the academy, the engagement letters within the example letters section and example reports in the example reports section of the manual include standard ‘Bannerman’ wording.

7.2 Regularity assurance reporting 2020 to 2021

In addition to requiring that the auditor reports upon the truth and fairness of the financial statements, the funding agreement also requires the auditor to report that grants were used for the purposes intended.

Part 4 of the Framework and guide for external auditors and reporting accountants of academy trusts contains guidance on regularity reporting. It is strongly recommended that auditors of academies refer to this guidance.

Chapter 9 of the guidance notes in this manual outlines further information in respect of the regularity reporting engagement.

Arrangements for assurance over regularity for future periods will be confirmed annually by the ESFA.

7.3 Principal audit requirements

The audits of academies need to comply, in all respects, with the requirements of the International Standards on Auditing (UK) - ISAs (UK).

In November 2017 the FRC issued a revised ‘Practice Note 11: The audit of charities in the United Kingdom (PN11)’. This document provides guidance on the application of ISAs (UK) for periods commencing on or after 17 June 2016 and includes relevant guidance for auditors of academy trusts.

The ISAs (UK) relating to audit risk, fraud and quality control have a significant impact. The standards generally require the audit team to think about the implications of risk in some depth, and to adopt a rigorous approach in planning and completing audit work.

The standards dealing with risk (ISAs (UK) 315 and 330) require documentation of risk assessments and the audit approach to be adopted. There is an emphasis on auditors gaining an understanding of the entity’s objectives and strategies and management’s procedures for identifying and addressing business risks, and on the evaluation of the design and implementation of internal controls. Controls must be tested unless the auditor concludes that audit evidence from substantive procedures will be sufficient to reduce the risk of material misstatement to an acceptably low level.

ISAs (UK) 200 and 240 require professional scepticism to be maintained throughout the audit, regardless of any past experience of the client’s honesty and integrity. ISA (UK) 240 includes examples of fraud risk factors and the audit team should consider whether any of these might be present and assess how a fraud might be perpetrated. Where fraud risk factors are identified, the audit must include additional procedures to address the related risks.

The audit team are also specifically required to discuss risk issues, including the possibility of fraud, as part of the planning process. This discussion should be documented and the engagement partner is responsible for ensuring that relevant issues are properly communicated to any individuals, such as tax or VAT specialists, who have an involvement in the audit but were not party to the discussion.

7.4 The FRC Ethical Standard

Key ethical threats relating to other services provided to an academy include the following:

Regularity assurance engagementThe work required to provide the additional conclusion on regularity is an ‘audit related services’ as defined in the ES. These are services closely related to the work performed in the audit and the threats to auditor independence are clearly insignificant. As a consequence, safeguards need not be applied.

Teachers Pensions assuranceWork performed in respect of the EOYC would only be considered as an ‘audit related service’ for the purpose of the ES if it is integrated with the work performed in the audit, performed largely by the existing audit team and performed on the same principal terms and conditions as the audit. Further detail is provided within the EOYC part of this section of these guidance notes.

Internal Audit servicesThe revised Ethical Standard, effective for audits of financial statements with periods commencing on or after 15 March 2020, places an outright prohibition on the provision of internal audit services to an audit client. In effect, this restriction will apply to academies with effect from 1 September 2020.

VAT and tax servicesIt is unlikely that there be no informed management within the academy. Therefore, to a large extent management threats (in addition to the self review threats which may arise through the provision of many of the usual tax services provided to academies) can be adequately safeguarded.

There is a prohibition against providing tax services that would result in acting as an advocate of an audit client in the resolution of an issue which is material to the financial statements or dependent on a future contemporary audit judgment.

Restructuring Services and Due DiligenceWhere restructuring services involve a management role being undertaken or acting as client advocate, the audit firm should not accept the engagement. Where a self-review threat has arisen as a result of restructuring services provided, this should be mitigated by appropriate safeguards being put in place. Restructuring services in the context of an academy may constitute work performed as part of conversion.

Accounting servicesAccounting services provided to academies may include payroll, the preparation of the statutory accounts or other financial returns.

The ES suggests that in order to carry out both the audit and a non-audit service, the client must have informed management and the auditors must include safeguards, which could include:

• accounting services provided by the audit firm are performed by partners and staff who have no involvement in the external audit of the financial statements;

• accounting services are reviewed by a partner or staff member who is not part of audit team;• the audit of the financial statements is reviewed by an audit partner who is not involved in the audit engagement to ensure that the accounting services

performed have been properly and effectively assessed in the context of the audit of the financial statements.

Ethical Standard threats are recorded on schedule B12 and the safeguards to be adopted on B13-1 within the Mercia audit system.

Governance roleGiven the need for finance expertise within many academies, employees of firms, persons closely associated with them, or close family members may be approached to sit on governing bodies or sub-committees within the academy.

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The ES notes that a partner or member of staff cannot perform a role as an officer, a member of the board or a member of any sub-committee of that board of an audit client. Restrictions also apply where persons closely associated or close family members of covered persons or other staff (including partners) hold similar positions.

7.5 Provisions Available for Audits of Small Entities (PAASE)

PAASE provides an alternative provision and an exemption for academies that qualify as small under Section 382/383 of the Companies Act 2006.

Alternative provisionFor academies that qualify to apply PAASE, auditors are not required to apply safeguards to address a self-review threat, provided:

• the client has “informed management”; and• the audit firm extends the cyclical inspection of completed engagements that is performed for quality control purposes, to include some PAASE clients.

It should be noted that if advantage is being taken of the alternative provision, no disclosure of this is needed in the audit report or notes to the accounts.

ExemptionWhere advantage has been taken of the exemption against the management threat in the provision of non-audit services, the Responsible Individual should ensure that:

• the audit report discloses this fact; and• either the financial statements or the auditor’s report discloses the type of non-audit services provided.

The sample wording offered to include in the audit report is:

"We are independent of the academy trust in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and the provisions available for small entities, in the circumstances set out in note [X] to the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements."

Sample wording that can be used to include in the note is:

“In common with many other academy trusts of our size and nature we use our auditors to prepare and submit returns to the ESFA and assist with the preparation of the financial statements.”

Other PAASE exemptions are also available - see your audit procedures manual or section 6 of the FRC Ethical Standard 2016 for details.

In practice, because the academy will usually have informed management, the alternative provision rather than the exemption above is likely to be utilised. When advantage is to be taken of PAASE, this is recorded on B13.

7.6 Opening balances

For initial engagements, we consider whether sufficient appropriate evidence can be obtained to confirm the client’s opening balances. Specifically, we confirm:

• opening balances do not contain material misstatement affecting the current year’s figures;• appropriate accounting policies have been consistently applied or, when changed, have been properly accounted for and presented.

If we become auditors of a previously audited academy then there is no responsibility to re-audit the financial statements of the preceding period. The sufficiency and appropriateness of the audit evidence regarding opening balances required by us as incoming auditors depends on such matters as:

• the accounting policies followed by the academy;• whether the preceding period's financial statements were audited and, if so, whether the auditors' report was qualified;• the nature of the opening balances, including the risk of their misstatement; and• the materiality of the opening balances relative to the current period's financial statements.

As incoming auditors normally the audit work on the current period provides evidence regarding opening balances. Other procedures which incoming auditors might perform include the following:

• requesting information from the predecessor auditor;• consultations with management and review of records, working papers and accounting and control procedures for the preceding period; and• substantive testing of any opening balances in respect of which the results of other procedures are considered unsatisfactory. Particular emphasis may

need to be given to such testing where the previous financial statements were unaudited.

7.7 Money Laundering Regulations (MLR)

The implications of the MLR must be considered on all academy assignments. Full details of the firm’s anti-money laundering procedures can be found in firm’s money laundering compliance manual and specific consideration of how these apply to audit assignments may also be found in the firm’s audit compliance manual.

Academy-specific identity considerationsThe Joint Money Laundering Steering Group (JMLSG) Guidance for the UK Financial Sector indicates that state supported schools, colleges and universities should be treated as public sector bodies. Academies appear to fall within this remit.

As such, the standard evidence required by the Public Sector Bodies, State Owned Companies and Supranationals section JMLSG Guidance includes:

• Information such as the full name of the entity, its nature and status, address and the names of directors & trustees;• Appropriate steps taken to understand who the members of the academy are (eg. see the register of members), and the nature of its relationship with

DfE;• Where appropriate, verification of identities of governors and key management personnel, consider those that have authority to give instructions

concerning the use or transfer of funds / assets (eg. passports of the Chairman and Finance Director).

Prompts are included in the planning and completion sections of the academies documentation to remind staff of the need to consider the need to update customer due diligence (CDD) information as well as reminding them of the need to report any suspicious activities observed during the course of their work. The permanent file documentation includes new client forms, along with a money laundering specific risk assessment and client identity checklists, which should be completed for all new clients. An alternative money laundering specific risk assessment is available for existing clients, along with identity checklists that firstly look to the extent of information already available in respect of existing client’s identity.

The full JMLSG guidance is available from www.jmlsg.org.uk

7.8 Client communication

The governance structure is likely to be such that management of the academy will be different from those charged with governance. The exact governance structure will differ dependent upon the type of academy. The board of governors may delegate certain of their functions to sub-committees, such as an audit committee or individual school governing bodies. It will be necessary to identify and understand the governance structure of the academy at the earliest opportunity in order that communication with those charged with governance in addition to management can be made as appropriate.

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Prompts of items requiring communication are included within B21-1/2 at the planning stage and A52-1/2 at the completion stage.

It is unlikely to be the case that all those charged with governance are involved in the management of the academy, as such communication is likely to be required with both parties.

The Accounts Direction notes that the auditor’s written communication should usually contain:

• approach to the audit;• the areas covered by the audit;• findings, including any significant concerns, if arising including ratings of the importance/risk, e.g. high/medium/low;• audit recommendations for the period;• the trust’s response to the auditor’s recommendations including timescale for action;• status of any audit recommendations from the previous year.

A copy of the management letter (the ‘audit findings report’) is submitted to the ESFA with the audited financial statements.

Section 9 of these guidance notes also highlight management letter reporting in the context of the regularity reporting engagement.

7.9 ISA (UK) 315 - Understanding the entity and its environment

ISA (UK) 315 requires that an understanding of the following matters is required:

• relevant sector, regulatory and other external factors;• nature of the entity;• entity’s selection and application of accounting policies;• entity’s objectives and strategies and related business risks;• measurement and review of the entity’s financial performance; and• internal control.

The information on the first five of these is recorded at PF1-1/2 of the permanent file and links to the suite of PF1- forms to document relevant information. Internal control is recorded on PF2.

Information recorded is likely to include the following:

• history of the academy/academies, land and building issues, relationship with the ESFA and DfE, relevant laws and regulations (PF1-3) and constitution including an understanding of the funding agreement;

• identification of related parties (PF1-4/5);• service organisations (PF1-6) - see below;• use of experts (PF1-7) - see below;• accounting estimates (PF1-8) should be documented per the requirements of ISA (UK) 540. Key accounting estimates may include apportionment of

expenditure between funds, depreciation, claw-back of funding, asset or liability valuation.• academies have historically been required to submit self-assessment forms in respect of financial management and governance which may be seen as

a useful starting point when documenting and assessing risk and internal controls (PF2). The Accounting Officer also ought to have assessed compliance with the funding agreement and Academies Financial Handbook in preparing the statement on regularity, propriety and compliance (see chapter 9);

Guidance on the ‘typical’ systems and controls in an academy may be found in Charity Commission resources such as CC8. Once design and implementation has been assessed it may be possible and cost effective within some academies to test the operating effectiveness of internal controls in key risk areas (prompts and key control objectives on B33 forms).

The internal audit / internal scrutiny function work should be assessed in the context of whether any fraud has been identified, whether work may be adequate for audit purposes and the effect of this work on the audit approach in line with ISAs (UK) 240 and 610 (PF2-4).

As with any other audit, the documentation of these factors is paramount and should be proportional to the size and complexity of the academy being audited.

7.10 Accounting estimates and the work of experts

Whilst often unavoidable, the use of accounting estimates in the preparation of the accounts gives rise to increased risk of material misstatement. Accounting estimates are identified and assessed on the permanent file (form PF1-8).

ISA (UK) 540 lists a number of examples of situations where accounting estimates, other than fair value accounting estimates, may be required.

One area that is central to academies is the use of estimates for allocating income and expenditure both between different SoFA headings and between different types of funds. Therefore, if it wasn’t already highlighted as a key area, classification of income and expenditure may well be a significant area.

Further examples of accounting estimates may include:

• allocation of income / expenditure between SoFA headings (as noted above);• provision for doubtful debts;• allowance of costs between funds;• stock provisions;• depreciation method / asset life;• valuation of defined benefit pension schemes;• valuation of investments;• valuation of fixed assets (including heritage);• valuation of income (including donated goods, services and facilities);• outcomes of litigation;• outcomes of long term contracts.

During risk assessment procedures, the auditor must gain sufficient understanding of the client’s use of accounting estimates. The focus is on estimates with a high level of estimation uncertainty. Examples of situations where there is relatively low estimation uncertainty include non-complex operations, routine transactions, simple methods of estimation or well established models used to make the estimation.

The auditor should also assess the degree to which assumptions may be biased by managers / trustees' of the academy.

An expert is an individual or organisation with expertise in a field other than auditing. In order to comply with ISA (UK) 500 Audit Evidence to the extent necessary, taking into account the significance of the expert’s work for the purposes of the audit, the auditor shall:

• obtain an understanding of the work performed;• evaluate their competence, capabilities and objectivity; and• evaluate the appropriateness of the work in relation to the relevant audit assertion.

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This information and evaluation is recorded on PF1-7 and appending schedules, as part of work performed to understand the entity and its environment driven from the completion of PF1-1/2.

The work of a management’s expert (ie. engaged by the client) will be used principally in two areas in respect of academies; actuarial valuations and property valuation.

Actuarial valuationsAn understanding and assessment of key assumptions used by the actuary is required. In the context of LGPS, the scheme actuary may issue standard information for auditors to support actuarial assumptions which can go some way towards providing a basis for assessing the appropriateness of the work. Where this is not the case, communication will be required to ascertain the competence, capabilities and objectivity of the actuary and of the appropriateness of the valuation. Where appropriate, the holders of the pension scheme assets should also be assessed in respect of whether an AAF 01/06 service organisation auditor report is required.

Procedures in respect of the audit of the LGPS surplus / deficit are also included within the Wages, Salaries and Pensions section of the manual.

Property ValuationWhere the academy has procured its own valuation, or chooses to use an ESFA procured valuation in its own accounts, the assessment of competence, capabilities and objectivity should be performed in addition to assessment of the results of the valuer's work. Again, an understanding and assessment of key assumptions is required so as to ensure that the asset valuation as disclosed within the financial statements is appropriate.

In December 2018, the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard. The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted.

The revised standard is a complete overhaul of the previous version and introduces a number of key changes to the approach that must be followed when auditing all types of accounting estimate and the associated financial statement disclosures. These changes strengthen the audit of what can be a difficult area.

In order to reflect the requirements of the revised standard, the audit methodology now places greater emphasis on the documentation of our understanding of accounting estimates, and the risks they present, and there is a revision to the workflow of key accounting estimates.

For each individual key accounting estimate that is identified using PF1-8 at the planning stage, we also complete a supporting Key Accounting Estimates Summary at B30X to document the risk assessment process specific to that estimate, along with the proposed audit procedures to be performed in response to the assertion risks that are identified. We replace the ‘X’ in B30X with a corresponding page number, eg. if there are three key accounting estimates, then we will complete three B30Xs, referenced at B30A, B30B and B30C.

To complete our risk assessment at the planning stage, we detail whether the key accounting estimate poses a significant risk of material misstatement. If so, the risk will also need to be documented on the Risk Assessment at B32.

Having identified the key areas of risk, we determine what our audit approach will be in response. The planned approach will be documented in full on the key accounting estimates audit plan at B33/Q2 and a Q audit programme must be tailored for each key accounting estimate and completed during the fieldwork stage of the audit. More detailed guidance on the use of the B33 forms to document the audit approach is provided in Appendix 1 to these guidance notes. The Q audit programme on key accounting estimates is designed to ensure that the detailed requirements of ISA 540 are being complied and that sufficient appropriate audit evidence has been obtained that enables us to be able to draw a conclusion on the reasonableness of the key accounting estimate, regardless of the approach that is being followed to test the accounting estimate.

We then consolidate all our individual accounting estimate work to formulate an overall conclusion for accounting estimates on the A44.

