Audit Plan For Kent Rural Development Trust

Audit Approach

An audit plan is a standard document that contains the audit procedures to be followed in an audit of financial statements of an organization. In this document a detailed audit plan of Kent Rural Development Trust, here in after shall be referred to as KRD Trust, shall be provided to present it to the Audit Committee of the Trust. The audit plan of KRD Trust must be in accordance with the necessary requirement of standards.

Tick and Bash, a firm of chartered accountants and registered auditors, have been appointed to conduct the audit of KRD Trust. Since the proposed audit manager has left the firm at short notice it has compelled to appoint another partner of the accounting firm   as the proposed auditor has left the audit after giving a short notice. The approach of the auditor determines how an audit shall be conducted thus, it is important to give specific attention to the approach of the auditor. In this case the auditor has determined to use substantive audit procedures to conduct the audit of the Kent Rural Development Trust.

‘In performing our audit, we apply the concept of materiality, following the requirements of International Standard on Auditing (ISA) 320: Materiality in planning and performing an audit. The standard states that ‘misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements’. As is usual in a non-profit sector, we have determined materiality for the statements as a whole as a proportion of the gross expenditure of the Trust. For purposes of planning the audit we have determined overall materiality to be £400k (being 1% of 2016/17 gross expenditure). We will consider whether this level is appropriate during the course of the audit and will advise you if we revise this. ISA 320 also requires auditors to determine separate, lower, materiality levels. In case there are ‘particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users’ so for this particular audit we will set performance materiality at a high risk (50%) for it to be £200k.’

The determination of materiality levels in planning and performing the audit of the trust shall be determined taking into consideration the key metrics as available from the financial statements of the trust for the year 2016. Gross assets of the trust as per the statement of financial position for the year 2016 is £26.20 Million and net asset for the same period is £4.10 Million. The turnover the trust as per the income statement of 2016 is £40.00 Million and the expenditures of the trust has exceeded the turnover as is clear from the fact that the trust has incurred a deficit of £1.30 Million. Use of 1% on these benchmarks, such as gross assets, net assets, revenue and deficit to determine the materiality levels. The expenditure is regarded as material if it is above 1% of the total expenses. Therefore, Materiality is calculated as 1% of 40 million that is $400000.

Materiality Levels determination

The risks of financial statements being materially misstated and the audit procedures fail to unearth the material misstatements are the main significant risks in an audit.  The nature of transactions and judgments are the most important factors which help us to identify the significant risks in an audit. Uncertainties attached with accounting estimates, complex accounting provisions are few of the most prone areas that increase the significant risks. During the course of planning for the audit of the trust, the following significant risks have been identified in accordance with the guidelines of ISA 315.

Apart from the significant risks there are other risks involved in the audit of the trust. These include the inherent risk, control risk and detection risks. Inherent risk is the risk of error and omission in the financial statements which cannot be controlled. Control risk is the weakness in internal controls within an organization to reduce the inherent risks to an acceptable level. Detection risk is the risk of failure on the part of the auditor to unearth the material misstatements despite conducting all substantive procedures in an audit.

Core accounting is provided in-house by a small finance team using a well known accounting package.

Payroll is provided by Gubbins Payroll services on a contract basis.

Internal audit is provided by Charlie Buggins, a trustee who is a retired office manager.  He undertakes about 50 days of work a year focussing on ‘high risk’ areas such as inventory, catering stocks and petty cash.

Other issues identified in audit planning

Discussions with management and review of Board minutes up to June 2017 has identified the following issues that may be relevant to audit planning:

• the trustees were dissatisfied with the work of the previous external auditors and rejected their recommendations for improved segregation of duties on the grounds that the employees of the Trust were all of the highest calibre and inherently trustworthy;
• the Trust has received a claim from the disgruntled nephew of a widow who gifted her entire £3m estate to the Trust.  The Trust believes that the claim is weak but has yet to obtain legal advice;
• the Trust has incurred a deficit for the third year running and has engaged an advisor to prepare cashflow forecasts for the next 9 months;
• the Trust has moved into a new market of operating some of its properties as holiday lets.  It anticipated income of up to £2 million per year but performance in the year to date has been very disappointing;
• the Trust has launched a consultation on its 10 year plan.  If adopted this would envisage doubling the turnover of the Trust over that period;
• the Trust suffered a fraud perpetrated by its stores manager.  The identified loss was £150,000 but records were incomplete and it could have been more;
• and a former partner in Tick and Bash, B Ash, is a trustee of the Trust.

Verification of the sources of income is an essential requirement for as the organization is registered trust and thus, have certain restriction as the activities in which it can involve to earn revenue. Thus, sources of revenue is to be assessed and verified to ensure these are in compliance with the requirements of Trust Law in the country. Income sources of the trust include legacies, membership fees, rental income, government grant and sale of goods. These all are to be verified properly during the course of the audit (Bryce 2017).

Similar to the income of the trust the expenditures are also to be properly assessed and justified by verifying the supporting documents. This is to ensure that the expenditures of the trust have been incurred properly and are in accordance with the objectives of the trust for which it has been created. A trust can incur expenditures only in accordance with the objectives of the trust thus, it is the responsibility of the auditor to verify the supporting documents in favour of the expenditures to assess whether these are in accordance with requirements of the trust and its objectives.

Significant Risks

Appraisal of the accounting system of the trust shall be conducted to assess the relevant strength of the accounting system and to ensure that the system has worked properly throughout the period of intended reliance.

Assessing the strength of the internal auditing of the trust will help the auditor to place his reliance on the system of internal auditing in the organization. Thus, the auditor will be able to assess whether the work of the internal auditor of the trust will be of any use for the auditor.

