Money Matters

Charity audit checklist: Guide and tools to plan ahead

Stressed out about your audit preparations? Read how a good charity audit checklist can relieve the strain, guaranteeing an audit that helps you gain trust and plan for growth.

18 May, 20268 min read Share

As a charity, your relationship with donors and government entities is vital and has to be built on trust. That is best achieved with accurate and transparent documentation.

Whilst audits can be onerous, the process presents the ideal opportunity for verifying that everything is in order with your charity’s finances. Not only does a well-organised audit process add weight to your standing with supporters, but it’s also excellent practice for good financial management and ensuring regulatory compliance.

This guide will help you understand the charity audit process and prepare for it.

Here’s what we’ll cover:

What is a charity audit?

A charity audit is a review of your charity’s financial records to verify their accuracy, compliance with laws, and adherence to accounting standards.

In the UK, a full audit is different from an independent examination, which is a less detailed level of scrutiny and may be required for smaller charities depending on their income. 

If you have qualified staff, an internal audit can be a cost-effective way to ensure your organisational controls are working.

External auditors, in contrast, give your organisation credibility and are often required for compliance with funders and regulators. For example, in England and Wales, the Charity Commission requires an external audit from charities whose annual income exceeds £1 million, whilst charities with income between £25,000 and £1 million may require an independent examination.

Unlike standard audits, charity audits must check for compliance with specific regulations and requirements, including restrictions imposed by donors.

The concept of restricted and unrestricted funds is unique to charitable organisations, with restricted funds allocated for specific purposes, whilst unrestricted funds can be used for general operations.

6 types of charity audit

1. Financial audit

One of the most common types of charity audit.

This focuses on the accuracy of financial statements and providing stakeholders with an objective overview of your organisation’s financial health and practices.

2. Compliance audit

This examines whether your operation adheres to applicable laws, regulations, and funding requirements.

It is especially relevant if your charity receives government grants or public funding, as the audit will check if you’re following the specific spending guidelines set by the grant providers.

These guidelines might include restrictions on how funds can be used, such as prohibiting the use of grant money for lobbying activities, requiring detailed financial reporting, and ensuring that funds are spent within the grant period.

Additionally, the audit might verify that your administrative costs do not exceed a certain percentage of the total grant amount and that all expenditures are directly related to the grant’s objectives.

3. Operational audit

This reviews your internal processes and efficiency.

It evaluates how effectively you use the available resources to achieve your mission, identifying areas where internal practices could be optimised.

Although internal, it shouldn’t be confused with an ‘internal audit’, which includes financial aspects.

For instance, an operational audit might assess the efficiency of your volunteer management system, ensuring resources are used effectively.

4. Internal audit

This is your proactive check-up, often done by in-house staff or independent auditors.

It looks at your control procedures, risk management, and adherence to policies. Imagine reviewing how you handle cash donations to ensure everything is secure and properly documented, catching any issues before they become big problems.

5. Programme-specific audits

Some grants or funding sources require audits focused solely on a specific programme.

Your funders would want to know exactly how their money is being used. If you received a health grant, a programme-specific audit would ensure those funds are used exclusively for health-related activities and outcomes.

These audits verify that your donors’ stipulations have been followed and that programme outcomes align with the funders’ expectations.

6. The HMRC enquiry

Although rare, this may occur where there are discrepancies in tax filings or where HMRC selects your charity for a compliance enquiry. 

It assesses your tax-exempt status, unrelated business income, and proper handling of donations and expenses.

Picture HMRC checking if you correctly report income from a major fundraising event, like an annual gala or charity auction.

These events often involve significant donations, ticket sales, and auction proceeds, which need to be accurately reported to ensure compliance with tax regulations.

When does your charity need an audit?

Not all charities are required to undergo an audit, but there are specific circumstances when it may be necessary.

These include legal and regulatory requirements, donor or grantor stipulations, and operational needs for transparency and accountability.

Here are some common situations in which your charity may be required to perform an audit:

Legal or regulatory requirements

The Charity Commission mandates annual audits for charities with income over £1 million, whilst those with income between £25,000 and £1 million may require an independent examination.