See ISA s (UK) 500, 540 and 620 and your firm's audit procedures manual for further guidance. Guidance on completing the substantive sampling form can be found within Appendix 3.

7.11 ISA (UK) 570 - Going concern

Various reports from the National Audit Office and Public Accounts Committee in recent years have highlighted going concern issues within academies and other schools making up the wider education sector.

Issues which may give rise to or highlight going concern issues include:

• the terms of the funding agreement significantly restricting borrowing or overdraft facilities;• underlying structural deficits not covered by non-recurrent funding;• academies within the trust with financial issues or a financial notice to improve;• the existence of earmarked grants or loans;• uncertain future funding, including that in respect of capital;• clawback of surplus’ on conversion;• unfavourable operational inspection (eg. OFSTED).

In September 2019, the FRC issued a revised version of ISA (UK) 570 on Going Concern, which is effective for audits of financial statements commencing on or after 15 December 2019, although early adoption is permitted. These revisions are in response to a number of recent audit failures regarding going concern, with the requirements of the new standard being much more prescriptive. Accordingly, a number of changes have been made throughout the manual to reflect these requirements and, again, there is a revision to the workflow and a number of new documents, most notably the creation of a going concern audit programme (R audit programme) within field work and a new permanent file document (PF1-10).

An understanding of the entity and its environment in relation to going concern is considered on PF1-10 and then an initial risk assessment is made at the planning stage on B31, although we should always be alert to additional events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern throughout the audit. An audit plan is included at B33 / R2 and an audit programme is included for section R along with update and evaluation procedures at the completion stage at A42.

See ISA 570 and your firm's Audit Procedures Manual for further details.

7.12 Subsequent events

In addition to the going concern audit programme within fieldwork, a subsequent events audit plan is included at B33 / S2 and a subsequent events audit programme (S audit programme) has been added to fieldwork to give the same level of prominence. An update and subsequent evaluation of the work is recorded at A41.

See ISA 560 and your firm's Audit Procedures Manual for further details.

7.13 ISA (UK) 402 - Service organisations

Often Service Organisations provide services to an academy that are part of the entity’s information systems and are significant to financial reporting (eg. a payroll bureau or outsourced accounting function). Where relevant, the auditor is required to consider how the entity’s use of a service organisation will affect the audit. In particular, they consider the following:

• the entity and environment (eg. the nature and significance of the services provided); • where sufficiently significant, details of the background including controls and how they can confirm their design and implementation so that risk can be

assessed;

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• the audit approach including whether a Type 1 or Type 2 service organisation audit report (per AAF 01/06) is to be used;• ultimately, whether sufficient appropriate evidence on the related assertions is available from the records held at the client or, if not, how further

evidence is to be obtained.

Form PF1-6 provides detailed guidance on what needs to be recorded. Where the auditor is unable to obtain sufficient appropriate evidence regarding the services provided by a service organisation, they will modify the audit report. Unmodified reports should not refer to the work of the service organisation.

7.14 Auditing groups

This manual can also be used to perform the audit of the group financial statements where also auditing all the components. ISA (UK) 600 imposes a number of requirements that affect a lot of the forms in the A and B sections of the file. Therefore, rather than include extra checklists to supplement the standard documents, the manual has a separate group pack (ie. sections A and B) which is prompted within Creator.

Also, an example engagement letter and audit report can be found in the example letters and example reports sections of the manual respectively.

7.15 Audit reports

Example audit reports can be found in FRC Bulletin ‘Compendium of illustrative auditor’s reports on United Kingdom private sector financial statements (March 2020)’, which are prepared in accordance with the requirements of ISA (UK) 700 (Revised November 2019) and ISA (UK) 570 (Revised September 2019). The Bulletin can be found at www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/bulletins. The only example reports included are for companies.

Revised ISA 700 requires auditors to explain in the auditor’s report to what extent the audit was considered capable of detecting irregularities, including fraud. The Audit and Assurance Faculty of the ICAEW have published two guides for auditors on reporting on irregularities, including fraud and can be found at: https://www.icaew.com/insights/viewpoints-on-the-news/2020/oct-2020/guide-for-auditors-on-reporting-on-irregularities-including-fraud. and https://www.icaew.com/technical/audit-and-assurance/audit/reporting-and-completion/how-to-report-on-irregularities-guide-for-auditors-reporting-for-the-first-time. A29 is completed in order to help auditors and the RI demonstrate the approval of this wording.

Under revised ISA 570, where the auditor concludes the going concern basis is appropriate and no material uncertainty exists, a positive conclusion regarding going concern is now required under ‘Conclusions related to going concern’ or other appropriate heading.

Example audit reports for charities have been updated in accordance with this and can be found in the example reports section of this manual.

7.16 Teachers’ Pensions EOYC reporting requirements

Each year, Teachers’ Pensions publish reporting accountants’ guidance for its End of Year Certificate certification exercise (TP05). This engagement is an agreed upon procedures engagement and results in the reporting accountant issuing a report of factual findings. Standardised tripartite engagement terms for this engagement are included within TP05, along with the procedures required and guidance on test completion and report submission.

Reporting accountants must be familiar with the requirements and guidance within TP05 prior to commencing the EOYC reporting engagement using the documentation within this manual.

The programmes, example letter and report in this manual are based on TP05 (2020/21 Version 1).

7.17 Using audit data analytics (ADA) and other technology

Use of technology

The variety of technology and automated tools which are available for use on an audit engagement is incredibly diverse, ranging from relative routine analysis within a spreadsheet, to the use of sophisticated applications which apply algorithms and machine learning, to the use of drones or online applications. Throughout this manual, audit data analytics (ADA) is referred to as a specific category of technology and automated tools. For the purposes of this manual ADA is defined as data analysis techniques (eg. the filtering and sorting of data to identify outliers, anomalies, deviations and other inconsistencies or detection and evaluation of trends and patterns within a data set) which can be used to perform risk assessment procedures, both controls and substantive testing and completion activities. In most cases, audit teams performing such analysis will have the ability to directly control the parameters used within this analysis, although certain applications may draw on the use of algorithms, artificial intelligence and machine learning to aid users with this analysis. Guidance on the additional considerations needed when planning the use of algorithms, artificial intelligence and machine learning is set out below.

B20 should be used to record how ADA and other technology is intended to be utilised on an engagement and how its use has been considered appropriate. Whilst not an exhaustive list, areas where ADA and other technology could be considered are:

• As part of the risk assessment (eg. for its use of part of the preliminary analytical review) • Highlighting high risk transactions for testing (see below)• Stratification of populations for sampling (see below).

The use other technology which does not meet the definition of ADA should be recorded on the respective B33/X2 when setting out the audit plan for each area (for example use of a drone or video technology to physically verify a fixed asset would be recorded on B33/E2).

Appraising the use of technology on engagements

The use of technology on engagements can take various forms and each engagement team team will need to appraise the use of technology on each engagement. Considerations are recorded on B20.

Applicability and potential uses of ADA on an engagement

The use of technology is evaluated on a client by client basis and is not deployed as a blanket approach to all engagements. While it is expected certain technologies and in particular ADA will be appropriate to use on the majority of engagements, certain complexities for particular clients may mean its use is not appropriate (such as unusual general ledger posting processes or complex business model meaning common algorithms are less applicable to them etc). Balanced consideration of these factors is recorded on B20 whether ADA or technology is applicable for use.

For clients where the use of ADA is considered applicable, how it is iintended to be used is considered. While not an exhaustive list, areas where its use could be considered are:

• As part of the risk assessment (eg. for its use for the preliminary analytical review);• Highlighting high risk transactions for testing (see below); and• Stratification of populations for sampling (see below).

Where the use of ADA in other areas is planned, (eg. to gather audit evidence), this should be recorded on B20 and if applicable, on B33 to confirm the audit plan has been suitable tailored to reflect its use.

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Evaluation of the application being used

Before using ADA or other data analysis applications, the system being used needs to be understood and evaluated. Such applications may have been developed either internally or sourced from an external provider, but in either case, individual engagement files need to record how it was deemed appropriate for use. As a minimum this needs to evaluate the integrity of the application being used and the knowledge, expertise, and competence of the developers (whether internal or external to the firm). While the extent of evaluation needed requires an element of judgement in each case, as a general rule the more complex / sophisticated the application being used is, the extent of evaluation required increases.

The evaluation of the independence and expertise of the application developer needs to be considered, much in the same way auditors assess an expert. The application itself needs to have its integrity evaluated, in the same way an internally developed application would. Where the application being used is hosted by a third party, this should be discussed with the client to confirm they understand the role of the third party and respective responsibilities for data handling have been acknowledged and agreed.

Where the use of ADA purely involves analysing data within a spreadsheet, using relatively routine functionality that can be understood and reviewed by most individuals with basic spreadsheet training, this would generally involve explaining which functionality / formula(s) is being used and why they are considered appropriate.

Where a more bespoke ADA application is utilised (eg. one which automates the running of analytical tools based upon parameters within the application), this evaluation needs to be expanded to demonstrate an understanding of the automation within the application, how this has been assessed as reliable and as such is appropriate for use (eg.via user acceptance testing).

For larger firms, some efficiencies may be gained by a central team of experts within the firm undertaking the required testing and evaluation of the ADA application being used, which individual engagement teams then look to draw on when completing B20, rather than the underlying evaluation of the application being performed by each individual audit team. Where teams use a centrally approved ADA application/functionality, they need to ensure the appropriate version is used on their engagement (i.e. not rolling forward an old version which is now out of date or accelerating the use of a new version prior to it being approved). Where individual engagement teams use a version of an ADA application that has not been tested and approved central, they should document why they are comfortable in using an unapproved version and how it is deemed appropriate for use.

Where an application utilises and relies on an algorithm (eg. use of machine learning or artificial intelligence), it is essential that development of any algorithms used is tracked, along with an audit trail to show how that algorithm has been tested and confirmed as being appropriate for use. It is expected that such testing (and approval for use) will be undertaken by a central team within the firm and that once approved any applications which utilise algorithms will be deployed and used consistently for a fixed amount of time (eg. 1 audit cycle) across all engagements, as this will help to ensure a consistent understanding of the application is in place across the firm. Individual teams looking to use such applications/algorithms with be responsible for confirming and documenting on each file that the version being used is appropriate , referencing where the testing of the version being used can be found and appraising why its use is considered appropriate for that specific engagement (eg their are no specific factors for that particular client which means it would not be reliable).

Evaluating the data to be used for ADA and other technology

Where applicable, each file should record details of the data set being analysed by ADA or other technological applications. In most cases this will be general ledger data, but could vary from audit to audit, with some analysing multiple data sets, from various sources (eg sales ledger, purchase ledger or inventory records from client systems).

Procedures to confirm the application has a complete and accurate data set(s) to be analysed will be performed. For general ledger data, this will generally be done by using the data set for all general ledger transactions during a period to reconcile the opening trial balance to the closing trial balance. The integrity of the data being used is evaluated, in particular considering controls around data extraction and the prevention of the data set being manipulated post extraction and also considering if wider audit procedures indicate any issues with the data set being used (eg. the results the preliminary analytical review) or if audit procedures need to be planned to test the validity of a data set (eg. where sales ledger data is being used, have audit procedures been planned to confirm this is complete and accurate).

Where teams are unable to validate the integrity of the data, then use of ADA is unlikely to be appropriate.

Preparing data for use in an application

In most cases where the application is using general ledger data, the chart of accounts will need to be mapped to the financial statements (eg. which general ledger accounts make up sales, cost of sales etc). While the account mapping will generally be rolled forward from one year to the next (with documentation also being rolled forward), any new accounts will need to be mapped in the first period they are used and an annual review should be performed to confirm if any accounts need to be remapped (eg. as a result of an accounting policy change).

For some uses, the application may also require the different document / transaction types within the clients general ledger data to be defined (for example manual journals, automated subledger posting, reversing journal etc), as these will generally present different levels of risk. As the coding of the different document / transactions types will vary between client systems this will be done for each engagement (although retaining a central firm wide library of system codes may provide some efficiencies should multiple clients use the same accounting software), with particular attention being paid to any bespoke document/journal types used by the client.

Where non-general ledger data is being analysed, the definition of the key data fields used by the application for its analysis will be considered. For example where ADA is being used to analyse aging of debtors, it is likely that the data fields which contain invoice number (as a document identified), invoice date (to determine age) and invoice amount. Where necessary the data fields which need to be defined with any internal experts (or the application developer) are confirmed.

Where sufficient understanding of the parameters needed for the application to analyse the data appropriately can not be obtained, then use of ADA is unlikely to be appropriate.

Use of audit data analytics (ADA) for identifying high risk journals / transactions

As noted above, ADA can be applied to identify transactions for testing on the basis of risk criteria, including journal entries. This allows testing to be focused more efficiently than it would be using manual sample selection. This could involve using ADA to generate a risk score for each general ledger transaction, which can either be based upon artificial intelligence / machine learning, criteria set manually by the audit team (which is tailored for each client), or a combination of these methods depending on the ADA system being used.

Automated risk scoring

Where transactions have been risk scored using an automated ADA application, the application will usually have preset parameters set by the developer. What these are need to be understood and evaluate their use for each client, ensuring they are tailored as appropriate. Given the bespoke nature of such applications, a freeform working paper will be needed to record this assessment, and a prompt to reference this included on B33/N2 (ADA). For larger firms, some efficiencies may be gained by a central team of experts within the firm undertaking the required evaluation of the preset system parameters, wand this is considered when completing the assessment. Consultation where relevant with the central teams of experts or the application developer to confirm the appropriateness of any tailoring made to these parameters should be recorded.

Manual risk scoring

Where risk criteria are manually applied to transactions (eg when analysing data in a spreadsheet), each of the criteria selected should be allocated a risk score on a scale of 1 to 5 (1 being used for criteria which is consider to be the lowest risk and 5 for criteria which is considered the highest risk). The risk posed by certain factors will vary from client to client, and is tailored based upon the knowledge and experience of each client.

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There are various criteria that can be applied when manually evaluating the level of risk posed by a transaction. While not an exhaustive list, common criteria to apply are as follows:

Risk Condition Example of criteria that could be applied

Large amounts Greater than or equal to performance materiality

Round sum amounts Amounts which end 000.00, 999.99, 999.00

Unusual description / key word search Descriptions which include names / titles of key management,directors and other related parties or unusual words such as adjust, correct etc

Transactions posted at unusual times Journals posted when the office is usually closed, such as weekends or between 7pm and 8am

Back dated transactions Journals which post to a prior period (i.e. a journal raised in accounting period 3 which is shown in accounting period 2)

Transactions posted and reviewed by the same person Where a system had a ‘park and post’ or ‘maker/checker’ function and these roles have been performed by the same person

Transactions posted by an unexpected person Journal posted by a senior member of staff/non-finance staff who typically are not involved in day to day ledger posting

Unexpected account combinations Journals which are posted to accounts which would not typically be linked, for example sales and fixed assets

Transactions which bypass the expected transaction flow System entries which are usually automated/triggered from a sub-ledger but are posted manually

These risk conditions and examples are not exhaustive examples and teams should also use their judgement to consider additional criteria and tailoring which could be applied relevant to the client. The justification for the criteria selected should be documented on file, with a template within B33/N3 being provided for this.

Risk enhancers

To further tailor the risk score, certain ADA applications (both automated and manual) may allow us to enhance the risk score of a transaction by applying a multiple. This may be linked to certain document / journal types or members of client staff considered to present a higher risk, the financial statement assertion risks (eg. a high risk area could receive a higher risk multiple) or certain accounts which are considered inherently riskier due to their susceptibility to fraud. Details of enhancers applied should be recorded on B33/N2 (ADA).

Manually calculating a transactions risk score

A transaction risk score is calculated by taking the sum of any risk scores triggered by a specific risk condition, which is then multiplied by any applicable risk enhancers (where no enhancer is applicable to a particular transaction, this will be assumed to be a multiplier of 1).

