TECHNICAL RELEASE TECH08/12AAF REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE ABOUT ICAEW ICAEW is a world-leading professional accountancy body and operates under a Royal Charter which obliges it to work in the public interest. ICAEW provides leadership and practical support to Chartered Accountants in more than 160 countries, working with governments, regulators and industry in order to ensure that the highest standards are maintained. The ICAEW Audit and Assurance Faculty is a leading authority on external audit and other assurance activities and is recognised internationally as a source of expertise on audit issues. It is responsible for ICAEW technical audit and assurance leadership and provides a range of information sources to its members which gives practical assurance in key audit and assurance areas. ICAEW 2012 All rights reserved. If you want to reproduce or redistribute any of the material in this publication, you should first get ICAEW s permission in writing. Laws and regulations referred to in this ICAEW Technical Release are stated as at October 2012. Every effort has been made to make sure the information it contains is accurate at the time of creation. ICAEW cannot guarantee the completeness or accuracy of the information in this ICAEW Technical Release and shall not be responsible for errors or inaccuracies. Under no circumstances shall ICAEW be liable for any reliance by you on any information in this ICAEW Technical Release. ISBN 978-0-85760-643-3 Technical Release ICAEW 08/12AAF
CONTENTS 1. INTRODUCTION... 5 1.1 Introduction... 5 2. BACKGROUND: ACADEMY TRUSTS... 5 2.1 An academy trust s funding agreement... 5 2.2 The Academies Financial Handbook... 5 2.3 The role of an academy trust s accounting officer... 5 3. REGULARITY REPORTING FOR ACADEMIES (2011-12)... 6 3.1 The requirement to report on regularity... 6 3.2 What is regularity?... 6 3.3 The form of the regularity assurance conclusion... 7 4. PROVIDING LIMITED ASSURANCE ON REGULARITY... 7 4.1 The approach to a limited assurance engagement on regularity... 7 5. DOCUMENTING THE REGULARITY ENGAGEMENT... 8 5.1 Documentation... 8 6. UNDERSTANDING THE FRAMEWORK OF AUTHORITIES AND ASSESSING RISk... 8 6.1 Introduction... 8 6.2 Understanding the framework of authorities... 9 6.3 Understanding how the academy complies with the framework of authorities... 9 6.4 Materiality... 10 6.5 Assessing risk... 10 7. TESTING FOR REGULARITY... 11 7.1 Introduction... 11 7.2 Types of testing... 11 8. REPORTING ON REGULARITY... 11 8.1 Summary of work... 11 8.2 Irregularity... 11 8.3 Fraud... 12 9. EFA AND ACCESS TO WORKING PAPERS... 12 9.1 Access... 12 10. ENGAGEMENT LETTER... 12 10.1 The engagement letter... 12 10.2 EFA s Standard Terms of Engagement... 13 10.3 Liability... 13 11. REFERENCES... 14 APPENDIX 1: ILLUSTRATIVE REGULARITY ENGAGEMENT REPORT... 15 Independent Reporting Accountant s Assurance Report on Regularity to XYZ Academy Trust Limited and the Education Funding Agency... 15 Respective responsibilities of XYZ Academy Trust s accounting officer and the reporting accountant... 15 Approach... 15 Conclusion... 16 APPENDIX 2: TESTING TO SUPPORT A REGULARITY CONCLUSION: EXAMPLES... 17 Technical Release 08/12AAF 3
1. INTRODUCTION 1.1 Introduction 1.1.1 This guidance has been developed by the ICAEW Academies Working Group to support the provision of regularity reporting on academy trusts for the financial year 2011/12, following the approach chosen by the EFA. It is intended to bring together existing guidance on regularity reporting and on assurance, in the context of academy trusts, to inform accountants professional judgement as they undertake engagements in the diverse academies sector. 1.1.2 Academy trusts are state-funded independent schools, or groups of schools. Legally, Academy Trusts are companies limited by guarantee and, under the terms of the Academies Act 2010, exempt charities. An academy trust may include one or more individual academies which, due to provisions of the Academies Act 2010 are only permitted to be established in England. 1.1.3 The Principal Regulator of all academy trusts is the Secretary of State for Education who performs this role through the Department for Education (DfE) and the Education Funding Agency (EFA). 2. BACKGROUND: ACADEMY TRUSTS 2.1 An academy trust s funding agreement 2.1.1 An academy trust is party to a funding agreement with the Secretary of State for Education, which is a contract outlining the undertakings set out in the Academies Act 2010 in order to receive grant funding and financial assistance given by the Secretary of State. 2.1.2 The funding agreement is central to ensuring accountability and assurance over the use of public funds. It sets out, amongst other items, the types, terms and conditions of grants paid by the Secretary of State. The conditions also include a number of operational, governance, financial, accounting and reporting requirements. 2.1.3 Under the terms of its funding agreement the academy trust must abide by the requirements of and have regard to the guidance in the Academies Financial Handbook. The funding agreement also requires that the Academy Trust appoints an Accounting Officer. 2.2 The Academies Financial Handbook 2.2.1 The academies Financial Handbook was issued by the Department for Education and Skills (DfES) in 2006 and acted as the financial guide for governing bodies and managers of academy trusts for the period up to and including 31 August 2012. 2.2.2 The Academies Financial Handbook (September 2006) draws upon the requirements specified in academy trust funding agreements, company and charity law. In a number of areas it supplements requirements of the funding agreement. 2.2.3 In September 2012, the EFA published an updated Academies Financial Handbook which is effective for periods commencing on or after 1 September 2012. 2.3 The role of an academy trust s accounting officer 2.3.1 The academy trust s accounting officer will usually be an academy principal or chief executive in a multi-academy federation. They have personal responsibility to parliament for resources under their control to ensure that public money is spent for Technical Release 08/12AAF 5
