Auditors' 'jargon' - Academy blog

Is your audit qualified or unqualified? Is the Academy Trust a going concern? These are just some of the questions which may sound like another language if you don’t have a financial background in the auditing world. In this blog I will try to explain below in some sort of English what on earth the auditors are talking about during our audit visit or during Governors meetings.

• Going concern – this basically means a business can carry on trading in the near future (for the next 12 months after the accounts are signed). The test as to whether an Academy Trust is a going concern is does it have enough funds to pay its staff and other bills in the foreseeable future or will it run out of money?

• Qualified audit report – qualified sounds like a good thing but in this case it isn’t! Qualifying an audit is thankfully rare with our clients. If we have had to qualify your audit report this means we haven’t been able to fully independently verify that the accounts show what is called a True and Fair View. This does not mean that we have agreed every single transaction down to the last penny. Rather it means that the figures are accurate enough to not mislead somebody making an informed decision on the basis of them.

• A qualified report does not always mean that there is anything wrong with the trust’s records or procedures. For example, we may be the new auditors this year and we haven’t received enough information to be happy with the balances brought forward from the previous years.

• Unqualified audit report – this is a good thing and thankfully the large majority of our audits are unqualified. It means at the end of our audit work we can say that the accounts do show a True and Fair View and they have been prepared in line with the accounting standards (accounting rules).

• Emphasis of matter (also known as a modification) – this is a paragraph included in the audit report in the accounts to draw attention to a particular item in the financial statements. There are different reasons why we may need to include this such as that there is uncertainty over the Academy Trust’s going concern.

• Materiality – when we carry out our audit work we have to work to what is called a ‘materiality’ level. We work out our materiality level when we do our planning. For academies this tends to be based on a percentage of income, although some specific areas (such as related party transactions) will have their own materiality levels. This amount is then looked at when considering how big a sample to test on various parts of the audits, or whether it is necessary to make an adjustment to the figures to satisfy True and Fair criteria.

• Trivial – we agree with you that we don’t report anything to yourselves which is below the trivial amount (triviality). The trivial amount may vary depending on the size of the Academy Trust. The bigger the Academy Trust the bigger the trivial amount is likely to be.

• Funds – think of these as different pots of money. There are Unrestricted Funds for which the income is mainly amounts the Academy Trust have generated themselves such as sports facility rentals, school fairs and other donations and then costs associated with these activities. There are also Restricted Funds for which the income is mainly grants received from the ESFA or Local Authority. Restricted Funds must be spent on educational purposes, Unrestricted Funds can be spent how the Academy Trust wishes.

• Statement of Financial Activities (SOFA) – this isn’t something you sit on to watch TV in the evening! The SOFA is a page in the accounts which shows the income and expenses for the year split out by the different funds mentioned above. It also shows any transfers (movements) from one fund to another. It is the equivalent of a Profit and Loss Account for a commercial limited company.

• Balance Sheet – this is a page in the accounts which includes the amounts of assets owned by the Trust, amounts owed to the Trust (debtors), the amounts owed by the Trust (creditors) and the amount of funds all at a snapshot in time (the year end date). Fixed assets are things the Trust owns which are intended for use over more than a year such as computer equipment, whiteboards, minibuses and building improvements. Other assets mainly include bank balances. Amounts owed to the Trust include amounts owed for any unpaid sales invoices and anything the Trust has paid for in advance such as subscriptions. Amounts owed by the Trust include amounts owed for any unpaid purchase invoices and any expenses not yet paid at the year end.

• Depreciation – this is an accounting adjustment made to the value of the fixed assets included in the Balance Sheet to reduce their value over time. A bit like when you buy a brand new car and the value of it reduces as soon as you drive it out of the garage. So it’s not a physical cost, there is no money going out as such.

• Payroll reconciliation difference – during the audit we test your staff costs as this is typically the biggest cost for an Academy Trust. We carry out a test during the audit called a payroll reconciliation. This means we look at what total wages costs you have in the accounts and then compare them to the total wages costs that are included in the payroll reports. We may find that there is a small difference at the end of the test but if it is within a reasonable amount we do not investigate this difference further as it is below our materiality level.

The ESFA have recently come up with some useful factsheets which can be found here which discuss topics such as going concern, choosing an external auditor and risk management in more detail.

You can ask a member of our Forrester Boyd education team for clarification on anything you don’t understand, we are more than happy to help.