Example risk score calculation

Extract example of a manually applied risk criteria:

Risk condition Specific definition for this client Risk score applied

Large Value £100,000 (performance materiality) 3

Round sum amount or transaction ending in '999' Amount ending '000.00' 2

Transaction posted at unusual timeAny posting between before 7.30am and after 8.00pm Monday to Friday and at any time on a weekend

5

Extract example of a risk enhancer:

Risk enhancer Multiple to be applied

Any transactions posted to Revenue 3

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Example extract transaction data and scores calculation:

Description Transaction ID Account Dr Account Cr Value (£) Time and Date Risk score

Correction to accrued income 1234 Accrued income Sales 200,000.00 11pm Friday

dd/mm/yyyy 30 [(3+2+5)x3]

Monthly depreciation charge for Motor Vehicles

1235 P&L depreciation (Motor Vehicles)

Accumulateddepreciation (Motor Vehicles) 105,000.00 2pm Monday

dd/mm/yyyy 5 [(3+2)x1]

Items to be selected for testing

The final element of tailoring is setting the criteria which highlight the transaction to be tested. A risk score is set and any transactions which score equal or greater than this will be selected for testing. Consideration of other specific risk factors which may trigger a transaction to be tested or why it can be excluded from testing (eg. the value of the transaction is trivial or a reversing journals where it can be confirmed the net impact in the period is nil) and the rationale for using is recorded on B33/N2(ADA).

Where teams are relying on an algorithm (eg. in which risk scoring is done via machine learning or artificial intelligence), the understanding and evaluation of the appropriateness of the algorithm being used should be recorded on B20.

The use of ADA and other technology and ethics

The use of certain ADA applications and / or other technology may allow us to communicate more detailed and meaningful insights to management. However, this does not extend beyond feedback that would be seen as being the normal by product of the audit, into wider commentary and analysis that could be seen as offering business advice that could be used in a managerial decision making process.

7.18 COVID-19

The FRC, ICAEW, ICAS and ACCA have all published guidance to support auditors in relation to the difficulties they face during the pandemic.

Guidance can be obtained at:

- https://www.frc.org.uk/getattachment/ae0044e3-a7bf-4b75-8aa2-4e39e20f525b/Bulletin-Coronavirus-Guidance-December-2020.pdf ;

- https://www.icaew.com/coronavirus/audit ;

- https://www.icas.com/professional-resources/coronavirus;

- https://www.accaglobal.com/gb/en/cam/coronavirus.html; and

Specific guidance for academies (although not necessarily audit related):

- https://www.gov.uk/government/collections/guidance-for-schools-coronavirus-covid-19

Specific guidance for charities that may be relevant to the academies sector:

- https://www.charitysorp.org/about-the-sorp/covid-19/

- https://www.ncvo.org.uk/practical-support/information/coronavirus.

8 Reporting To The Regulator

8.1 Introduction

Section 156 of the Charities Act 2011 places a duty on the auditors of charities appointed under Sections 144-146 of the Act to report matters of material significance to the Charity Commission. Section 159 of the Act then extends the duty to the auditor of a charitable company appointed under Chapter 2 of Part 16 of the Companies Act, which includes academy auditors. Section 160 of the Act places a requirement on auditors of unincorporated exempt charities to report matters of material significance to the charity’s principal regulator rather than the Charity Commission.

Guidance issued by the Charity Commission on reporting Matters of Material Significance notes the following:

“Nothing in the Act disapplies section 159 from exempt charities and so the Companies Act Auditor of an exempt charitable company also has a duty to report any concerns. This duty is modified by section 160 so that the report must be made to the principal regulator rather than the Commission.”

Whilst the underlying legislation is unclear in this respect, the above guidance sets out that the Charity Commission would not expect to receive reports in connection with academies. Matters should instead be reported to the principal regulator being the Secretary of State for Education through the ESFA.

It is recommended that the audit engagement letter should include appropriate reference to this duty to report matters of material significance to the Secretary of State for Education through the ESFA.

8.2 Reporting to the ESFA

Within the Accounts Direction, the ESFA sets out its process for auditor ‘whistleblowing’ as follows:

The requirement as set out in the Charities Act 2011 (sections 156(2), 159 and 160) is that auditors (reporting accountants) should report matters of ‘material significance’ to the principal regulator, being ESFA on behalf of the Secretary of State for Education (to whom the Charity Commission discharged their duties). To assist, the Charity Commission produced specific whistleblowing guidance.

The principles of reporting to the Charity Commission apply, however the reporting accountant has a duty of care regarding confidentiality.

In the first instance of identifying matters of ‘material significance’ the reporting accountant is to contact ESFA via its enquiry form.

The Accounting Officer and governing body of an academy are also required to report to the Secretary of State for Education (DfE) in a number of instances under the terms of the funding agreement.

8.3 What must be reported?

The duty to report arises where the auditor, in the course of their audit, identifies a matter, which relates to the activities or affairs of the academy or of any connected institution or body, and which they have reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the regulator of its functions.

Auditors are only required to communicate matters described as being of material significance in the context of the regulator’s functions. These functions are set out under sections 46, 47 and 50 (inquiries) and 76 and 79 to 82 (power to act for protection of charities) of the Charities Act 2011 (CA11).

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Determining whether a matter is reportable involves consideration both of whether the auditor has a ‘reasonable cause to believe’ and that the matter in question ‘is, or is likely to be of material significance’ to the regulator. The regulations do not require auditors to perform any additional audit work as a result of the statutory duty nor are they required specifically to seek out breaches of the requirements applicable to a particular academy. However, in circumstances where they identify that a reportable matter may exist, they should carry out such extra work, as considered necessary, to determine whether the facts and circumstances give them ‘reasonable cause to believe’ that the matter does in fact exist. It should be noted that the work done does not need to prove that the reportable matter exists.

‘Material significance’ is defined as follows:

“The term material significance requires interpretation in the context of the specific legislation applicable to the regulated entity. A matter or group of matters is normally of material significance to a regulator’s function when, due either to its nature or its potential financial impact, it is likely of itself to require investigation by the regulator.”

The determination of whether a matter is, or is likely to be, of material significance to the regulator inevitably requires auditors to exercise their judgement. In forming such judgements, they need to consider not simply the facts of the matter but also their implications. In addition, it is possible that a matter, which is not materially significant in isolation, may become so when other possible breaches are considered.

In order to recognise whether a situation is likely to be of material significance to a regulator’s function an understanding is needed of those matters which either due to their nature or potential financial impact are likely to require evaluation and, where appropriate, investigation by the regulator.

The CC and hence ESFA will always consider the following to be of material significance and hence reportable where identified during the course of an audit:

• matters suggesting dishonesty or fraud involving a significant loss of, or a major risk to, charitable funds or assets;• failure(s) of internal controls, including failure(s) in academy governance, that resulted in, or could give rise to, a significance loss or misappropriation of

charitable funds, or which leads to significant charitable funds being put at major risk;• matters leading to the knowledge or suspicion that the academy or charitable funds, including its bank accounts, have been used for money laundering

or such funds are the proceeds of serious organised crime or that the academy is a conduit for criminal activity;• matters leading to the knowledge or suspicion that the academy, its trustees, employees or assets, have been involved in or used to support terrorism

or proscribed organisations in the UK or outside the UK;• evidence suggesting that in the way the academy carries out its work relating to the care and welfare of beneficiaries, the academy’s beneficiaries have

been or were put at significance risk of abuse or mistreatment;• matters suggesting single or recurring breach(es) of either a legislative requirement or of the academy’s trusts leading to material charitable funds being

misapplied;• a deliberate or significant breach of an order or direction made by a regulator under statutory powers including suspending a trustee, prohibiting a

particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities; • an intention to issue a modified audit opinion, emphasis of matter or material uncertainty related to going concern paragraph in the audit report; and• evidence suggesting that conflicts of interest have not been managed by the trustees in accordance with guidance issued by the regulator and / or

related party transactions have not been fully disclosed in all respects required by the Charities SORP.

A whistle blowing checklist is included in this manual which may be completed to help identify possible reportable matters.

8.4 What may be reported?

A separate statutory right (as opposed to a duty) to report to the appropriate regulator also exists and may be used by auditors. Auditors may become aware of circumstances which in their opinion does not give rise to a duty to report to the regulator but which should nonetheless be brought to their attention. Such matters should be considered in conjunction with ISA (UK) 250 'Consideration of law and regulations', and where any report is made auditors rely on the protection afforded by general law.

8.5 Contents of a report to the regulator

The Charity Commission has issued guidance on how to report and this is supplemented by further information within the Accounts Direction (see 8.2 above). The auditor should include in his / her report:

• a header ‘Matter(s) of material significance reported’;• the auditor’s name and contact address, telephone number and / or e-mail address;• the academy’s name;• a statement that the report is made in accordance with section 156 of the Charities Act 2011;• under which of the nine headings of reportable matters the report is being made;• describe the matter giving rise to concern and the information available on the matter reported and, where possible, provide an estimate of the financial

implications;• where the trustees are attempting to deal with the situation, a brief description of any steps being taken by trustees of which the examiner has been

made aware;• if the report concerns terrorist, money laundering or other criminal activity whether you have notified the National Crime Agency and / or Police as

appropriate;• if the report concerns the abuse of vulnerable beneficiaries whether you have informed the Police and / or social services.

Auditors are not relieved of their duty to make a report where an oral report has been previously made or by any informal discussions of the issue. Similarly, they are not relieved of their duty to report on the basis that any other party has provided relevant information, whether written or oral.

8.6 Reporting to the National Crime Agency (NCA) and to the Regulator

It should be noted that the submission of a report to NCA under the Anti-Money Laundering Regulations does not relieve an auditor of a duty to report that matter to charity regulators (ie Charity Commission and ESFA) where the information is of material significance to the Regulator’s function.

8.7 Timing of a report

The duty to report arises once auditors have concluded that there is reasonable cause to believe that the matter is, or is likely to be, of material significance to the regulator’s function. In reaching their conclusion they may wish to take appropriate advice and consult with colleagues or lawyers.

The report should be made without undue delay once a conclusion has been reached. Unless the matter casts doubt on the integrity of the trustees this should not preclude discussion of the matter with trustees and seeking such further advice as is necessary, so that a decision can be made on whether or not a duty to report exists. Such consultations and discussions are however undertaken on a timely basis to enable auditors to conclude on the matter without undue delay.

9 Regularity Assurance Engagement

9.1 The requirement to report on regularity

The Accounts Direction requires a separate report to be issued, with addressees including the ESFA, to provide a limited assurance conclusion on regularity.

Regularity is the requirement that income received and expenditure disbursed has been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

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The ESFA has included guidance on regularity reporting within Part 4 of the Framework and guide for external auditors and reporting accountants of academy trusts.

The approach outlined in the following sections of these guidance notes must be read in conjunction with the Accounts Direction and other relevant guidance and auditor instructions.

9.2 The Accounting Officer’s Statement on Regularity, Propriety and Compliance

A formal signed declaration of the Accounting Officer’s responsibilities is required as part of the annual accounts. Though this does not expand their responsibilities in any way, it forms part of the direct assurances provided to the ESFA and DfE that they in turn rely upon for their own audit purposes. An example statement is included in section C of this manual.

The statement confirms the Accounting Officer’s and governing body’s ability to identify any material irregular or improper use of funds by the academy trust (with monetary amounts if known), or material non-compliance with the terms and conditions of funding under the academy trust’s funding agreement and the Academies Financial Handbook. Further, it confirms whether any instances have been discovered and notified to the governing body and ESFA. Fraud, by its inherent nature is irregular and improper, and therefore needs to be included in the Accounting Officer’s statement.

The Accounting Officer should also have due regard for, and include in their statement, any items included in the reporting accountants report on regularity.

Where there is a change of Accounting Officer during the period, the new Accounting Officer has to be satisfied that they can support their signing of the statement.

An accounting officer will need to consider the basis upon which they are making assertions within the Statement and also assertions made in the Governance Statement. This should be the starting point for the regularity assurance engagement.

9.3 Engaging as the regularity reporting accountant

The ESFA has published its standardised terms of engagement for the regularity reporting engagement within the Accounts Direction. The terms form the basis of engagement between the academy, the reporting accountant and the ESFA. Paragraphs are included within the engagement letter schedule on regularity in section B of the manual, which refers to the terms of engagement available on the DfE website and includes the standard paragraph that is required by the Accounts Direction.

Once the reporting accountant's report is submitted to the ESFA in accordance with the terms, the ESFA will accept that an agreement is formed between the parties. By issuing standardised terms of engagement, the ESFA is not required to sign separate terms of engagement for all academies.

It is strongly recommended that firms undertaking academy audit and regularity engagements consider whether the level of professional indemnity cover held is adequate in light of terms regarding limitation of liability capping for these engagements.

9.4 Regularity assurance in the Academies Specialist Assignment Manual (SAM)

The Academies SAM includes the following documents to aid the completion of the regularity assurance engagement:

• B11-R Regularity Planning Checklist;• PF3-R Regularity Risk Analysis;• B32-R Regularity Risk Assessment; and• A21-R Regularity Review and Conclusion.

The B33/PF5 audit plans also incorporate prompts to tests which may be used to provide assurance relevant to the regularity assurance engagement.

It is strongly recommended that the “-R” forms are used and B33/PF5 documents are referred to even where the audit planning has commenced at the time of publication of this SAM. It is also recommended that they are used where a ‘freeform’ planning approach is being taken. The following sections outline the use of the above documents in conjunction with other audit documentation.

9.5 Recording the regularity assurance engagement

The standardised terms of engagement do not refer to ESFA right of access to engagement working papers. As such, though the approach and evidence supporting the regularity conclusion should be clear, the work can be performed on the same file. Where testing performed as part of the audit is relied upon to inform the regularity assurance conclusion (dual purpose testing) the test objective(s) and separate conclusions relating to audit and regularity engagements should be clearly documented.

It should be clear from the file which evidence supports the separate regularity assurance conclusion as although much of the evidence will be drawn from existing audit procedures, this is technically a separate engagement.

9.6 Regularity assurance engagement risk assessment

The regularity assurance engagement requires that an understanding of the framework of authorities which govern transactions is obtained, such that an assessment of risk may be performed to enable evidence to be obtained sufficient to inform a negative form of conclusion.

Within the Academies SAM, the planning process for the regularity assurance engagement is driven by the B11-R Regularity Planning Checklist. To aid efficiency, it is preferable for the B11-R to be completed at the same time as the B11 and audit planning.

Where it is believed there is an issue with a specific academy trust, ESFA communication requests for any relevant information considered necessary to the planning and subsequent delivery of the regularity assurance engagement may be made via the ESFA enquiry form. The ESFA’s standardised terms of engagement provide further details.

Risks relevant to the regularity assurance engagement and the planned approach to the engagement are outlined on B32-R. The risk of material irregularity, impropriety and non-compliance is also concluded on within this form.

Non-compliance in the context of the regularity assurance engagement relates to transactions not conforming to the authorities which govern them and has wider scope than just compliance with the funding agreement and Academies Financial Handbook. This is discussed further below.

Sources of information which may inform the risk assessment may include a number of existing audit planning and permanent file documents including, but not limited to:

PF1-1 Understanding the entity and its environmentAs part of the audit documentation, there ought to be relevant consideration of the activities of the academy which may in themselves increase the risk of irregularity. Information such as the length of time that the academy has been in existence, the experience of key management and accounting personnel, the number of locations that the academy operates over (hence affecting oversight) will all be factors to consider in assessing the risk of irregularity.

PF1-3 Significant laws and regulationsISA (UK) 250A requires that a general understanding is obtained of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. Auditors must obtain a sufficient understanding of laws and regulations to identify and assess risk. It is not the auditors responsibility to prevent non-compliance with laws and regulations and auditors are not expected to detect non-compliance with all laws and regulation. Auditors should be chiefly concerned with areas that:

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• directly affect amounts / disclosures in the financial statements;• may have a fundamental effect on operations of the club.

The understanding of the framework of authorities should include an understanding of the articles of association (and charitable objects), funding agreement and Academies Financial Handbook which are the authorities which govern a majority of transactions within an academy. Depending upon the activities of the academy, however, the understanding may also extend to laws and regulations specific to other activities and terms attaching to other sources of income. These details are recorded on PF1-3 and appending schedules.

Beyond the risk assessment procedures, auditors must maintain professional scepticism and remain alert for the possibility of non-compliance or suspected non-compliance during the fieldwork and completion stages of the audit (prompted on A31). Certain procedures on significant laws and regulations are included on K section audit programmes (in this context, ‘Significant’ means those laws and regulations where non-compliance may have a material effect on the financial statements). Written representations from the client are obtained and confirm that they have disclosed all known or suspected instances of non-compliance with laws and regulations.

Beyond this however, in the absence of identified or suspected non-compliance, auditors are not required to perform any further procedures.

Further information pertaining to understanding the framework of authorities as relevant to the regularity assurance engagement is provided in the part 9 of the Accounts Direction.