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE the purposes intended by Parliament (regularity) and that appropriate standards of conduct, behaviour and corporate governance are maintained when applying the funds under their control (propriety). 2.3.2 The accounting officer also has a responsibility to advise the governing body and the EFA of any instances of irregularity or impropriety, or non-compliance with the terms of the trust s funding agreement. 2.3.3 Further detail on the role and responsibilities of the Accounting Officer are given in Part 2 of the Academies Financial Handbook (September 2006). 3. REGULARITY REPORTING FOR ACADEMIES (2011-12) 3.1 The requirement to report on regularity 3.1.1 Academy trusts are required to appoint a registered auditor, as a term of their funding agreement with the Secretary of State for Education, under arrangements approved by the Secretary of State. 3.1.2 Academy trust audit reports have historically been required to provide an opinion that EFA/DfE grants were used for the purposes intended. This opinion, reported as an other matter in the audit report addressed to the members of the academy trust, did not provide sufficient assurance to accounting officers of academy trusts, EFA and DfE. 3.1.3 As a result, the Academies: Accounts Direction 2011/12 which acts as an adjunct to the Academies Financial Handbook (September 2006), introduced new reporting requirements for the: academy trust Accounting Officer to provide a Statement on Regularity, Propriety and Compliance; and the academy trust auditor to issue a separate regularity assurance report which should be addressed jointly to the academy trust and EFA. 3.2 What is regularity? 3.2.1 Regularity derives from a concern that public money is used for purposes approved by Parliament, and can be defined as the requirement that a financial transaction is in accordance with indications of Parliament s intention such as funding agreements, specific statutory requirements, and direction issued by government bodies. 3.2.2 Propriety is a related concept, concerned more with standards of conduct, behaviour and corporate governance. It includes matters such as fairness, integrity, the avoidance of personal profit from public business, even-handedness in the appointment of staff, open competition in the letting of contracts and the avoidance of waste and extravagance 3.2.3 Obligations in respect of regularity and propriety typically cascade through layers of public sector. Academies are classified as public sector bodies, and considered part of central government. Funds are voted by Parliament for schools; the academies portion of this is passed to the EFA; and the EFA allocates this to individual academies. The standards of regularity and propriety required by the academy trust funding agreement and Academies Financial Handbook (September 2006) sit alongside other relevant authorities including charity law (as academies are also exempt charities) and company 6 Technical Release 08/12AAF
law (as academies are companies limited by guarantee incorporated under the Companies Act 2006). 3.2.4 Public funds, for central government bodies such as academy trusts, include both grant funding and monies raised by other means which become public money once received and applied by the academy trust. 3.3 The form of the regularity assurance conclusion 3.3.1 For academy trusts, the regularity reporting requirement for 2011-12 is an extension of the opinion given previously on the use of EFA/DfE funds. It encompasses providing a conclusion on the regularity of all funds regardless of source, and the regularity of income. 3.3.2 Specifically, the opinion on the use of the EFA/DfE funds included in the audit report of the financial statements is now replaced with a separate reporting engagement giving a limited assurance conclusion on regularity for 2011/12. The form of the wording of the 2011/12 conclusion is set out below. Accounts Direction 2011/12 Extracts 3.3.3 In the course of our work, nothing has come to our attention which suggests that in all material respects the expenditure disbursed and income received during the period 1 September [or earlier if relevant] to 31 August 2012 has not been applied to purposes intended by Parliament and the financial transactions do not conform to the authorities which govern them. 3.3.4 An illustrative regularity engagement report forms Appendix 1 to this document. 