Firstly, the auditor needs to determine the preliminary figure for materiality levels to ensure that the financial statement is not materially misstated. Use of a percentage on bench marks such as gross assets, net assets, turnover, and total expenditures will be helpful for determining the items on which the substantive and analytical procedures are to be used for the purpose of audit of the trust.  

Secondly, following incomes shall be verified to see whether these are in accordance with the requirements of objectives of the trust:

1. Legacies income of £12.10m.
2. Membership fees of £0.4m as to whether these have been collected properly in accordance with rules and regulations of the trust.

• The rental income of £2.2m.

1. Whether the government grant of £15.6m is being properly used by the trust and the conditions attached with the grant are being fulfilled by the trust to avoid refund of such grant.
2. The income of £9.7m from sale of goods. Whether the necessary documents have been maintained and the revenue from sale of goods have been collected properly.

The types of expenditures and the amount of expenditures shall be assessed and justified by verifying the supporting documents against the following expenditures:

1. Staff salary £16.1m shall be verified by assessing the staff records and the relevant documents supporting the expenditures incurred on the salary of the staff and other expenses related to the staff. Register containing the names and other details of the staffs and workers of the trust along with bank details containing the payment of salary and other expenses to verify the authenticity of the staff expenses. It is also the responsibility of the auditor to see whether the payments made to the staffs are in accordance with the terms and conditions of the agreement between the trust and the staffs of the trust.    
2. Interest expenditures of £1.2m needs to be assessed as to their justification in terms of the activities of the trust.

• Whether the grants provided to the community groups amounting to £4.5m is in accordance with the objective of the trust with which the trust was registered.

1. Whether the payment to the suppliers of £17.2m are proper and in accordance with the objective of the trust.
2. Assessment of the method used to charge depreciation on non-current assets of the trust (Zainon al. 2016).

The trust uses a well-known accounting package, the auditor needs to assess the strengths of the financial package to ensure that the accounting transactions have been properly recorded in the books of accounts of the trust on the basis of which the audit shall be conducted. The auditor is allowed to use the work of an expert in case he thinks it is necessary and that the work of an expert will help him to express proper opinion on the financial statements of the trust. Thus, the auditor manager of KRD Trust can decide to use the work of an expert to assess whether the financial system used by the trust is proper and reliable.

An audit plan for a non-profit organization will certainly be different from an audit plan for a profit oriented organization. In this case the fact that KRD Trust is registered as a charitable organization in the United Kingdom will have to be taken into consideration while conducting the audit of the trust. Thus, the audit plan of KRD Trust will have to be prepared accordingly (Amin and Harris 2017).  

This is first time that Tick and Bash has been appointed as the auditor of the trust thus, the initial audit engagements such as appraisal of opening balances by verifying the correctness of the opening balances in the financial statements of the trust. This can be done by relying on the audited financial statements of the trust of the previous year.

Other Risks

The scope of Audit is of two types. The auditor should report the truth and fairness of the financial statement. The second scope is to analyse whether the trust has been able to meet its objective. The auditors should therefore establish what the objectives are and consider how they can identify whether the objectives are being met. In order to identify the key areas, the auditors will have to consider audit risks.

The International Standards on Auditing (ISAs) and International Standards on Quality Control (ISQC), formulated in accordance with the global auditing standards, are applicable for the audit of UK entities. Accordingly, the audit plan for the KRD Trust shall be prepared in accordance with the relevant ISAs and ISQC.   

An audit plan for a non-profit organization will certainly be different from an audit plan for a profit oriented organization. In this case the fact that KRD Trust is registered as a charitable organization in the United Kingdom will have to be taken into consideration while conducting the audit of the trust. Thus, the audit plan of KRD Trust will have to be prepared accordingly.

This is first time that Tick and Bash has been appointed as the auditor of the trust thus, the initial audit engagements such as appraisal of opening balances by verifying the correctness of the opening balances in the financial statements of the trust. This can be done by relying on the audited financial statements of the trust of the previous year.

The auditor will have to maintain a separate file to keep all the necessary documents used in the audit of the trust as these will help the auditor to express an appropriate opinion on the financial statements of the trust. The documents include working papers and other documents used by the auditor in completing the audit of the trust. Each and every single document shall be kept in the working file of the auditor to assess the financial transactions of the trust and provide an appropriate opinion on the financial statements of the trust.

Audit fees shall be as following:

• Supporting schedules to all figures in the accounts are supplied by the agreed dates and in accordance with the agreed upon information request list.
• The Trust will make available management and accounting staff to help us locate information and to provide explanations.
• The accounts presented for audit are materially accurate, supporting working papers and evidence agree to the accounts, and all audit queries are resolved promptly.

Audit Team

The senior audit executives of the firm Mathew Anderson and Michael Gough shall be part of the audit team and will report to the audit manager. The taxation matters shall be assessed and verified by the senior tax executive of the firm Alan Butcher, again he will report his findings to the the audit manager.  

An audit is conducted with the objective of an independent appraisal of the financial statements of an organization to provide an unbiased and independent opinion on the financial statements of such organization. The auditor is independent of the entity and thus, neither he nor any of his relative shall have any interest with the entity to ensure the independence of the auditor. In case an auditor acquires any interest then he will have to vacate the office of auditor immediately.  

The following steps must be taken by the Trust before finalizing the audit plan:

1. A letter shall be provided to describe the roles and responsibilities of the members of the trust.
2. The previous audit report shall be made available to use before start of the audit.

• The documents relating to receipts of Government grant has not been found. Thus, it should be made available at the beginning of the audit.   

1. A meeting shall be facilitated with the internal auditors of the Trust to allow us to evaluate the efficiency of internal audit system within the Trust.
2. All necessary supporting documents in support of the expenditures incurred by the Trust shall be made available for verification of the supporting documents.

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