PF2 Internal controlsWhere controls in a particular area appear weak or have been in operation for only part of the period then the risk associated with potential irregularity may be increased. An understanding of the oversight affected by the accounting officer and those charged with governance and the quality of policies and procedures in place to ensure compliance will often inform the assessment of risk. Key internal controls identified are also likely to be subject to testing as part of the regularity assurance engagement.

PF2-3 Internal audit / internal scrutiny functionThe internal audit department or internal scrutiny function in place throughout the period will have reported on a regular basis. Issues reported may impact on the assessment of risk of irregularity. Also, specific discussion pertaining to fraud will have been performed as part of the audit which would directly impact upon the assessment of risk.

Consideration should be given as to whether it might be effective and efficient to use the results of testing already undertaken by this function to alter the nature, timing or extent of work performed in forming the assurance conclusion on regularity and to minimise any duplication of work.

In such cases, the independence, objectivity and competence of the function and the nature, scope and subjectivity of the work performed, should be assessed. Where the work is used, the reporting accountant may evaluate and perform testing on that work to determine its adequacy for regularity reporting. The regularity reporting accountant should also consider making reference to the internal auditors and the extent of the use of their work in the regularity assurance report.

PF3-1/2/3/R Overall, fraud, group and regularity risk factorsSpecific consideration of issues which may indicate an increased risk of misstatement or irregularity will be prompted through the completion of the above checklists.

The PF3-R regularity risk analysis should be used to help identify indicators of increased risk relating to irregularity, impropriety and non-compliance in the period. Risks highlighted may also affect procedures performed as part of the audit engagement. The form may also help to evidence review of the Accounting Officer’s own assessment of compliance with funding agreement and Academies Financial Handbook terms, as referenced risk indicators are also requirements of the Handbook.

There will be a risk of irregularity, impropriety and non-compliance within all academies. This risk may be reduced by the absence of some indicators of risk, however, to inform professional judgement in the level of procedures required, the regularity reporting accountant will need to be aware of information relevant to that particular client obtained through informed discussion and assessment with the Accounting Officer, management and potentially governors. It may also be possible that a preliminary analytical review as part of the audit has identified an increased risk of activities being performed which are not in accordance with the framework of authorities.

9.7 The planned approach

The approach outlined within B32-R relevant to the regularity assurance engagement should be reflected within B33/X2 individual audit area plans (or freeform planning memorandum). Prompts to tests which may provide assurance as part of the regularity assurance engagement are included on B33/X2 documents. Materiality at the planning stage will likely be the same as for the audit engagement though it is important to consider that issues identified may be considered material by nature. Further guidance on the application of materiality is provided within the ESFA guidance.

It should be noted that a number of the tests which are likely to be planned as part of audit procedures may provide assurance as part of this separate regularity reporting engagement, however some additional testing will be required.

Accounts Direction includes example procedures to aid focus of the regularity approach in the following areas:

• Delegated authorities;• Transactions with connected parties;• Governance;• Internal controls; • Procurement; and• Income.

The type and extent of testing is entirely dependent upon the assessed risk of material irregularity, impropriety and non-compliance. The example tests provided in the Accounts Direction are incorporated in the regularity risk assessment, the untailored work programmes and highlighted on B33/X2 as being relevant to the regularity engagement.

9.8 Completion and reporting

Steps relevant to the completion stage of the regularity assurance engagement are prompted on A21-R. This form is also used to document the reporting accountant’s overall conclusion on the engagement.

Where potential irregularities are identified, they should be discussed with the accounting officer and the governing body as appropriate and consideration should be given to modification of the Accounting Officer’s own Statement and the regularity assurance report. Where appropriate, a reassessment of risk and additional procedures may be required. Regularity matters will also be reported through the report to management.

A separate representation letter is required which should be obtained from the Accounting Officer. An example letter is included in section B of this manual. Representations from the governors (trustees) are included within the example audit representation letter.

The file ought to clearly document how the conclusion has been drawn specifically in relation to the regularity reporting engagement and be clear on the work performed to inform this conclusion. A summary of the work performed should be included either on A25 or on a separate schedule.

Example wording for the reporting accountant’s assurance report on regularity is included in section C. Example engagement terms and an example letter of representation for this engagement are also included in section B.

The audit management letter should include matters in relation to the regularity engagement in the following form:

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• Issue (including a rating of risk / importance and financial impact).• Implications / consequence.• Recommendation;• Management response (including timescale for change).

Further guidance on materiality and reporting issues is also included within the ESFA guidance.

10 Other Sources Of Information

The Education and Skills Funding Agency (ESFA):

• The Education and Skills Funding Agency, multiple locations across England

• Website: www.gov.uk/government/organisations/education-and-skills-funding-agency

• Enquiry form: form.education.gov.uk

HM Revenue & Customs:

• HMRC Charities, St John’s House, Merton Road, Liverpool. L75 1BB.

• Telephone: 0300 123 1073

• Website: www.hmrc.gov.uk/charities

• E-mail: charities@hmrc.gov.uk

Charity Commission:

• Charity Commission Direct, PO Box 1227, Liverpool. L69 3UG.

• Central telephone help line: 0300 066 9197

• Website: www.gov.uk/government/organisations/charity-commission

• General enquiries form: https://forms.charitycommission.gov.uk/charity-commission-enquiry-form/

Footnote

This manual reflects existing legislation and current best practice. However the sector has seen an increasing rate of change, and the professional adviser needs to keep up to date with relevant developments.

Appendix 1 - notes for completion of planning forms B33 - Audit plan

Audit plan - notes for completionThe objective of the audit plan is to record the risk and approach for the individual areas of the audit.

This can be achieved by completing the individual area audit plans on B33 / X2.

Alternatively, you may prepare a free-form audit plan setting out the risks (including the risks in relation to internal control) and the planned approach.

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Appendix 1.1: notes for completion of planning forms B33 Audit plan - Trial balance (use of ADA)

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Appendix 2 - notes for completion of planning form B41 - Materiality

Appendix 3 - notes for completion of substantive sampling formThe substantive sampling form requires the documentation of a number of qualities of the test being performed and population being tested in order to evidence due consideration of those factors. The form encourages the extraction of significant and other key items which would be tested in addition to the calculated sample size for the residual population. This sample size for the residual population is determined by reference to the assessed risk in the population, the planned reliance on other procedures and the size of the residual population.

Sample size calculation

When determining the sample size for the residual population in a substantive test of detail the initial sample size will be 60 items. This number can be reduced based on various deduction factors that are dependent upon the following:

• the risk of material misstatement associated with the population being tested;• the planned level of reliance placed on the operating effectiveness of controls;• the strength of analytical and other related substantive procedures; and

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• the size of the residual population (adjusted via a ‘materiality factor’).

The following table highlights the level of deduction available in each instance. This is followed by guidance on the application of judgement in taking deductions available.

Assessed risk in population Planned reliance on internal controls

Analytical and other related substantive procedures Materiality factor

Level No. Level No. Strength of evidence No. Value No.

Low 20 High 20 Strong 20 Under 15 20

Medium 10 Medium 10 Moderate 10 15-27 10

High 0 None 0 Weak 0 Over 27 0

Assessed risk in the population

The assessed risk of material misstatement inherent in the population relates to the susceptibility of a relevant assertion (or assertions) within the population to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related controls.

This assessed risk in the population will depend on the audit area and the particular assertion being tested.

Examples of factors which may affect the risk assessment include:

• misstatements identified by the audit team in prior audits;• unexplained relationships identified at the preliminary analytical review stage;• complex financial reporting which requires specialised skills, eg, valuations;• the involvement of significant judgements or estimates;• significant related party transactions;• the potential for fraud or misappropriation;• recent changes in the related accounting system; and• the expected and tolerable misstatement within the population.

Accounting estimatesSampling techniques are unlikely to be utilised when testing accounting estimates, however certain accounting estimates such as depreciation / amortisation calculations may utilise a sampling approach. Care is needed here regarding clarity over the assertion(s) being tested The process for determing the risk assessment of accounting estimates differs from other aspects of the financial statements as it requires inherent risk and control risk to be considered separately.

The inherent risk assessment of an accounting estimate is assessed on a ‘spectrum of risk’ resulting in an assessment ranging between very low and very high. In order to be able to reflect how this method of assessing the risk inherent in an accounting estimate when determining a sample size for testing the approach should be as follows:

Inherent risk as assessed for an accounting estimate Assessed risk in the population as used for determining a sample size

1 or 2 Low

3 Medium

4 or 5 High

Control risk is assessed using low / mmoderate / high and if there is no plan to test the operating effectiveness of controls then control risk is assessed as high.

Planned reliance on internal controls

Where we only confirm the design and implementation of control procedures, we cannot reduce the substantive test sample size for any reliance on controls.

Tests of operating effectiveness of internal controls are often designed to provide either a high or moderate level of reliance and therefore risk reduction.

• A high level of reliance (low level of risk remaining) applies where the primary evidence is coming from tests of controls.• A medium level of reliance (medium level of risk remaining) applies where the tests of controls will be combined with other substantive procedures to

address a particular assertion.

The type of controls being tested may influence the level of reliance to be placed on them. For example, a control applied to all items in the population is likely to provide a sounder basis for reliance than one only applied to certain types or sizes of transactions.

The extent to which we test controls for the planned level of reliance is a matter of professional judgement; however, in ascertaining an appropriate sample size for tests of controls we may use the tests of controls sampling form.

Analytical procedures and other related substantive procedures

The level of reliance which can be placed on analytical and other related substantive procedures is specific to each situation and so is an area where we will need to apply professional judgement.

The degree of reliance on analytical procedures will generally depend upon:

• The predictability of the relationships relevant to the assertion – in general, predictability tends to be greater for profit and loss account items than for balance sheet items.

• The level of detail of the analytical procedure – for example, analytical procedures may be applied to the overall population, eg sales or debtors, or the population could be disaggregated into its component parts, eg different types of sales or classes of debtors.

Care should be taken that undue reliance is not placed upon analytical procedures which provide little assurance.

The extent of sample size reductions based on analytical procedures should have a direct link to the effectiveness of the analytical procedure in detecting the same errors as the test being performed on the sample items.

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The reference to "other related substantive procedures" does not solely refer to analytical procedures, but includes other tests of details within the same cycle that provide evidence regarding the monetary correctness of a financial statement assertion. For example, if subsequent cash receipts are examined in conjunction with the determination of the reasonableness of the valuation assertion for debtors, the audit team may “take credit” for the fact that this procedure also provides evidence as to the existence of debtors – the same assertion being tested by the debtors sample.

Although evidence from other substantive procedures can be obtained from any procedure within the same cycle, it is important to remember that the procedure has to provide evidence in respect of the assertion being tested.

Materiality factor

The materiality factor is calculated as follows:

total value of population / materiality = materiality factor

The lower the resulting figure for the materiality factor the greater the reduction in sample size. Thus, not surprisingly, the larger the value of the residual population relative to materiality the greater the value of the materiality factor and the larger the final sample size will be.

Where a different specific audit area materiality is set on the B41 then this materiality rather than the overall materiality should be used to calculate any sample sizes for that particular area.

Minimum sample size

Small samples have an increased risk of being unrepresentative and unreliable. If the total population comprises a relatively small number of items, say fewer than 50 items, then alternative procedures should be considered in place of sampling. For example, this might include analytical procedures or a review for unusual items.

When the calculated sample results in a sample size of 15 items or fewer, then alternative audit procedures should be considered as outlined above. If these are not appropriate then the minimum sample size should be 15 items.

Total number of items to be examined

The total number of items to be examined is equal to:

• the number of items over tolerable misstatement; plus• the number of other key items; plus• the sample size for the residual population.

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Getting started for new manual usersIntroductionThis getting started guidance will help you to use the Mercia Academies Manual. You may be a regular user of our products or this may be the first time that you have used such a manual. Either way these notes will help you understand the Mercia approach and how to maximise the benefits of the package.

The manual includes example letters, proforma accounts and disclosure checklists, in addition to all the other essential current and permanent file documentation necessary for an audit assignment.

The Academies Manual itself consists of the following sections:

• Guidance• Example letters• Example reports• Example accounts• Accounts disclosure checklists• Current file documents• Permanent file documents

GuidanceYou will find the following documents in this section of the Academies Manual:

• a contents page;• guidance notes on the academies sector• this getting started guidance for new manual users; and• What’s Changed, which provides a summary of the changes made to the manual in the most recent updates.

Example lettersThis section provides examples of the following:

• letters of engagement, both for individual academy and for group audits - the engagement letters are structured in the following way:1. a covering letter to identify the services to be provided, which cross-reference to detailed schedules of professional services - there are two

example covering letters in the manual, one for an individual academy and one for a group;2. standard terms of business - the standard terms of business can be used for either an academy or a group headed by an academy.;3. detailed schedules of professional services - example terms have been provided for:

1. audit of the financial statements - there are two example schedules of professional services for audit in the manual, one for an individual academy and one for a group;

2. regularity assurance engagement3. Teachers' Pensions; and4. Accounts Return 2020.

The schedules of professional services for regularity assurance, Teachers’ Pensions and the Accounts Return 2020 can be used for either an academy or a group headed by an academy.

• letters of representation;

Example reportsExample audit reports for both an academy or group headed by an academy can be found in this section, along with an accounting officer’s statement on regularity, propriety and compliance and a reporting accountant’s regularity assurance report. An example Teachers’ Pensions report in the form of an accompanying letter is also included.

Example accountsThis section includes an example proforma accounts for an academy under the Charities SORP 2019 (FRS 102).

The proforma accounts incorporate the disclosure requirements within the Academies Accounts Direction 2019 to 2020 (Accounts Direction) issued by the Education and Skills Funding Agency.

Accounts disclosure checklistsAn accounts disclosure checklist covering an academy complying with the disclosure requirements of the Companies Act 2006, the Charities SORP 2019 and requirements within the Accounts Direction.

Current file documentsEach section of the current file working papers (including planning, audit programmes, completion and group audit documentation). See below for further details.

Permanent file documentsEach section of the permanent file working papers is separately available and they are all filed in one place in this section. See below for further details.

Audit approachThe Mercia approach encourages you to adopt a thinking rather than a form filling approach. This is achieved in two main ways:

• Through the use of permanent information. If something that you record is unlikely to change significantly from one year to the next, we believe it is better that this is recorded properly once and then rolled forward (updating where necessary) each year.

• By encouraging those completing audit work not to file surplus copy documentation thus generating the need to sign off, date and evidence as reviewed the excess paperwork. Where additional paperwork is considered necessary, the system encourages you to file these on a non-audit section of the file.

The planning approach (the Permanent File Documents and section B within the Current File Documents)The key to an effective audit is effective planning. The various steps to be undertaken at the planning stage (such as updating your knowledge of the client, calculating materiality, etc.) are driven by the planning checklist (B11) which is filed within the Current File Documents.

There are different approaches to completing the planning documentation. For more straightforward assignments, as an alternative to completing many of the standard current planning forms, you may choose to adopt a ‘free-form’ planning memorandum.

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In such cases, you may opt for the Mercia proforma free-form memorandum which must also be completed alongside a two-page planning checklist (B11) to ensure you have covered all necessary matters.

Whilst completing the memorandum, you are able to read guidance on what is required in certain areas by reading the applicable endnotes.

It is for the firm to decide the criteria as to when the free-form planning memorandum should be used to replace other standard forms. We recommend that such criteria include:

• the client has been audited by the firm for at least the immediate preceding period;• there has been no history of controversial issues arising from the previous audits;• the client qualifies as small as per company law or contains characteristics indicative of a simple business as set out below.

The following characteristics may be indicative of a simple business:

• ownership is concentrated in a small number of individuals (sometimes a single individual) who are actively involved in managing the business; and• the operations are uncomplicated with few sources of income and activities; and• business processes and accounting systems are simple; and• internal controls are relatively few and may be informal.

Such entities are likely to include companies which are exempt from audit, but which choose nonetheless to have a voluntary audit, small subsidiary companies, as well as larger entities that are also relatively simple.

The fieldwork approach (sections C onwards within the Current File Documents)Once the audit plan has been formed and tailored audit programmes have been produced (see the section named "The structure of each audit section" within these notes), the audit evidence should be obtained in accordance with these programmes.

To assist in the recording of the detailed procedures at the fieldwork stage, you may find it useful to use some or all of the proforma working papers included in the manual.

The completion approach (section A within the Current File Documents)At the completion stage, the planning must be reviewed alongside the evidence obtained and all matters need to be drawn together and concluded upon. Completion of the appropriate forms on this section (including a full record of review points, notes of discussions with the client and evidence of clearance of all of these points) will help to achieve the required objectives.

