The Overrun on a First-Year Charity Audit
You are the engagement partner on the first-year audit of Riverbend Housing Trust, a charity with £14m turnover and 60 staff. The audit is fee-capped at £38,000, agreed when the charity's finance team was described as 'experienced'. In practice the finance manager left two weeks before year-end and the interim bookkeeper has no charity SORP experience. At the planning meeting you budgeted 320 hours; by the interim review 260 hours are already used with fieldwork barely started. The draft trial balance has £180,000 of restricted grant income posted to general funds, a £95,000 debtor that the CEO says is 'a housing grant we're confident about', and no supporting schedule for £60,000 of legacy costs. The trustee board meets in five weeks and expects signed accounts. The firm's policy requires partner approval for overruns above 15%.
1. Identify the threats and judgements arising from the fee and scope situation, and explain how you would respond as engagement partner.
Read the worked answer
The core issue is a mismatch between the resources the fee funds and the work the standards require. This is not a commercial negotiation problem dressed up as ethics; it is a scope and quality problem.
Threats
- Self-interest threat: the firm wants to retain the client and avoid an uncomfortable conversation about fees, which pressures the team to cut corners.
- Intimidation threat: the trustee meeting date and the CEO's confident assertions create pressure to accept weak evidence.
- Competence and due care: the bookkeeper lacks SORP knowledge, so the team must do more work, not less.
Judgements
- The £180,000 misclassification is a SORP compliance issue (restricted funds must be shown separately). It is likely to be material to the fund statement even if not to the surplus.
- The £95,000 debtor needs corroboration. 'We're confident' is not audit evidence. If no grant agreement or correspondence exists, consider a provision and a modified opinion.
- The £60,000 legacy costs with no schedule is a limitation of scope until resolved.
Response
- Escalate the overrun internally and seek approval under the 15% policy, but frame it as a scope change, not a fee grab.
- Discuss with the trustees: the original fee assumed a finance function that no longer exists. Set out options - additional fee, revised timetable, or reduced but still ISA-compliant scope (which may mean a modified report).
- Do not allow the trustee meeting date to drive the evidence. If evidence is unavailable, the report must say so.
- Document the discussion and the basis for any revised fee, and consider whether the firm should decline future years unless controls improve.
2. The CEO offers to 'help things move along' by preparing the debtor schedule and grant letters himself. How does this affect the evidence you can rely on?
Read the worked answer
Management-prepared schedules are normal and acceptable, but the source and independence of the evidence matter.
- A schedule the CEO prepares is management representation, not corroboration. It tells you what management believes, not whether the grant is receivable.
- The stronger evidence is third-party: the grant agreement, funder correspondence, post-year-end receipt, or confirmation from the funder. You should seek these directly where possible.
- If the CEO's schedule is the only evidence, it is insufficient for a £95,000 balance that is likely material. You would need to consider a provision and, if unresolved, a qualification.
- Watch for the familiarity/self-review risk if the CEO is also a trustee and the same person controls the records. Document who prepared what and why you accepted it.
- The CEO 'helping' with the restricted funds reclassification is fine as a correction, but you must test the corrected figures against the SORP and the underlying grant terms, not simply accept the adjustment.