4. PROVIDING LIMITED ASSURANCE ON REGULARITY 4.1 The approach to a limited assurance engagement on regularity 4.1.1 Existing APB guidance in Practice Note 10 (PN10) refers to an audit of regularity. This represents a reasonable assurance engagement carried out in parallel and reported with the audit of a public sector body s financial statements. PN10 does not provide guidance on a limited assurance engagement and there is no other professional guidance on this topic issued by the APB or the FRC. 4.1.2 However, PN10 identifies certain aspects that will be relevant to any engagement which requires that assurance is provided over the regularity of income and expenditure. Obtaining a sufficient understanding of the framework and authorities; Testing for regularity; Reporting on regularity. 4.1.3 The ICAEW Assurance Sourcebook discusses the differences between a reasonable and a limited assurance engagement. The approach taken by this document is to bring together existing guidance on regularity reporting with guidance on limited assurance. 4.1.4 The nature of limited assurance, particularly in a diverse sector such as the academies sector, is such that an auditor is best placed to use professional judgement and take into account the circumstances of each academy trust. Overly prescriptive guidance would not help establish an efficient and effective engagement. Technical Release 08/12AAF 7
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE 4.1.5 Appendix 3 of the Assurance Sourcebook states that: 4.1.6 The practitioner s approach to business understanding and risk assessment is the same for both reasonable and limited assurance engagements. However, in a limited assurance engagement where the practitioner is providing a negative form of conclusion less evidence is required and therefore less testing may be performed. This can impact the type of procedures and tests employed, the sample sizes and even the number of locations visited. 4.1.7 As less evidence is required, an academy auditor engaged to give a limited assurance regularity conclusion may not need to carry out all of the steps in PN10. However, it is possible that the auditor may judge, based upon their assessment of risk, that a level of testing is required which is similar to that needed to support a reasonable assurance conclusion. 5. DOCUMENTING THE REGULARITY ENGAGEMENT 5.1 Documentation 5.1.1 Many areas of the regularity engagement will be addressed through the work performed to provide the audit opinion on the financial statements. The following sections of the guidance outline the approach and potential procedures for the regularity reporting assignment. However, consideration ought to be given to the dual purpose of work performed to provide the audit opinion and regularity conclusion. 5.1.2 Work is likely to be performed as an extension to or in addition to existing audit work. However, whilst the regularity engagement work may be documented within the financial statement audit file, the documentation of each area or test should identify the objective(s) of and conclude separately where it relates to the financial statements audit and the regularity engagement. This will enable appropriate conclusions to be drawn in both engagements. 6. UNDERSTANDING THE FRAMEWORK OF AUTHORITIES AND ASSESSING RISK 6.1 Introduction 6.1.1 The Academies: Accounts Direction 2011/12 states that the starting point for the regularity conclusion is the Accounting Officer s Statement on Regularity, Propriety and Compliance ( the Statement ). 6.1.2 The Statement confirms that the accounting officer and governing body are able to identify any material irregular or improper use of funds or material non-compliance with the terms and conditions under the academy trust s funding agreement and Academies Financial Handbook (September 2006). The statement also confirms whether there have been any instances during the period reported to the governing body and EFA, or if after the period end that they will be notified to the governing body and EFA. 6.1.3 The governing body and accounting officer are also required to sign a Governance Statement which makes representations regarding compliance and the methods employed to ensure compliance. 8 Technical Release 08/12AAF
6.2 Understanding the framework of authorities 6.2.1 Understanding the framework of authorities relevant to the different activities of an academy trust and using this information appropriately will assist the auditor in developing the engagement plan and in identifying potential material irregularities in the financial statements. 6.2.2 Much of the work required to understand the activities and relevant framework of authorities will already have been considered within the audit of the financial statements through the satisfaction of requirements within ISA (UK&I) 315 and ISA (UK&I) 250A. 6.2.3 Understanding the authorities includes knowledge of the reasons for the legislation and its objectives as this will aid understanding of any secondary legislation or subsidiary regulations. This includes company law, charity law and public sector guidance on regularity and propriety, for example, Managing Public Money. 6.2.4 For an academy trust, the framework of authorities for 2011-12 will include: The academy trust s funding agreement with the Secretary of State for Education; The Academies Financial Handbook (September 2006); Academies: Accounts Direction 2011/12 Specific terms and conditions from other sources of funding; and The academy trust s articles of association. 6.3 Understanding how the academy complies with the framework of authorities 6.3.1 Academy governing bodies and accounting officers will need to consider how they comply with the framework of authorities in order to make representations within the Statement of Regularity, Propriety and Compliance and Governance Statement within the annual report. 