Audit of group accountsWhere you are responsible for the audit opinion of group accounts, the manual contains alternative versions of the planning and completion documentation, as well as two additional permanent file documents (PF3-3 Group risk analysis and PF1-9 Component auditors). This documentation should be used for the audit of the group accounts as it covers both the parent company and the group audit opinions.

Where you are also responsible for the audit opinion of one or more subsidiary companies you should create standalone documentation (and not use the ‘audit of group accounts’ documentation) for these companies and their individual audit files.

The current fileThe current audit file provides the documentary record of the audit and constitutes the evidence of what was done and why. In conjunction with the permanent file, it supports the report on the financial statements.

The report not only consists of the opinion but also contains a statement that the audit has been carried out in accordance with auditing standards, thus the two files must demonstrate compliance with the International Standards on Auditing (ISA) (UK), the Ethical Standard and any other regulatory requirements.

The principal objectives of the current audit file are to provide:

• evidence of the planning process (including the risk assessment procedures) and any changes from the original plan;• a record of the nature, timing and extent of auditing procedures undertaken, the results of such procedures and conclusions drawn;• a record of the figures included in the financial statements, and evidence supporting these figures;• evidence of control and review;• a record of problems encountered, weaknesses discovered, and any contentious issues raised and how they were resolved;• a record of communications with the client relevant to the audit; and• evidence of the opinion formed.

The permanent fileThe principal purpose of the permanent file is to improve the efficiency of the assignment by providing a good understanding of the organisation. It is an intrinsic part of the audit assignment. Therefore, the permanent file must be comprehensive and up to date. Each year the file should be reviewed, updated and signed to evidence that this has been done.

The permanent file contains information of a permanent and semi-permanent nature, being information, which will be of continuing importance to assignments over a number of years.

Although there is a standard index to the file, as with all aspects of an audit, the file should only contain mandatory information required to comply with auditing standards and other legislation and regulation along with information which will aid the efficiency of the audit. The content and form of the file is therefore likely to be different for each client and must be decided upon by the Responsible Individual and manager.

However, a permanent file will normally include the following information:

• information concerning the legal and organisational structure of the organisation, including information regarding related parties and any group structure;

• extracts of important legal documents and agreements;• any sector specific data;• details of the accounting systems and internal control environment;• an appraisal of those systems;• permanent risk information;• a summary of key ratios and figures over a period of years; and• accounts information of ongoing value.

The Mercia approach also encourages users to develop tailored audit programmes which can be held on the permanent file. If held on the permanent file, in future years these must be reviewed and, if necessary, updated as appropriate.

The structure of each audit sectionDivider cards (see Current file indexes within the Current File Documents)The divider cards include recommended standard references for working papers as well as the conclusions for each section of the audit file.

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The audit conclusions should be signed by the person completing the work and should then be signed by the reviewer.

Audit planWhere individual audit sections have been planned separately using the standard individual area audit plans, a copy of the working paper can be placed on the planning section, the permanent file and / or the front of each section of the audit file (where it is filed behind the relevant lead schedule, as this helps to ensure that the section is audited in accordance with the plan).

The use of the individual area plan schedules also helps to focus selection of appropriate audit programmes.

Audit programmesThe audit programme is very flexible and must be carefully tailored for each audit area at the planning stage.

• A General and mandatory tests• B Tests of controls• C Non-audit services• D Analytical procedures• E Tests of detail (blank programme), or• F Tests of detail (tailorable programme)

Section A (General and mandatory tests)This section is nearly always applicable, as this deals with general file completion issues, and in some cases mandatory ISA (UK) requirements, rather than specific audit assertions. Selecting section A will ensure that each programme generated has the correct heading and objectives at the top. Also included in this section, where applicable, is the prompt to record the risk assessment procedure confirming the design and implementation of controls.

Section B (Tests of controls)This section is a prompt to the test required when assurance is to be placed on the effective operation, throughout the period, of one or more control procedures, as established on the individual area audit plans.

Section C (Non-audit services)This section is useful when non-audit procedures (such as involvement in the compiling of numbers for the accounts) are to be carried out and used as part of the audit evidence.

Section D (Analytical procedures)This section is a menu of possible procedures that could be utilised to achieve the objectives.

Section E (Tests of detail (blank programme))This section is a page highlighting the key audit assertions for the individual audit area. It should be used either:

• to record any additional tests for objectives not achieved by sections A to D above, or;• on a very low risk area, to record all the tests required for the section.

Section F (Tests of detail (tailorable programme))This section can be used:

• to record the additional procedures for objectives not achieved by sections A to D above, or;• as the main audit programme for the individual audit area.

NB. If this section is selected, it is very likely that it will need to be tailored, with a number of the procedures crossed through or deleted.

Each individual section of the audit file has its own audit programme. The tailoring process takes place in two stages. Firstly, you should select which of the standard pages are appropriate. Once this decision has been made, further tailoring on a line by line basis is required to select / design the appropriate tests.

The four main areas are referenced consistently for each individual section. Using the sales / income and debtors’ section as an illustrative example:

• H3 General and mandatory testsAs above this should normally be included on all sections as it deals with general requirements and specific ISA (UK) requirements.

• H3 Tests of controls and non-audit services programmeThis is the programme to select when some or all of the evidence is to be obtained from non-audit services (accounts preparation) or systems work.

• H3 Analytical proceduresThis is the programme to select when some or all of the evidence is to be obtained from analytical procedures.

• H4 Blank additional programme The programme to select either:

4. to record any further tests on objectives not met by work planned on the above tests at H3; or5. to record all the tests required in a low risk area.

These pages could be used in every section of a very low risk assignment.

• H5 Bank of 'tests of detail'This programme can be used in a variety of ways, for example:

6. as the main programme; or7. as a reference document to select tests for recording on H4; or8. as an additional programme to H3 for higher risk areas.

Selecting appropriate audit programmes for each section is the answer to eliminating over auditing and improving efficiency.

Regardless of which audit programmes are selected as the starting point, individual tests must be added or deleted depending on the specific circumstances of the client.

All combinations and permutations of programmes are acceptable. However, the appropriate programme would normally be made from the first three areas with the fourth area being used in rare circumstances only. It is extremely unlikely that all of the tests on any of the programmes will be necessary. This is particularly true of the "bank of tests of detail" programme (H5).

Accessing the manual

Introducing a new and improved way to access some of our productsWe are delighted to present to you our new online platform, found within our existing

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website, from which you can access some of our methodology and compliance products which you subscribe to.To access your methodology and compliance products all you need to do is log into the Mercia Group website and click on My methodology and compliance products under Dashboard on the right hand side, as before. For My methodology and compliance products please ensure you click View more and download:

Once within My methodology and compliance products for one of the products listed above, please click Open Manual and the manual will automatically open:

Once clicked Open Manual, this allows you to navigate, view and download the entire manual, or parts of it, via our website.

There are two ways of consuming the manuals:

• Browse;• Customise.

BrowseOur easy to use Browse function allows you to view the entire manual online and also gives you the ability to target specific parts of the manual more efficiently. One way this can be done is by clicking on the orange underlined text (typically on a contents page or embedded within the text of the manual where a related section is referenced), this will take you directly to the section referred to. It should be noted that using the ‘back’ button within your browser will not return you back to the section where you clicked the link, as you have been navigated internally on the same web page.

Alternatively, you can use the menu on the left-hand side to access specific areas, pressing the “+” or “-” icons to expand or collapse sections then clicking on the section you wish to read. Should you click a section which has subsections within it (as indicated by the “+” or “-” icons being shown) then all the subsections will also be loaded (for example clicking ‘B1 Accounts preparation’ would load that section, plus ‘Contents’, ‘B1.1 Introductions’, ‘B1.2 Planning and Control’ etc.).

Where a “>” icon is displayed, this indicates you are not able to expand this section further.

By selecting either the Word or PDF icons within the menu, you will be able to download specific areas in your desired format (as above, this will also include any subsections of the area you have selected).

In addition, there is an Expand all and Collapse all tool located at the bottom to aid with navigation using this option.

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Where the manual includes attachments (typically templates, forms and other documents), you are able to access and download these through several methods:

1. Expanding the Attachments section within the left-hand menu under each chapter and clicking the icon.2. Clicking the Attachments highlighted in the blue box within each section (where there are a large number of attachments you may need to click the

Show all option for these to be displayed on screen).3. In addition, where attachments have been referenced within the content of the manual the Attachments are also hyperlinked in orange throughout the

manual. Clicking on any of these options will automatically download the relevant attachment.

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When viewing content in the browse tab, you have the option Maximise the page, which will remove the standard website boarders and allow more content to be displayed on screen.

Selecting the Minimise option will then return you to the normal website view.

CustomiseYou can also use the Customise tab to download the manual in its entirety, or specific parts of it, by using the tick boxes next to the relevant section select the areas you wish to download. As in the browse tab , pressing the “+” or “-” icons will expand or collapse sections, where a “>” icon is displayed, this indicates you are not able to expand this section further and there is an Expand all and Collapse all tool located at the bottom to aid with navigation using this option.

When selecting a section of content which has subsection (as indicated by the “+” or “-” icons being shown) all the subsections will be preselected to be included within the download, although users have the option to deselect any sections they wish to exclude by clicking on the tick box against that section. You also have the option to select all or specific Attachments by ticking or unticking these as desired.

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In those manuals aimed in assisting with client engagements, it is possible to create and download the documents as a client or firm-tailored pack. This can be done via Options menu on the right-hand side where you can enter client’s / firm’s name in the relevant input field and if applicable, the financial year end date. These are then displayed in the header of the downloaded documents.

Once you have finished selecting the areas you wish to include in the download, you then choose either a Word or PDF format, by selecting the relevant option in the Options menu on the right-hand side of the Customise tab. It should be noted that the choice of Word or PDF is not applicable to any attachments and these will be downloaded in their pre-set format regardless of the option selected when choosing a download format.

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The customised documents are pulled into a zipped up folder for you to save in your preferred location, with any attachments selected being included within a subfolder.

We hope you find our new online platform useful and more efficient to navigate.

For details of the fully paperless versions of the manual available, where all programmes can be completed on screen and stored digitally please visit our website at https://www.mercia-group.com/.

Contact usAdministration or product related queries: technicalmanuals@mercia-group.com

Mercia website login details requests: onlineservices@mercia-group.com

Telephone: 0330 058 7141

What's changedWe are pleased to issue updates to your Mercia Academies Manual (dated 06/21). The principal changes in this update relate to:

Changes to Auditing StandardsISA (UK) 540 (Revised December 2018) – Auditing Accounting Estimates and Related Disclosures

In December 2018 the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard. The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted. Several other minor consequential amendments were made to other ISAs (UK) early in 2020.

The revised standard is a complete overhaul of the previous version and introduces several key changes to the approach that must be followed when auditing all types of accounting estimate and the associated financial statement disclosures. These changes will strengthen the audit of what can be a difficult area. The revised standard emphasises the need for professional scepticism at all times when assessing the methods, significant assumptions and data used by management when determining accounting estimates to be included in the financial statements, as well as the associated financial statement disclosures.

In order to reflect the requirements of the revised standard the audit methodology now places greater emphasis on the documentation of our understanding of accounting estimates and the risks they present at the planning stage and there is a revision to the workflow of key accounting estimates.

ISA (UK) 570 (Revised September 2019) – Going Concern

In September 2019, the FRC issued a revised version of ISA (UK) 570 on Going Concern, which is effective for audits of financial statements commencing on or after 15 December 2019, although early adoption is permitted. These revisions are in response to a number of recent audit failures regarding going concern, with the requirements of the new standard being much more prescriptive. Accordingly, a number of changes have been made throughout the manual to reflect these requirements, most notably the creation of a going concern work programme within field work.

Other changes

In addition to the going concern work programme within fieldwork, we have also added a subsequent events programme to fieldwork to give the same level of prominence.

Other changes to the Academies Manual have been made for ISA amendments that are effective for audits of financial statements commencing on or after 15 December 2019 including reporting on irregularities, including fraud. Following the ICAEW publication of 'How to report on irregularities, including fraud, in the auditor’s report - Guide for auditors reporting for the first time' in April 2021 and the comment that 'how the auditor developed their explanation, and the areas considered, would be expected to be documented in the audit file', we have added a new A29 Reporting on irregularities, including fraud in the auditor's report in the Audit Methodology and also an additional test on A21 for the RI to confirm their approval.

Ethical Standard 2019The B12 and B13 (both individual and groups) have been updated for the Ethical Standard 2019 which is largely effective for engagements with periods commencing on or after 15 March 2020. A new letter for reporting breaches of the Ethical Standard / Firms ethical policies and procedures has also been included within the example letters section.

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Use of audit data analyticsA number of changes have been throughout the manual to encourage teams to consider the use of audit data analytics (ADA) on audit engagements. These changes principally focus on the use of ADA as part of the risk assessment, selection of high risk transactions for testing and stratification of populations to assist with sampling, although teams are encouraged to consider its use in other areas, with revisions to planning forms providing prompts for you to record its planned use. Given the audit quality and efficiency gains which can provided by the use of ADA, a new planning form (B20) has been added for teams to appraise its use on engagements and record why ADA was or was not considered appropriate to use. Where the use of ADA is intended, a number of other revisions have been made throughout the manual to help you record and reflect on the results from its use.

Please see below for a detailed list of all changes made as part of this update.

Updated ESFA requirementsThe Education & Skills Funding Agency issued its Accounts Direction 2020 to 2021 in March 2021. For the first time the model set of academy accounts has been published as a separate document, alongside a separate framework and guide for auditors and reporting accountants. This Accounts Direction and the related documents must be used by academy trusts preparing annual reports to 31 August 2021. We have updated the pro-forma accounts, accounts disclosure checklist and other relevant forms and guidance to reflect changes made to the 2021 reporting requirements.

Relevant forms and guidance on regularity reporting within the Academies Manual have also been updated to reflect the Academies Financial Handbook 2020, which became effective on 1 September 2020.

Teachers’ Pensions End of Year Certificate reportingTeachers’ Pensions have published Reporting Accountant Guidance TP05 for 2020/21 which contains information on reporting requirements pertaining to the Teachers’ Pensions End of Year Certificate (EOYC). Documentation and guidance for this engagement have been updated in the manual to reflect the updated requirements. The EOYC reporting engagement has a filing deadline of 30 September 2021.

OtherA number of other minor updates to wording have also been made including updating the language used in example letters and reports for gender neutrality.

We have also updated the manual include a new section 'Supplementary forms' which are not mandatory but maybe used on assignments. These include COVID-19, Brexit and a Change of Financial Reporting Framework Impact assessment and risk analysis. These have previously been provided outside of the manual but with the new method of delivery are now included as supplementary material. Please let us know if there is any other documentation that would enhance the product.

Contact us We are always pleased to receive feedback on our manuals, including any improvements that you would like to see incorporated. Please contact me if you have any comments to make.

Jenny Faulkner (Head of Publications - Assurance and Financial Reporting)

June 2021

July 2021The following changes have been made:

Updated area Main reason for update

Permanent file documents

PF1-9 Component auditors - This form has been removed as it was included in error.

June 2021Set out below is a list of all of the documents that have been revised in this update, along with a brief explanation of how they have changed.

Pages to be changed Main reason for change

All

All - The creator tool has been amended, so areas of the audit manual required are selected from the manual webpage.

-The list of tailoring questions for creator has also been reduced to make user input more efficient (for example rather than selecting ‘Is this an audit of group accounts’ as a tailoring question, users now select either completion and planning sections for either an individual or group engagement. Users will also have the choice to select the detailed or freeform planning approach in this way.

-The overall document hierarchy has been amended to be more intuitive. ‘Permanent file documents’ is now the final section of this manual (also see comments below for how specific sections have been re-ordered).

-Throughout the manual a number of minor changes to the phrasing and wording of guidance, tests and procedures (including the addition of those seen as best practice and removal of any now considered obsolete) have been made to ensure consistency across the Mercia product range.

Guidance and Procedures

All - Section renamed to ‘Guidance’ from ‘Section A - Guidance notes’.

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Contents - Contents page updated to reflect the new format and method of delivery.

Guidance and procedures - Chapter referencing has been updated to reflect the new method of delivery.

- A number of other minor amendments to reflect best practice and standardise guidance notes across the Mercia product range.

Getting started for new manual users - A revised set of guidance notes has been included to reflect the updated method of product delivery.

What's changed - A copy of this document.

Example letters

All - Section renamed to ‘Example letters’ from ‘Section B - Example letters’.

- Updated language for gender neutrality.