Check your charity accounts audit requirements to determine if you fall into this category.

Grant or funding requirements

Certain grants, particularly those from government agencies or large foundations, require audited financial statements as part of their awarding criteria.

This assures them that your charity has what it takes to manage funds responsibly and can be trusted to respect their guidelines.

Those guidelines could include reporting requirements, performance metrics, or legal observations.

Internal policies and best practices

Many charities choose to conduct regular audits as best practices, even if it’s not legally required.

Regular audits reinforce your charity’s transparency, strengthen donor trust, and help you stay on a good footing financially.

Significant growth or operational changes

Rapid growth, major changes in campaign programming, or the arrival of a new leadership team may warrant a fresh audit.

This helps ensure that your organisation’s financial framework can support new demands or changes in strategy.

Benefits of a charity audit

Charity audited financial statements offer much more than financial validation; they help you detect internal inefficiencies, which means your financial affairs stay on track, enhancing overall accountability.

By showing your commitment to fiscal and legal responsibility, an audit strengthens donor confidence, helping you retain contributors and therefore increasing the chance that they will step up donations.

A financial audit may also be an official prerequisite as part of the application process when you seek a grant, particularly when the funders are government agencies or corporations.

Finally, solid financial information is essential for long-term planning and the ongoing development of your organisation and its mission.

A clear game plan is another factor that works in your favour when pitching to potential supporters, especially if you have a trustworthy reputation supported by verified information.

Advice for choosing an auditor

There are individual auditors or entire audit firms that specialise in the charity sector.

They will have the appropriate qualifications, such as being a Chartered Accountant (CA) or Association of Chartered Certified Accountants (ACCA) member with charity specialisation.

Many such professionals will be listed in directories maintained by entities like the Institute of Chartered Accountants in England and Wales (ICAEW) or the Charity Finance Group.

References from other organisations in your field will help you identify firms with experience in the different types of audits for charities.

Ideally, you will find an auditor who has a greater emphasis on mission alignment and sector-specific challenges compared to those working purely in the business or financial sectors.

That kind of vision generally goes hand in hand with a more collaborative approach, addressing the organisation’s operational needs rather than simply crunching the numbers.

However, this does not mean that charity auditors are any less business-like than commercially oriented auditors, and you can be sure their experience brings a good understanding of the regulations surrounding charity operations.

Auditing features to look for in charity accounting software

Specialist charity accounting software with audit automation capabilities can make sense of this entire operation by organising documents, ensuring secure access, and tracking internal review processes.

Here is the minimum set of features your automation system will need to perform these functions:

Document management

The software must manage a centralised system to store, organise, and retrieve documents, often including tasks like tagging, searching, and version control.

Audit trail

Your system must feature a robust audit trail to track all changes and activities, ensuring transparency and accountability throughout the many tasks, documents, and workflows in the system.

This should include the history of actions by time, date, user, ledger, and change detail–all of which can be queried and reported on.

User controls

Such as approval rules and user access rights, are essential to maintain security and proper workflow.

This means you can set who can view, edit, or approve documents, reducing the risk of unauthorised access.

Although centralised, the system can be configured to facilitate access to external auditors so they can run the charity audit remotely.

Compliance tracking

A good system matches your account entries to charity-specific regulatory requirements, such as Charity Commission, SORP and Companies House reporting standards.

It generates alerts for upcoming deadlines and monitors adherence to donor restrictions.

Data encryption

Security features like data encryption protect sensitive donor, financial, and organisational information, restricting access only to people you have authorised.

This is particularly important if your organisation has the technological means to run paperless charity audits.

Compiling reports

Reports can be generated based on financial statements, donor reports and compliance summaries, often in real-time and allowing customisation.

This lets you rearrange the data depending on the audience.

Tracking grants and donations

One of the most helpful features is the ability to track the receipt and allocation of grants and donations, recording details such as restrictions, spending deadlines, and reporting requirements.

Preparing your charity for a successful audit

Picking the right audit partner and specialist financial software can help make sure you are prepared to pass the audit process with positive outcomes.

Leveraging AI tools and a partner you can trust not only benefits your organisational efficiency but also helps grow your mission.

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