6.3.2 Most academy trusts will have completed a recent Financial Management & Governance Evaluation (FMGE) self-assessment return. The questions within the FMGE relate to compliance with the framework of authorities and include the key requirements of the Academies Financial Handbook (2006) and the funding agreement. 6.3.3 The FMGE includes reference to the internal controls that are expected to be in place to secure compliance. The return may provide a basis for the assessment of risk and direction of the nature and extent of detailed procedures. 6.3.4 Auditors will need to confirm when the latest FMGE was completed, which will depend upon whether the academy trust prepared audited accounts for 2011, or if not, when they opened. Depending on the specific date of the return the auditor may wish to consider: a) enquiring as to the extent that the responses remain valid for 2011/12 and, if not, whether the academy trust will provide updated responses; and b) enquiring as to the extent to which they wish to seek evidence to support the answers therein where they have been used in preparing the accounting officer s statement on regularity, propriety and compliance. Technical Release 08/12AAF 9
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE 6.3.5 Where the academy trust has not completed a recent FMGE, or it has assessed compliance by some other means for the current period, the consideration of the framework of authorities within the FMGE may still be useful in assessing the actual supporting evidence of the compliance statements and concluding whether they are complete and appropriate. 6.3.6 Controls around the regularity of transactions should be fully integrated into the control environment of the academy trust. There will be controls to ensure compliance with the framework of authorities (for example a Financial Handbook requirement) which would also address specific financial statement assertions, or vice versa. 6.4 Materiality 6.4.1 The auditor s assessment of what is material is a matter of judgement and includes both quantitative (value) and qualitative (nature) considerations. Materiality affects both the way in which the auditor plans and designs the audit work on regularity and how the auditor evaluates and reports the results of that work. The assessment of materiality is the same for a limited assurance engagement as it would be for a reasonable assurance engagement such as, for example, the audit of the financial statements. 6.4.2 The assessment of materiality at the planning stage may not be the same as that applied when reporting, particularly if a propriety issue is identified. For example, a transaction leading to a personal profit from public operations might be deemed material by its nature even if its value is below the level considered material during planning. 6.5 Assessing risk 6.5.1 The risk basis used to plan the regularity work, like the level of materiality used to evaluate the outcome of tests, is the same for reasonable and limited assurance engagements. In both a limited and a reasonable assurance engagement, the auditor s risk assessment determines what level of work is required to provide sufficient appropriate evidence that will support the conclusion given. 6.5.2 Since the extent of evidence collected for a limited assurance engagement may be limited due to the reduced sample sizes and test coverage adopted, the level of risk of material misstatement remaining is potentially higher than in a reasonable assurance engagement 6.5.3 The risk of material irregularity may be increased at a recently established academy producing audited financial statements for the first time in 2011/12, which may not have had time to develop robust internal controls or did not have those controls in place for the entire period. An academy trust of similar size and complexity that has produced audited financial statements for a number of years may have a more developed system of internal controls, giving the accounting officer more comfort over regularity and reducing the risk of material irregularity. To gain comfort over the assurance conclusion on regularity in the former case, the auditor may have to perform additional testing, beyond what would be necessary for the latter case. 6.5.4 Where specific authorities govern transactions (for example, the terms of an academy s funding agreement and the Academies Financial Handbook), specific procedures should be planned and performed to support the limited assurance conclusion on whether the entity s expenditure and income comply with those authorities. 10 Technical Release 08/12AAF