- Updated to reflect Brexit and for best practice amendments.

Engagement - covering letter-

A number of amendments to reflect best practice and standardise engagement letters across the Mercia product range.

Engagement - schedule of professional services -

A number of amendments to reflect best practice and standardise engagement letters across the Mercia product range

Engagement - standard terms of business - ‘Term of business’ renamed ‘Standard terms of business’, along with a number of amendments to reflect best practice

and standardise engagement letters across the Mercia product range.

Representation letter - A number of minor amendments to reflect best practice and standardise engagement letters across the Mercia product range

- Amended to include the going concern management representation requirements as set out in ISA (UK) 570 (Revised September 2019).

- Updated to reflect revised wording of the representation required from management for accounting estimates as set out in ISA (UK) 540 (Revised December 2018).

Example reports

All - Section renamed to ‘Example reports’ from ‘Section C - Example reports’.

-Updated to reflect the requirement in ISA (UK) 570 (Revised September 2019) to give positive conclusions regarding going concern and ISA (UK) 700 (Revised November 2019) to add a placeholder to explain the extent the audit was capable of detecting irregularities, including fraud.

- Updated to reflect the ICAEW 'Audit guide: how to report on irregularities, including fraud' published in April. The footnotes have been added to give clarity over what is mandatory and what is expected of auditors.

Example accounts

All - Section renamed to ‘Example accounts’ from ‘Section D - Example accounts’.

- Updated to show that disclosure of total contributions to non-UK political parties (rather than non-EU) is required for accounting periods commencing on or after 1 January 2021 for charitable companies.

-Updated to reflect the Academies Accounts Direction 2020-2021 and the updated Financial Handbook effective from 1 September 2020.

See Appendix II for further details.

Accounts disclosure checklists

All - Section renamed to ‘Accounts disclosure checklists’ from ‘Section E - Accounts disclosure checklists’.

- The references given to the disclosure checklists, including the summary, have been amended to reflect the new system of product delivery. Titles have also been updated in some cases for clearer descriptions.

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- All guidance is now shaded grey and in small italics to aid users in completing these documents.

- Areas which used to be shaded grey (eg. where qualifying entities may take advantage of disclosure exemptions) are now marked with a symbol (eg. an omega (Ω)) rather that indicated by shaded text.

-The "Section N/A" column has been removed, instead users select "N/A" from the column options situated against the section headings, where needed, to reflect the section does not apply. In addition, the heading "Compliance" above the column options has been removed.

- Updated for the FRC’s Amendments to FRS 102: UK exit from the European Union and the requirement to disclose of early adoption of these amendments, where applicable.

-Updated to show that disclosure of total contributions to non-UK political parties (rather than non-EU) is required for accounting periods commencing on or after 1 January 2021.

- Updated auditor’s remuneration section for clarity.

- Updated to reflect the requirement in ISA (UK) 700 (Revised November 2019) to explain the extent the audit was capable of detecting irregularities, including fraud.

- Updated for FRC's Amendments to FRS 102 - COVID-19-related rent concessions, Amendments to FRS 102 – Interest rate benchmark reform and Amendments to FRS 102 - Multi-employer defined benefit plans.

-Updated to reflect the Academies Accounts Direction 2020-2021 and the updated Financial Handbook effective from 1 September 2020.

See Appendix II for further details.

Current file documents (Including both individual and group versions where appropriate)

All - Section renamed to ‘Current file documents’ from ‘Section G - Current file documents’.

- The hierarchy of the content in this section has been amended to be more intuitive, with sections now being presented in the order they would appear in an audit file (i.e. Completion, then Planning, then Audit programmes).

- For consistency across the Mercia product range, specific references in the main body of forms to 'ISA (UK) have been replaced with 'ISA', with guidance notes at the top of the form being added to make it clear these refer to ISAs (UK),

- Procedures throughout have been updated as required to reflect the latest Academies Accounts Directions and Academies Financial Handbook.

All completion documents - For consistency of presentation, under all subheadings within a completion form, procedure numbering now reverts back to 1 (for example within A21-1 procedures 13-15 are now 1-3 under the heading ‘Approval and signature’).

A21-1 - Responsible Individual Review And Conclusion

- Procedures 1-13 now sit under a heading ‘Audit finalisation’.

- The heading ‘Confirmation of signing / completion’ has been replaced with ‘Approval and signature’.

- Conclusions now have explicit options to ‘tick as appropriate’, rather than being a strike through ‘delete as appropriate’.

- ‘Reappointment considerations’ have been separated into their own section under ‘Conclusions and Audit Opinion’.

- References to new document B30X added.

- Amended to reflect going concern and subsequent events which now form part of the field work programme.

- New test added to confirm the RIs approval of the 'Reporting irregularities, including fraud' wording in the audit report.

A21-2 - Engagement Quality Control Review Checklist - Column headings ‘Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules

where applicable)’.

-The procedures on this form have been re-ordered, to be better grouped for the objectives they achieve, with 8 & 9 now being under the heading ‘Integrity, objectivity and independence’, 1, 3, 4 & 5 now being under a heading ‘Matters arising during the assignment’ and 6, 2, 7 & 10 now being under the heading ‘Final review and reporting’.

A21-3 - Consultation / Ethics review - For improved styling guidance notes for the relevant section have been re-formatted.

- Within the ‘Review points’ section, the column headings ‘Sch Ref.’ ‘Clearance’ and ‘Initials/Date’ have been consolidated under the heading ‘Schedule reference and details of clearance, with initials and date’.

A22 - Overall Review Of The - Column headings ‘Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules

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Financial Statements where applicable)’.

- Additional test added in relation to ISA (UK) 540 (Revised December 2018).

A25 - Audit Summary Memorandum - For improved styling guidance notes for the relevant section have been re-formatted.

- The column heading ‘Clearance’ has been renamed ‘Justification for clearance', to encourage more appropriate responses.

- Amended to reflect the updated work paper references regarding going concern.

A27 - Summary Of Misstatements - For improved styling the materiality section has been re-formatted, with the conclusion section now having options to ‘tick

as appropriate’, rather than being a strike through ‘delete as appropriate’.

A29 - Reporting on irregularities, including fraud in the auditors' report

-New form added to reflect the ICAEW 'Audit guide: how to report on irregularities, including fraud' published in April which states 'How the auditor developed their explanation, and the areas considered, would be expected to be documented in the audit file'. This expectation goes beyond ISA 700 and we have added a new form to aid documentation for firms.

A31 - Audit completion checklist - For clarity, confirmation that ISA references refer to ISA’s (UK) is now in the guidance notes at the top of the form.

- The column headings ‘Yes, No or N/A’ and ‘Comments’ have been consolidated under the heading ‘Yes/No (add comments as needed)’ to better reflect the expected responses.

- Footnote explaining point 7 is relevant for accounting periods beginning on or after 15 December 2017 has been removed given all year ends now being audited will be beyond this date.

- Updated for FRC's Ethical Standard 2019.

- Amended to reflect the updated requirements of ISA (UK) 540 (Revised December 2018) in respect of accounting estimates.

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

- [Groups] Updated to remove references to the freeform memorandum planning approach for group engagements.

A41 - Subsequent Events Checklist - Column headings ‘Comments’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules

where applicable)’ to encourage more complete responses.

- For clarity the conclusion section now cross references to A42 for going concern considerations.

- For clarity the section for updates prior to signing is now headed ‘Update to the audit report date’.

- Amended to remove some core ISA (UK) 560 requirements which are now set out in the S work programme within field work. Updated conclusions to allow space to document key judgements made.

A42 - Going Concern Work Programme - Column headings ‘Comments’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules

where applicable)’.

-Amended to remove some core ISA (UK) 570 (Revised September 2019) requirements which are now set out in the R work programme within field work. Additional areas added to ensure that key documentation requirements are dealt within in relation to stand back requirements and key judgements made.

A43 - Whistle blowing - Reporting to the regulator checklist

- Updated for changes in the timing of reports.

A44 - Accounting estimates update and evaluation - A new completion form to document the global conclusions on accounting estimates and to demonstrate compliance

with ISA (UK) 540.

A45 - Audit data analytics and other technology update and evaluation

- New form added to provide an update and evaluation of the use of ADA and if relevant, other technology.

A51 - Written Representations Checklist - ‘The ‘Comments’ column has been renamed ‘Notes (refer to other schedules where applicable)’ to encourage more

complete commentary.

- For clarity, confirmation that ISA references refer to ISA’s (UK) is now in the guidance notes at the top of the form.

- For clarity, the section for updates in respect of additional procedures performed up to the date of signing has been separated from the ‘Conclusions’ section and is now under the heading ‘Update to the audit report date’.

- Amended to include the going concern management representation requirements as set out in ISA (UK) 570 (Revised September 2019).

- Wording updated to bring into line with the requirements of ISA (UK) 540 (Revised December 2018) in respect of accounting estimates.

A52-1 - Communication With Management Checklist - Guidance notes to indicate that any communication with those charged with governance, where different from

management, should be recorded on B21-2 has been moved to the top of the form for clarity.

- Column headings ‘Sch Ref’ and ‘Comments’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

Academies Manual September 23

- Test updated to include salient findings from the use of ADA and / or other technology.

- Amended to include the required communications with management regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- The need to discuss accounting estimates with management to comply with ISA (UK) 540 (Revised December 2018) has been added.

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

A52-2 - Communication With Those Charged With Governance Checklist

- The ‘Comments’ column has been renamed ‘Notes (refer to other schedules where applicable)’ to encourage more complete commentary.

- Column headings ‘Sch Ref’ and ‘Comments’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

- Amended to include the required communications with those charged with governance regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

All planning documents -For consistency of presentation, under all subheadings within a completion form, procedure numbering now reverts back to 1. (for example within B12 procedure 2-3 are now procedure 1-2 under the heading ‘Long association with the audit engagement’).

B11 - Planning Checklist - Column headings ‘Notes’ and 'Sch Ref' have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

-Updated risk assessment procedures to include a new test 5 on consideration of the use of audit data analytics (ADA) and confirming the appropriateness of it's use (B20) A new footnote has also been added to refer to additional guidance material included.

- Added the requirement to consider accounting estimates as part of the risk assessment procedures, including reference to new document B30.

B12 - Acceptance of appointment or reappointment

- New footnote added for consideration of audit data analytics as a non-audit service.

- Updated for FRC's Ethical Standard 2019.

B13 - Compliance With The Ethical Standard - ‘N/A’ has been removed from the response column given questions should generally only require a ‘Yes’ or ‘No’ answer,

although a prompt has been added to ‘add comments as needed’ for where enhanced explanation is required.

- Prompts to ‘tick as applicable’ have been added where the form gives multiple options for the response.

- The Acceptance of appointment or reappointment form has been consolidated under one reference 'B13-1'.

- A ‘Consultation and communications’ section has been added to separate any communications with the firm’s ethics partner and the client from the final conclusion.

-The conclusion section has been renamed ‘Responsible Individual judgement and conclusion’ and now includes space for RI judgement to be recorded, with the final conclusion now being a tick options rather than a strike through to make the choice clearer.

- Amended internal references to reflect changes made elsewhere in the manual.

- Updated for FRC's Ethical Standard 2019.

B14 - Preliminary Engagement Quality Control Review

- The columns ’Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

- The conclusion section has been renamed ‘EQC reviewer conclusion’ for clarity.

B20 - Audit data analytics assessment - New form added to appraise the use (or rationale for the lack of use) of audit data analytics and to plan the approach.

B21-1 - Communication With Management - The title of the form has been shortened to ‘Communication with management’.

- Guidance notes to indicate that any communication with those charged with governance, where different from management, should be recorded on B21-2 has been moved to the top of the form for clarity.

- The heading ‘Discussions must, as a minimum, include the areas noted below’ has been replaced with ‘Record of the communication’, with additional guidance notes added for recording the discussion.

- Column headings ‘Response / matters arising’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

- Updated nature of assignment to refer to audit data analytics and other technology when communicating the scope of the engagement and the general approach.

- Amended to include the required communications with management regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- Amended to better highlight the need to discuss with management the contents of the other information to be presented alongside the financial statements and the timing of their issuance as required by ISA (UK) 720.

Academies Manual September 23

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

B21-2 - Communication with those charged with governance

- The title of the form has been shortened to ‘Communication with those charged with governance’.

- The heading ‘Discussions must, as a minimum, include the areas noted below’ has been replaced with ‘Record the communication’, with additional guidance notes added for recording the discussion.

- Column headings ‘Response / matters arising’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

- Added accounting estimates to the list of matters to be discussed as part of understanding the entity and its environment in accordance with the requirement to do so in ISA (UK) 540 (Revised December 2018).

- Amended to include the required communications with those charged with governance regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

B22 - Preliminary analytical review -

Updated objective to include the utilisation of audit data analytics (ADA) for the preliminary analytical review. Additional guidance added at the top of the form and confirmation that the B20 must be completed to confirm the appropriateness of the use of ADA.

- Amended opening narrative to highlight that changes in the method of determining accounting estimates may help to identify audit risks.

B23 - Audit Team Discussion - Guidance notes regarding capturing the discussion(s) have been moved to the top of the form for clarity and the summary of points to discuss is now under the heading ‘Matters to discuss’.

-Approach to the assignment updated to incorporate the use of audit data analytics (ADA) and other technology. A new footnote added in relation to which area(s) are assigned to which team members to confirm that where there are specialists supporting the engagement for ADA / other technology they should also be included in the team briefing.

- Added accounting estimates as a matter to be discussed as part of the audit approach.

- Amended to align audit team discussion prompts regarding going concern to ISA (UK) 570 (Revised September 2019).

B30X - Key accounting estimates summary - New planning checklist designed to ensure compliance with the requirements of ISA (UK) 540 (Revised December 2018).

A copy of this should be completed for each identified key accounting estimate.

B31 - Going Concern Risk Assessment - Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019).

B32 - Risk Assessment - For clarity the strike-through options for risk levels in the conclusions have been replaced with tick boxes.

- Amended to include new forms within the checklist, including PF1-10 and B30X.

B33 - Audit Plan - All - For clarity, the guidance notes have been moved to the top of the forms.

- The options to select the audit programmes required now sit above the area to record more detailed comments.

B33/ Q2 / R2 / S2 - Audit plan - Amended to reflect accounting estimates, going concern and subsequent events now being part of the field work programmes.

B33 - Audit plan - Trial balance (use of audit data analytics)

- New form added for when using ADA to identify journals /significant unusual transactions for testing.

B41 - Materiality - Guidance notes have been moved to the top of the form for clarity.

-The table has been reformatted for clarity, with ‘Basis for determining materiality’ section being merged into the ,’Materiality for the financial statements as a whole’ section and the ‘Amount below which misstatements are clearly trivial’ and ‘Audit areas requiring other levels of materiality’ not being under a heading of ‘Trivial threshold and other levels of materiality’.

- The area to update for final materiality has been given more prominence in it’s own section at the end of the form.

B11 - Planning Checklist – Freeform Memorandum Approach

- Across all areas, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

-Updated risk assessment procedures to include a new test on consideration of the use of audit data analytics (ADA) and confirming the appropriateness of it's use (B20) A new footnote has also been added to refer to additional guidance material included.

- Added the requirement to consider accounting estimates as part of the risk assessment procedures.

- Added a requirement to discuss with management the contents of the other information to be presented alongside the financial statements and the timing of their issuance as required by ISA (UK) 720.

B11 - Freeform Audit Planning Memorandum - For ease of use, this form is now contains more tick box options, rather than having to tailor and lock the form prior to

printing.

- Guidance notes have been updated to reflect changes elsewhere in the manual and some examples no longer considered necessary have been removed.

- Other minor amendments have been made to reflect best practice guidance and ensure consistency across the Mercia product range.

- Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019) and ISA (UK) 540 (Revised December 2018) and related footnotes included.

- Amended to highlight that subsequent events are now addressed in the S programme at fieldwork.

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- A number of minor amendments made to reflect best practice and consistency with other areas of the manual.

- References to the B20 for planning the use of ADA and a new footnote added which confirms that B20 must be completed to appraise the use (or rationale for the lack of use) of audit data analytics.

Audit programmes - all - The structure and referencing of work programmes has been amended to reflect the new method of delivery and best practice.

- Across all the work programmes, the heading 'Sch ref / Work done' has been replaced with 'Notes (refer to other schedules where applicable).

- E1 – This section is now titled ‘E Test of detail (blank programme)’.

- E2 – This section is now titled ‘F Test of detail (tailorable programme)’.

- Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended C section 'Non-audit services' to reflect best practice within the work programme.

