Does my association need an audit or a review?

In recent years, federal legislation was streamlined to reduce the compliance burden for many small and medium sized companies limited by guarantee. The result being that some no longer required an audit, while others had the option of completing a review instead of an audit. If your association is incorporated under state based legislation you will need to carefully check the requirements in your state.

Determining whether your association needs to have an audit or review depends on a number of factors, such as:

  • Whether your association is incorporated under the Corporations Act (as a Company Limited by Guarantee) or under state-based legislation
  • The size of your association
  • Whether your association has Deductible Gift Recipient (DGR) status
  • Your association’s constitution and any other governing documents

Companies Limited by Guarantee

A few years ago, the legislation was streamlined to reduce the compliance burden for many small and medium sized companies limited by guarantee. The result being that some no longer required an audit, while others had the option of completing a review instead of an audit.  Companies were split into three categories:

Category (Tier)CriteriaRequirements
One (small)Revenue less than $250,000 and not a DGRExempt from preparing financial statements and of having either a review or audit unless requested by more than 5% of members or by ASIC
Two (medium)Revenue between $250,000 and $1 million OR DGR and revenue under $250,000Choice of either an audit or review of the financial statements unless an audit is requested by more than 5% of members or by ASIC
Three (large)Revenue over $1 millionAudit of the financial statements is required

 

State Based Legislation for Incorporated Associations

Each State has its own Associations Act and the requirements for an audit or review vary.  Many states have similar criteria to those under the Corporations Act.  If your association is incorporated under state based legislation, you will need to carefully check the requirements in your state.

Check Your Constitution

Despite changes in the legislation, we have identified that many constitutions, especially when prepared prior to 2010, require the association to have an audit. These requirements overrule the legislation. If this is the case, your association can either arrange for the constitution to be amended (with permission of the members) or to vote on the requirements annually at the Annual General Meeting (AGM).

What is the Difference Between an Audit and a Review?

Audit

An audit is a detailed process that provides a high level of assurance to users of the accounts. This is often called ‘positive assurance’, and includes a statement by the auditor such as ‘In our opinion the financial report of the xxx Ltd is in accordance with the Corporations Act 2001….’

Responsibility for the prevention and detection of irregularities and fraud rests with directors. An audit is planned so that there is a reasonable expectation of detecting material misstatements in the financial statements or accounting records.

The audit entails reviewing supporting documentation for all material balances and transactions and requirements. In addition to the work performed for a review (as detailed below) an audit may involve an inspection of items such as invoices, bank statements and agreements with third parties.  It may also involve obtaining information from third parties, such as bank confirmations.

Review

A review provides a lower level of assurance than an audit. This is often called ‘negative assurance’ and includes a statement by the auditor such as ‘Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the financial report of xxx Ltd is not in accordance with the Corporations Act 2001....’

A review consists of making enquiries and applying analytical and other review procedures, such as reading the minutes of meetings conducted by the association. 

As a review involves less work than an audit, there is a higher risk that any material misstatements that exist in the financial statements may not be revealed by the review. The benefit is that a review is usually significantly cheaper than an audit.

 

This article was also published in the AES March newsletter which can be found here http://www.associationexecutiveservices.com.au/blog/does-my-association-need-an-audit-or-a-review