7. TESTING FOR REGULARITY 7.1 Introduction 7.1.1 For a large number of academies, 2011/12 will be the first year that they prepare financial statements. For those that have prepared financial statements in previous years, testing to provide an opinion over the use of funds would have included testing to ensure compliance with specific terms of the academy trust funding agreement and Academies Financial Handbook (September 2006). Based on risk of material noncompliance, this would have encompassed detailed testing of specific EFA/DfE income and related expenditure streams which had specific conditions attached. 7.1.2 Testing in previous years is unlikely to have been extended to other funds, activities conducted, consideration of propriety, or the review of high level financial controls, except to the extent that this was covered in the true and fair opinion by virtue of academy trusts being charities and having restricted funds. 7.2 Types of testing 7.2.1 The types of procedure applied to obtain sufficient appropriate evidence to support the conclusion on the regularity of transactions in the financial statements of an entity are the same as those applied to provide assurance over any other financial statement assertion. However, as discussed in section 4.1 above, the level of work required to support a limited assurance conclusion may be less than that required to support a reasonable assurance conclusion. 7.2.2 The analysis needed to inform the regularity opinion often goes beyond that required to support statutory audit work, but may involve normal sources of audit evidence as the evidence base is the same. In many areas, dual testing of the same sample could provide evidence to support both engagements. 7.2.3 An integrated approach is likely to bring efficiencies and enable a rounded picture of the academies activities to be established by the auditor. 7.2.4 A list of examples of the types of testing that may be performed, by no means exhaustive, can be found in Appendix 2 to this document. These are illustrative only, and have been provided as a prompt to help accountants develop their own professional judgement on the nature and extent of testing required to support a conclusion on regularity for each academy trust. 8. REPORTING ON REGULARITY 8.1 Summary of work 8.1.1 The suggested model report given in Appendix 1 contains a prompt for a summary of the work performed to support the assurance conclusion. The extent and nature of the testing performed is expected to vary between reports according to the accountants professional judgement of the situation at each academy trust. This is envisioned as a high level summary, an outline that users of these reports can refer to as context in each case. 8.2 Irregularity 8.2.1 Where potential irregularities are identified then they should be discussed with the accounting officer and the governing body. They should be considered individually and in aggregate in terms of whether they represent a material irregularity. Where matters of irregularity are identified then they should be considered to determine whether they also represent a propriety issue. If they do represent a propriety issue then the auditor Technical Release 08/12AAF 11
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE may need to revisit the risk assessment and undertake further appropriate procedures before including in their regularity engagement conclusion. 8.2.2 Where it is concluded that material (by value or nature) financial transactions are not in compliance with the appropriate authorities, the regularity part of the conclusion is qualified. Where the auditor is unable to obtain sufficient evidence to reach a conclusion on regularity the regularity conclusion will be qualified on the grounds of a limitation in audit scope. 8.2.3 A qualified conclusion will outline material exceptions identified as part of the regularity engagement, as outlined in the illustrative report at Appendix 1. 8.2.4 A qualified conclusion on regularity does not in itself lead to a qualification of the true and fair audit opinion. For example improper expenditure may be considered material by nature in the context of the regularity engagement though immaterial in the context of the audit. 8.3 Fraud 8.3.1 Where fraudulent transactions are identified they cannot, by definition, be legitimate since they are without proper authority. Fraud that is material to the financial statements would lead to an inclusion in the regularity engagement conclusion. Fraud that is not material to the financial statements may be considered material from a propriety perspective and also lead to an inclusion in the regularity report. 8.3.2 This additional requirement to report fraud as a breach of regularity in the regularity report does not alter, reduce or replace in any way the standard reporting requirements for fraud and the role of the MLRO. 9. EFA AND ACCESS TO WORKING PAPERS 9.1 Access 9.1.1 The EfA do not require rights of access to the working papers in respect of the regularity engagement for 2011/12 and no such terms are included in the standard terms of engagement. 9.1.2 Therefore even though a separate regularity assurance conclusion is required a separate working paper file need not be maintained. 10. ENGAGEMENT LETTER 10.1 The engagement letter 10.1.1 In the Academies Accounts Direction 2011/12 section on the regularity assurance engagement, the EFA acknowledges that in order for the EFA to place reliance on and draw assurance from the regularity conclusions of reporting accountants, they should be a party to the engagement. 10.1.2 The Accounts Direction states that the EFA will not sign the engagement letter between the reporting accountant and the academy trust, but will instead publish standard terms of engagement on its website that it will adopt as a party to the regularity engagement. 10.1.3 The engagement letter between the reporting accountant and the academy trust should make reference to the standard terms of engagement for the regularity 12 Technical Release 08/12AAF