- Amended D section ‘Analytical procedures’ for best practice amendment.

- Amended F section ‘Tests of detail’ to make clear that there are accounting estimates. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

N - Trial balance audit programme - New test on journals for confirming the appropriateness of using ADA where relevant.

Q - Accounting estimates programme -

New programme created to ensure auditors obtain sufficient appropriate audit evidence for key accounting estimates in accordance with ISA (UK) 540 (Revised December 2018). A copy of this programme is to be used for each key accounting estimate identified at the planning stage (B30X).

R - Going concern programme - New programme created to give more prominence to certain requirements of ISA (UK) 570 (Revised September 2019)

within field work.

S - Subsequent events programme - New programme, created to give more prominence to certain requirements of ISA (UK) 560 within field work.

Current file indexes - The sign-off’s on these forms have been updated from ‘Signed by’ to ‘Prepared by’ to be consistent with other sign-offs within the manual.

- Updated for the changes made in this update.

Permanent file documents

Permanent file indexes - Updated for the changes made in this update.

All - Section has been renamed to ‘Permanent file documents’ from ‘Section F - Permanent file’.

- Across all the permanent file forms, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

New and existing client customer due diligence forms - These have been removed from the manual, as these should be completed inline with the guidance and procedures in the

firm's Anti-Money Laundering compliance manual.

PF1-1 - The Entity and its environment - Given it is one form, PF1-1 and PF1-2 have been merged, with PF1-2 now being an omitted reference.

- Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019) and ISA (UK) 540 (Revised December 2018).

PF1-3 - Laws and regulations - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this provides more space for documentation.

- Amended to add whether there are any indications of non-compliance with laws and regulations in accordance with the requirements of ISA (UK) 250 Section A (Revised November 2019).

PF1-4 - Related parties -To emphasise the requirements when recording related parties the guidance ‘You should include all known related parties, regardless of whether or not there are any likely transactions.’ has been moved from a end note to be part of the core content on the form.

PF1-6 - Using a service organisation - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this

provides more space for documentation.

PF1-7 - Using the work of an expert - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this

provides more space for documentation.

PF1-8 - Accounting estimates - The ‘Planned approach’ section of this form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this provides more space for documentation.

-Amended form to provide an overview of management’s approach for determining accounting estimates and to highlight expected key accounting estimates, with cross reference to supporting documentation for each identified key accounting estimate at B30X.

PF1-10 - Going concern - New form to ensure that the requirements of ISA (UK) 570 in relation to understanding the entity and its environment including internal control specifically in relation to going concern are addressed.

PF2-1 - Systems overview - Amended to reflect the need to obtain an understanding of the entity’s processes regarding accounting estimates, going concern and subsequent events (where these are not covered elsewhere).

PF2-2 - Internal control overview - For clarity, the items to consider have now been listed as bullet points, rather than a single body of text.

- Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019), and ISA (540) (Revised December 2018) making it clear that documentation of the entity’s risk assessment process includes consideration of going concern

Academies Manual September 23

and accounting estimates.

PF2-3 - Internal control summary - Amended to reflect the need to obtain an understanding of the entity’s internal controls regarding accounting estimates,

going concern and subsequent events.

PF2-4 - Using The Work Of And Communication With Internal Auditors

- Across all areas, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

PF3-1 - Risk analysis -The ‘Y/N’ column has been removed, to encourage more qualitative discussion of risk factors, with the ‘Comments / other factors’ column being replaced with ‘Notes (refer to other schedules where applicable). The guidance notes have been updated and moved to the top of the page to also reflect this.

- Question added to consider whether there are accounting measurements subject to a high degree of subjectivity in accordance with the requirements of ISA (UK) 540 (Revised December 2018).

- Question added to consider whether there are any indications of non-compliance with laws and regulations in accordance with the requirements of ISA (UK) 250 Section A (Revised November 2019).

PF3-2 - Fraud risk analysis -The ‘Y/N’ column has been removed, to encourage more qualitative discussion of risk factors, with the ‘Comments / other factors’ column being replaced with ‘Notes (refer to other schedules where applicable). The guidance notes have been updated and moved to the top of the page to also reflect this.

PF3-3 - Group risk analysis -The ‘Y/N’ column has been removed, to encourage more qualitative discussion of risk factors, with the ‘Comments / other factors’ column being replaced with ‘Notes (refer to other schedules where applicable). The guidance notes have been updated and moved to the top of the page to also reflect this.

- For clarity the questions in this form have been broken down into subsections, under the headings ‘Group-wide risks’, ‘Component entity risks’ and ‘Intra-group transactions risks’.

PF3-R - Regularity risk assessment -

Updated Financial Handbook effective from 1 September 2020.

See Appendix II for further details.

Supplementary forms - New section added with the inclusion of non-mandatory supplementary forms, including on COVID-19, Brexit and Changes to Financial Reporting Framework.

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Appendix IISA (UK) 540 (Revised December 2018) – Auditing Accounting Estimates and Related Disclosures

In December 2018 the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard.

The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted. A number of other minor consequential amendments were made to other ISAs (UK) early in 2020.

The new version of the ISA includes:

• A requirement to obtain an understanding of the entity and its environment, including an entity’s internal control, to provide an appropriate basis for the identification and assessment of risks of material misstatement of accounting estimates at both the financial statements and assertion level. It should be noted that this standard was developed internationally alongside a new version of ISA (UK) 315, however, the application of these sister standards is non-coterminous, with the ISA (UK) 315 revisions not coming into effect for or audits of financial statements for periods beginning on or after 15 December 2021, although early adoption is permitted. The revised ISA (UK) 540 will still work alongside the extant ISA (UK) 315, however it does include a number of concepts that are in common with the new version that are not yet in effect.

• Requirements for risk assessment at the assertion level, with the new standard explicitly requiring separate assessment of inherent risk and control risk. It also introduces the concept of the “spectrum of risk” which is part of a theme of looking at the overall position with regard to inherent risk and making a clear-sighted assessment of actual risk levels for each engagement. Control risk is based upon the likely effectiveness of the control procedures implemented by management to address the assessed inherent risks. If there is no plan to test the operating effectiveness of controls the assessment of control risk should be high.

• When assessing inherent risk, the degree of estimation uncertainty, the effect of complexity, subjectivity and other inherent risk factors on the selection and application by management of the methods, assumptions and data used in making the estimate and on the selection of point estimates and related disclosures will need to be considered.

• Other considerations relating to obtaining and documenting audit evidence around:9. the events up to the date of the audit report;10. testing how management made the estimate;11. testing controls (where appropriate);12. management’s disclosures in relation to estimation uncertainty; and13. developing an auditor’s point estimate or range (requiring that the range only includes amounts supported by sufficient appropriate audit

evidence).• The updated objective requires audit procedures to address whether both the accounting estimates AND related disclosures are reasonable (rather

than simply adequate, as is currently the case for the latter) in the context of the financial reporting framework.• Reinforced the application of professional scepticism. Enhancements include using wording to drive questioning or challenging management where

appropriate; more focus on identifying indicators of possible management bias; requiring further audit procedures to be designed and performed in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory; and an enhanced retrospective review and an overall evaluation based on procedures performed.

• A new requirement to remind auditors of their responsibilities to communicate certain matters to those charged with governance and to consider the matters to communicate regarding accounting estimates, considering the reasons given to the risks of material misstatement.

• Enhanced documentation requirements, particularly around:14. understanding the entity;15. the link between audit risks and audit procedures;16. the response if management procedures are inadequate;17. indicators of possible management bias and implications for the audit; and18. significant judgements made when assessing whether or not estimates and disclosures are reasonable.

The revised standard is applicable to all estimates. It has been designed to be scalable, recognising that some estimates may not require significant judgments and the processes for making them may not be complex.

Alongside the revised ISA (UK) 540, confirming and consequential amendments have also been made to the following standards:

• ISA (UK) 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing (UK)• ISA (UK) 230 Audit documentation• ISA (UK) 240 The auditor’s responsibilities relating to fraud in an audit of financial statements• ISA (UK) 260 Communication with those charged with governance• ISA (UK) 500 Audit evidence• ISA (UK) 580 Written representations• ISA (UK) 700 Forming an opinion and reporting on financial statements

Most of these changes are minor and have little impact. The most significant change is the inclusion for the first time of guidance for auditors within ISA (UK) 500 on the use of external information sources which are often used by auditors when assessing the estimates and judgements made by management when determining accounting estimates to be reflected in the financial statements.

The publication of a revised version of ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures has provided the opportunity to revisit the approach adopted by the Mercia audit methodology in addressing this complex area. In doing so we have not just ensured that the methodology demonstrates compliance with the requirements of the revised standard but have also overhauled the entire approach to documenting the work performed in respect of accounting estimates, from planning through to completion. The inclusion of new and revised forms at each key stage of the process will facilitate an efficient audit approach that concentrates on those key accounting estimates that represent a heightened risk of material misstatement in the financial statements and better enable the auditor to demonstrate that all aspects of ISA (UK) 540’s requirements have been complied with.

The risk assessment

The initial phase of the planning of an audit engagement is to complete a risk assessment. As with previous versions of the Academies Manual this will include completion of form PF1 The Entity and its Environment and it is here, as part of the documentation of the financial reporting framework that the entity is subject to, that knowledge of the accounting estimates relevant to the entity is first recorded.

The majority of entities that are subject to audit will have one or more accounting estimates in their financial statements, and for those entities it will be necessary to complete form PF1-8 Accounting Estimates in support of the overall consideration of the entity and its environment.

Compared to the previous version of the Academies Manual form PF1-8 has been significantly updated. The purposes of this form are the following:

• To document issues relevant to understanding the entity’s approach to determining accounting estimates at an entity level. This includes how management identifies the need to reflect accounting estimates in its reporting, regulatory issues and how the entity’s system of internal control demonstrates oversight and governance of the process, identifies areas of risk, implements general control procedures and utilises management experts.

• To record all the accounting estimates that have been identified as being relevant to the entity’s financial reporting, whether or not management have reflected them in the draft financial statements presented for audit. This would include any accounting estimates that the auditor would expect to be

Academies Manual September 23

relevant to the entity’s reporting based on their understanding of the entity and the applicable financial reporting framework but may have been overlooked by the entity’s management.

In recording the accounting estimates relevant to the entity, it is necessary to record whether from an audit perspective it is considered to be a key accounting estimate or not. A key accounting estimate is one with an increased possibility of there being material misstatements in the financial statements due to estimation uncertainty or the complexity, subjectivity or other inherent risk factors involved in its determination.

For those accounting estimates that are not considered to be key accounting estimates documentation of this is required on form PF1-8, including the reason why in the professional judgement of the auditor this is the case. It may be that the accounting estimate concerned does not have a material impact on the financial statements due to its magnitude, or that the method used for its determination is such that the assumptions and data utilised carry no risk of significant estimation uncertainty, such that the possibility of a material misstatement in the financial statements is considered to be remote. Such accounting estimates will not need to be considered further in planning the audit engagement.

Additional consideration is required for each key accounting estimate that has been identified. In order to better document the risk assessment of those key accounting estimates that do present a risk of possible material misstatement in the financial statements form B30X Key Accounting Estimates Summary has been introduced, and a separate copy of this form should be completed in respect of each key accounting estimate (eg. the X is replaced with a letter, therefore if there are three key accounting estimates, then there will be a B30A, B30B and a B30C).

This form records the auditor’s understanding of specific issues related to that key accounting estimate. This includes issues such as those related to the entity and its environment, such as any specific requirements of the applicable financial reporting framework, and the entity’s internal controls and other related procedures. This will set out the method utilised by the entity to determine the accounting estimate, the underlying assumptions involved, and data incorporated into the calculation, and ultimately how management select the point estimate for recognition in the financial statements. The use of any management experts will be noted. Crucially the form also records how management address the level of estimation uncertainty inherent in the accounting estimate.

Form B30X also provides an opportunity for the auditor to record their review of the outcome of previous accounting estimates made in prior years and their accuracy, useful in helping to identify the risk of material misstatement in the current period.

Having identified all of the issued related to each key accounting estimate, form B30X also records the auditor’s assessments of inherent risk and control risk, which in order to comply with the requirements of the revised version of ISA (UK) 540 are required to be considered separately.

The revised standard requires inherent risk to be assessed on a spectrum, which under the Mercia methodology results in an assessment that falls between 1 (being very low) and 5 (being very high). In arriving at this determination there is an opportunity to note the degree to which the accounting estimate is affected by the following:

• Estimation uncertainty;• The complexity, subjectivity and other inherent risk factors arising from the selection and application of the method, assumptions and data used to

determine the accounting estimate; and• The complexity, subjectivity and other inherent risk factors arising from the selection of management’s point estimate and related disclosure.

The auditor’s understanding of these three key issues will inform the inherent risk assessment. Clearly an accounting estimate that is simple to determine and carries little estimation uncertainty would result in a conclusion of their being minimal inherent risk and would be assessed at the lower end of the spectrum. Conversely an accounting estimate that exhibits considerable estimation uncertainty and requires complex modelling to determine would be assessed as being at the higher end of the spectrum.

The control risk assessment is based upon whether the auditor considers the control procedures implemented by management will be effective and will be assessed on a scale from low to high, similar to other risk assessments within the Mercia audit methodology. If there is no plan to test the operating effectiveness of controls (see below) the assessment of control risk should be high.

If there are any risks which are considered to be significant risks, they also reflected on form B32 Risk Assessment.

Lastly form B30 requires the auditor to consider whether testing of controls should be planned, where management implement control procedures in relation to the key accounting estimate.

The approach to the key accounting estimate then needs to be planned and this is recorded on B33 / Q2 Audit Plan or an alternative freeform memorandum. The planned approach must meet ISA (UK) 540’s requirement to take the form of one or more of the following:

• Obtaining evidence from events occurring up to the date of the auditor’s report;• Testing how management made the accounting estimate; or• Developing an auditor’s point estimate or range.

Whichever of the above approaches is followed, the audit procedures performed should be designed to ensure that auditors can conclude on the following issues:

• whether management has appropriately applied the requirements of the applicable financial reporting framework;

• whether the methods used to determine the accounting estimate are appropriate and have been consistently applied;

• that any changes in accounting estimates are appropriate; and

• that disclosure related to the accounting estimate included in the financial statements is reasonable.

Each individual key accounting estimate should have its own planned approach and there are duplications of the planned approach tables within the B33 / Q2 in order to facilitate this (ie. if there are three key accounting estimates, then there will be a B30A, B30B and a B30C and three corresponding planned approaches on the B33/Q2 – that this does not require three versions of the B33/Q2 as there are duplications of the tables within the form).

For each key accounting estimates documented at B30X, we consider where management implement control procedures, whether testing of controls should be planned. Where it is deemed suitable to test controls in relation to key accounting estimates, either because we aim to rely on those controls, or where substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level, we perform the controls testing as part of the related individual audit area programme. For example, if the impairment of a particular class of fixed assets is a key accounting estimate and we plan to test controls then we would use the Fixed asset audit programme, B tests of controls to record our controls audit. This would also be documented on the audit plan for Fixed assets and feed through to the Fixed asset audit programme (E).

Audit fieldwork

An entity may have several key accounting estimates, and it is likely that the procedures to be performed in respect of each will differ considerably. For example, you would not expect to adopt the same approach for testing an impairment provision and the valuation of investment property. Regardless of the nature of each individual key accounting estimate, the procedures being performed must comply with the approach required by ISA (UK) 540.

To help the auditor ensure that the standard is being complied with a new Q Audit programme for Accounting Estimates has been developed, a copy of which should be completed for each key accounting estimate being tested. This sets out the specific requirements of the standard for each of the three permitted audit approaches, allowing the auditor to demonstrate that they have been complied with.

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There are certain requirements of the standard that will apply regardless of the approach being followed, such as whether the requirements of the applicable financial reporting framework have been complied with and that the disclosures in the financial statements are appropriate and to consider whether there has been management bias. There are separate sections of the Q audit programme which deal with these requirements.

Having ensured that the key accounting estimate has been tested in accordance with the requirements of ISA (UK) 540 the form requires the auditor to conclude on whether they have obtained sufficient appropriate audit evidence on which to be able to form a conclusion in respect of that key accounting estimate. The documentation surrounding this area is critical to show compliance with the standard.

Audit completion

The updated ISA (UK) 540 includes a ‘stand-back’ requirement that involves performing an overall evaluation of accounting estimates based on the audit procedures that have been performed. This is performed at an individual key accounting estimate level on the Q audit programme, but it is also considered globally at the completion stage. To help demonstrate compliance with this requirement a new form has been added to the completion section, form A44 Accounting Estimates Update and Evaluation.

Using the experience gained from having completed the detailed audit work this form is used to consider whether the original risk assessment determined during the audit planning stage remains appropriate, and if not whether any additional procedures should be completed.

The overview process is used to determine whether management’s approach to assessing accounting estimates is reasonable or not. It helps the auditor to identify possible instances of management bias, for example where assumptions made or point estimates selected in the context of an individual accounting estimate may appear reasonable but collectively demonstrates a pattern that best fits management’s objectives for the company’s reporting rather than a more objective, reasonable approach.

The overview is also used to ensure that the accounting estimates have been made in accordance with the applicable financial reporting framework, including any related disclosure requirements. This may include disclosures beyond that required by the framework when considered necessary to ensure that the financial statements show a true and fair view.

Building on the conclusions reached on the individual Q audit programmes completed for each individual key accounting estimates, the overview also provides an opportunity to document whether sufficient appropriate audit evidence has been obtained in respect of accounting estimates. This should take account of all audit evidence obtained, whether it corroborates the entries in the financial statements or is contradictory. As part of the audit evidence required the overview form is used in conjunction with form A51 Written Representations to consider whether what, if any, representations need to be obtained from management or those charged with governance in respect of accounting estimates.

Working alongside form A52-1 Communication with Management Checklist the overview form is also used to detail any matters that need to be reported, including any qualitative aspects of the entity’s reporting practices or significant deficiencies in internal control.

Lastly the overview form provides an opportunity for the auditor to conclude on whether, in their opinion, accounting estimates collectively are reasonable and whether sufficient appropriate audit evidence has been obtained and to document any significant judgements made in relation to this conclusion. The impact on the audit opinion is also documented.

ISA (UK) 570 (Revised September 2019) – Going Concern

In September 2019, the Financial Reporting Council (FRC) issued a revised version of ISA (UK) 570 Going Concern which becomes effective for audits of financial statements for periods commencing on or after 15 December 2019. Early adoption is permitted. This revised ISA (UK) has been extensively amended in light of the well-publicised criticisms of the auditing profession. ISA (UK) 570 (Revised September 2019) increases the work which auditors are required to undertake when auditing the going concern status of an entity. A summary of the amendments is as follows:

• Responsibilities of the auditor – the standard has been revised to clarify that as well as obtaining sufficient appropriate audit evidence to conclude on the appropriateness of management’s use of the going concern basis of accounting, the auditor also needs to obtain sufficient appropriate audit evidence to conclude on whether or not a material uncertainty regarding going concern exists, this requirement being more explicit than in the previous standard.

• Definitions – the revised standard now also includes the following definitions to be applied when using ISAs (UK):19. Management bias – A lack of neutrality by management in the preparation of information.20. Material uncertainty related to going concern – An uncertainty related to events or conditions that, individually or collectively, may cast

significant doubt on the entity’s ability to continue as a going concern, where the magnitude of its potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary for, the fair presentation of the financial statements.

• Enhanced risk assessment procedures – The risk assessment procedures in the revised standard have been significantly expanded, drawing a clear link to the requirements of ISA (UK) 315, including a requirement to understand the following areas in relation to going concern in order to meet the objectives of the standard:

21. the entity and its environment;22. the applicable financial reporting framework; and23. the entity’s system of internal control.

• Further, should the auditor identify events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern which management has not previously identified or disclosed to the auditor, the standard now requires the auditor to:

24. request management to perform additional procedures to understand the effect of the events or conditions on management’s going concern assessment;

25. inquire as to why management’s going concern assessment failed to identify or disclose the events or conditions; and26. perform additional audit procedures relating to the newly identified events or conditions.

• Requirements when evaluating management’s assessment – While the broad requirement to evaluate management’s going concern assessment is unchanged, the new standard gives much more prescriptive requirements for the auditor when doing this, including:

27. evaluating the method used by management in assessing the entity’s ability to continue as a going concern;28. evaluating the relevance and reliability of the underlying data used to make the assessment;29. evaluating the assumptions on which management’s assessment is based;30. evaluating management’s plans for future actions in respect of going concern.

• The new standard also gives an explicit requirement that management’s assessment needs to cover at least 12 months from the date of approving the financial statements and where this is not done, the auditor shall request management to extend its assessment to cover this period.

• Evaluating the sufficiency and appropriateness of audit evidence and consider all relevant audit evidence obtained, whether corroborative or contradictory.’

• Reporting – The revised standard uses the words ‘appropriate’ and ‘appropriateness’ in terms of the disclosures made in the financial statements relating to going concern rather than ‘adequate’ and ‘adequacy’. In the audit report, should the auditor conclude the going concern basis is appropriate and no material uncertainty exists, a positive conclusion regarding going concern is now required under ‘Conclusions related to going concern’ or other appropriate heading.

• Documentation - The revised standard now also includes some specific documentation requirements which need to be recorded on the audit file (drawing on the requirements of ISA (UK) 230 which would be relevant to this standard) as follows:

31. Key elements of the auditor's understanding of the entity and its environment, including the entity's internal control related to going concern;

32. Indicators of possible management bias related to going concern, if any, and the auditor's evaluation of the implications for the audit.33. Significant judgments relating to the auditor's determination of:

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5. Whether or not a material uncertainty related to going concern exists;6. The appropriateness of management's use of the going concern basis of accounting in the preparation of the financial

statements; and7. The appropriateness of management's disclosures in the financial statements.

In light of the changes above several updates have been made throughout the Academies Manual to reflect these requirements within the methodology. Firstly, permanent file forms have been updated to reflect the specific requirements within the updated ISA to ensure the requirements regarding going concern are reflecting in the understanding of the entity and its control environment. There is a new PF1-10 which specifically looks at understanding the entity its environment in relation to going concern.

The PF1-10 firstly identifies the events or conditions regarding the going concern status by reviewing the information of PF1 relating to the following areas:

Entity's business model, objectives, strategies and related business risks

Through understanding the above, auditors will obtain information that is relevant in identifying events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and whether a material uncertainty related to going concern exists, for example;

• developments in the environment where the entity operates (eg. a potential related business risk might be increased costs, loss of market share);

• new products and services (eg. leading to increased product liability);• expansion of the business (eg. demand has not been accurately estimated); and• current and prospective financing requirements (eg. current financing requirements may be approaching maturity without realistic prospects

of renewal or repayment).

The nature of the entity, including its operations, the types of investments or disposals the entity is making and plans to make, and how the entity is structured and financed

Through understanding the above, auditors will obtain information that is relevant in identifying events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and whether a material uncertainty related to going concern exists (eg.

• whether the entity has a complex structure or large in size;• whether the entity has any financial obligations / undertakings / guaranties, with lenders / suppliers / group entities and the terms of those

facilities.

Requirements of the applicable financial reporting framework relating to going concern, and the related disclosures that we expect to be included in the entity's financial statements

The entity’s risk assessment process relating to going concern

After identifying events or conditions regarding the going concern status, consideration of the entity’s risk assessment process is required:

• the risk assessment process identifies relevant business risks and assesses their significance; including likelihood and impact;

• the information system identifies and captures events or conditions, that individually or collectively may threaten the entity’s ability to continue as a going concern;

• the methods, assumptions and data used in assessing its going concern status are identified by management. This may include how they determine the relevance and accuracy of the method, how they determine that assumptions are relevant and complete and the nature and source of the method, data and assumptions;

• management prepares disclosures relating to going concern for its financial statements;

• the nature and extent of oversight and governance over management’s assessment process. Auditors’ will assess whether those charged with governance have the skills and knowledge to understanding how characteristics of the method used by management to assess the entity’s ability to continue as a going concern and as to whether the assessment fulfils the requirements of the financial reporting framework. This final element is also covered on the B21-1 and B21-2.

The understanding reflected in these forms then leads to an updated B31 risk assessment. This revised form guides users to consider if any events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern would give rise to a material uncertainty regarding going concern. The form then prompts auditors to obtain a copy of management’s initial going concern assessment and document the understanding of how this was made. Auditors are then required to evaluate if the period assessed covers at least 12 months from the expected date of approving the financial statements and where it does not, this should be discussed with the client, noting the key points from the discussed and considering the impact this has on your risk assessment. Auditors inquire with the client of their knowledge of events or conditions beyond the period initially assessed and the potential significance of these on their assessment of the entity’s ability to continue as a going concern and then, considering management’s assessment as whole, evaluate if their assessment considers all the events or conditions that may cast significant doubt on the entity's ability to continue as a going concern.

An important aspect is that auditors evaluate whether factors, events or conditions that may cast significant doubt on the entity's ability to continue as a going concern give rise to a risk of management bias.

When reflecting on this risk assessment process auditors ensure they have updated and reviewing relevant permanent file documents. If through their risk assessment process, additional factors, events or conditions that cast significant doubt over the entity's ability to continue as a going concern have been identified by the auditor, auditors must inquire as to why management failed to identify or disclosure those factors, events or conditions. An overall conclusion should then be summarised as to whether events or conditions [have / have not] been identified that may individually or collectively, cast significant doubt on the entity’s ability to continue as a going concern and there is a [low / medium / high] risk that a material uncertainty related to going concern exists; and a[low / medium / high] risk that managements use of the going concern basis of accounting in the preparation of the financial statements is inappropriate. Any specific risks noted should be added to B32 and B33 / R2. The audit approach should be planned on B33 / R2 and the R audit programme tailored accordingly.

Given the increased emphasis on the auditors work around going concern, a dedicated audit programme has been created to give a greater focus on the work needed during core field work. This takes a number of the procedures that were previously performed when completing A42 along with a number of mandatory procedures now required in the revised version of ISA (UK) 570 and is set out in Section R of the work programmes. For consistency, the same change has been made for work required over subsequent events, with certain procedures which were previously set out in A41 now being included in Section S of the work programme. Given the nature of these areas, these sections only contact ‘General and Mandatory’ procedures, given the other work programmes seen in other areas are not considered applicable.

While the majority of work required over going concern (and subsequent events) has been moved into field work per the changes set out above, A41 & A42 have been retained for a final update and evaluation prior to finalising the engagement. The documentation of significant judgements made and the impact on the audit opinion should be reflected here and are also documented on the Audit Summary Memorandum at A25.

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The example reports included within the manual have also been updated to reflect the reporting requirements set out in the revised version of ISA (UK) 570. In addition the a standard opinion, which reflects a positive conclusion regarding there not being a material uncertainty relating to going concern and that managements use of the going concern basis of accounting in preparing the financial statements is appropriate, there is now also a template which reflects a material uncertainty relating to going concern.

Other recent changes to ISAs (UK)

Alongside the recent update to the FRC Ethical Standard in December 2019, the FRC issued a number of relatively minor revisions to the following ISAs (UK) that take effect for accounting periods commencing on or after 15 December 2019:

• ISQC (UK) 1 Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements

• ISA (UK) 220 Quality control for an audit of financial statements• ISA (UK) 250A Consideration of laws and regulations in an audit of financial statements• ISA (UK) 250B The auditor’s statutory right and duty to report to regulators of public interest entities and regulators of other entities in the financial

sector• ISA (UK) 260 Communication with those charged with governance• ISA (UK) 600 Special considerations – audits of group financial statements (including the work of component auditors)• ISA (UK) 620 Using the work of an auditor’s expert• ISA (UK) 700 Forming an opinion and reporting on financial statements• ISA (UK) 701 Communicating key matters in the independent auditor’s report• ISA (UK) 720 The auditor’s responsibilities relating to other information

As can be seen from the list above, the changes affect a broad selection of the ISAs, although the main changes focus on four principal areas.

Laws and regulations

There are requirements for greater consideration of whether there are any indications of non-compliance with the legal and regulatory framework in which the audited entity operates. Additional work will be required as part of the auditor’s risk assessment, and the updated ISA (UK) 250A includes improved guidance on circumstances which may indicate that such non-compliance has taken place.

The changes also emphasise the importance of qualitative factors when considering whether non-compliance is material and may require disclosure in the financial statements. PF1-3 and the related guidance in the Audit Procedures Manual has been updated for this.

Reporting

Possibly the biggest impact outside of the ISA 540 and ISA 570 changes for the majority of auditors will be the introduction of what is intended to be a bespoke paragraph in each audit report. It is required to explain to what extent the audit was considered capable of detecting irregularities, including fraud. The FRC’s own impact assessment noted that it was expected that this additional requirement would take an additional one manager hour per engagement, though in reality this will undoubtably vary considerably from one engagement to the next.

The example reports included within the manual have also been updated to reflect the reporting requirements set out in the revised version of ISA (UK) 700. This includes a section for you to set out the extent the audit was considered capable of detecting irregularities, including fraud. We have included guidance within the Audit Procedures Manual to help guide auditors as to what could be included in this section. A new A29 Reporting on irregularities form has been added to reflect the ICAEW 'Audit guide: how to report on irregularities, including fraud' published in April which states 'How the auditor developed their explanation, and the areas considered, would be expected to be documented in the audit file'. This expectation goes beyond ISA 700 and we have added a new form to aid documentation for firms. A prompt on A21-1 for the RI's approval has also been added.

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Appendix IIUpdated ESFA requirementsAcademies Accounts Direction 2020 to 2021

The Academies Accounts Direction 2020 to 2021 is effective for periods ending 31 August 2021.

The main changes within the 2020 to 2021 Accounts Direction are as follows:

• editorial changes to improve the structure and flow of the Direction.• the “Coketown” model accounts have been split out to a separate document.• sections aimed at auditors and reporting accountants have been moved to a separate document.• a new section which provides feedback from ESFA to the sector relating to the application of and compliance with the Direction.• greater clarity on the content of the financial review section of the trustees’ report.• a new requirement for trusts who have had a Financial Notice to Improve in place at some point during the year to declare this and provide more

information.• where the academy trust has entered into an “off-payroll” arrangement with someone who is not an employee, including but not limited to where ESFA

has exceptionally approved the appointment of an Accounting Officer (AO) or Chief Financial Officer (CFO), the amount paid by the trust for that person’s work for the trust in this role must also be included in this note as if they were an employee. The prior year figure should also be reported and restated if necessary.

• clarification of which funding sources should be classed under each heading in the note on funding received for the academy trust’s educational operations, to align more closely with the Academies Accounts Return.

• a reminder for academy trusts to ensure the correct identification, classification and treatment of finance and operating leases.• clarification that service concession commitments e.g. payments made under secondary agreements with local authorities should be disclosed as part

of the long-term commitments note [see model accounts note 23].

The disclosure checklist, proforma accounts, example reports and relevant regularity documentation have been updated to reflect these requirements.

At the date of publication of this manual, it is expected that the ESFA will also publish a supplemental bulletin to the Accounts Direction 2020 to 2021 that covers COVID-19 reporting matters.

Academies Financial Handbook 2020The Academies Financial Handbook (AFH) 2020 is effective for the year commencing 1 September 2020.

The main changes within the 2020 Handbook are as follows:

• Further information on governance arrangements including:34. trustees’ responsibility to maintain the trust as a going concern [1.14, 2.5 and 2.8],35. confirmation that members must not be employees or occupy unpaid staff roles [1.4],36. that members must remain informed about trust business [1.8] and that trusts must appoint a clerk to the board [1.40].37. clarification that trusts must keep their register of interests up to date [5.46].

• Confirmation that both the accounting officer and chief financial officer (CFO) should be employees, and a requirement for ESFA approval if, exceptionally, they are not [1.26 and 1.36].

• Also encouraging larger trusts to consider relevant accountancy qualifications for their CFO, and for all CFOs to maintain professional development [1.37 and 1.38].

• Updated clarifications including:38. maintenance of a fixed asset register [2.7],39. termly review of pupil number projections [2.12],40. use of integrated curriculum and financial planning [2.13],41. avoidance of overdrafts [2.24],42. publication of information about high pay [2.32] and whistleblowing [2.44],43. confirmation that the trust’s funds must not be used to purchase alcohol [2.35],44. board and committee responsibilities for risk management [2.38, and 3.6 to 3.8] and45. completion of the School resource management self-assessment tool [6.8].

• Updated text including clarification that internal scrutiny covers both financial and non-financial controls [3.1], removal of the option for internal audit to be performed by the external auditor [3.17 and 3.20] and confirmation that trusts can use additional individuals or organisations to support internal scrutiny where specialist nonfinancial knowledge is required [3.18 and 3.23].

• More on the audit and risk committee’s role in relation to external audit [4.17].

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