engagement, as required by Academies Accounts Direction 2011/12, in accordance with which the reporting accountant will report to the EFA and the academy trust. 10.2 EFA s Standard Terms of Engagement 10.2.1 The EFA s standard terms of engagement set out: the responsibilities of the respective parties to the engagement; the scope of the reporting accountant s work; and the form of the reporting accountant s report and liability. 10.2.2 The liability considerations are discussed separately in the section below. 10.2.3 The scope of the reporting accountant s work reflects the requirement for the engagement, setting out: that it is limited assurance; the framework under which the engagement should be conducted; that it is separate from the reporting accountant s audit work on the statutory financial statements of the academy trust; and that the EFA has no right by virtue of regularity engagement to place reliance on the work of the reporting accountant and the opinion they form in respect of their statutory audit of the academy trust. 10.2.4 It should be noted that the terms of engagement are silent on access rights to the reporting accountants working papers. As discussed above, this is because the EFA are not requiring access as part of the regularity engagement for 2011/12. 10.3 Liability 10.3.1 The EFA standard terms of engagement suggest a cap on the reporting accountants liability set at 1m per academy in each trust. For a multi academy trust, therefore, the liability suggested by EFA would amount to 1m multiplied by the number of individual academies within the trust. Given the diversity in the academies sector, this arrangement may not be appropriate for all engagements or for all practices. 10.3.2 Individual firms of accountants need to consider whether or not to accept EFA s suggested liability cap. Such consideration will take into account relevant factors such as whether the limitation is appropriate to the scope of the engagement, the fees generated, their assessment of the risks in undertaking the work, and their internal risk management policies. Firms should also consider whether a shareholder s agreement should be in place, if relevant. Where firms consider that they are unable to accept the suggested cap, they may wish to negotiate their own individual capping arrangements with the EFA and their academy trust clients, or to consider whether it is appropriate for them to accept the engagement. 10.3.3 Accountants may wish to refer to ICAEW s technical release AAF 04/06 Assurance engagements: Management of risk and liability to inform these considerations. Technical Release 08/12AAF 13
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE 11. REFERENCES 11.1.1 This guidance represents the bringing together of relevant material from a range of relevant documents. Academies Academies Financial Handbook (September 2006) Academies Accounts Direction 2011/12 DFE Accounting Officer Accountability System Statement for Education and Children s Services (September 2012) Academies Act 2010 Assurance APB Practice Note 10 Managing Public Money ICAEW Assurance Sourcebook AAF 04/06 Assurance engagements: Management of risk and liability 14 Technical Release 08/12AAF
APPENDIX 1: ILLUSTRATIVE REGULARITY ENGAGEMENT REPORT Independent Reporting Accountant s Assurance Report on Regularity to XYZ Academy Trust Limited and the Education Funding Agency In accordance with the terms of our engagement letter dated [x] and further to the requirements of the Education Funding Agency (EFA) as included in the Academies: Accounts Direction 2011/12, we have carried out an engagement to obtain limited assurance about whether the expenditure disbursed and income received by XYZ Academy Trust during the period 1 September 2011 [or earlier if relevant] to 31 August 2012 have been applied to the purposes identified by Parliament and the financial transactions conform to the authorities which govern them. This report is made solely to XYZ Academy Trust and the EFA in accordance with the terms of our engagement letter. Our work has been undertaken so that we might state to the XYZ Academy Trust and the EFA those matters we are required to state in a report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the XYZ Academy Trust and the EFA, for our work, for this report, or for the conclusion we have formed. Respective responsibilities of XYZ Academy Trust s accounting officer and the reporting accountant The accounting officer is responsible, under the requirements of XYZ Academy Trust s funding agreement with the Secretary of State for Education dated [x] and the Academies Financial Handbook as published by DfES in 2006, for ensuring that expenditure disbursed and income received is applied for the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. Our responsibilities for this engagement are established in the United Kingdom by our profession s ethical guidance and are to obtain limited assurance and report in accordance with our engagement letter and the requirements of the Academies: Accounts Direction 2011/12. We report to you whether anything has come to our attention in carrying out our work which suggests that in all material respects, expenditure disbursed and income received during the period 1 September 2011 [or earlier if relevant] to 31 August 2012 have not been applied to purposes intended by Parliament or that the financial transactions do not conform to the authorities which govern them. Approach We conducted our engagement in accordance with the Academies: Accounts Direction 2011/12 issued by the EFA. We performed a limited assurance engagement as defined in our engagement letter. The objective of a limited assurance engagement is to perform such procedures as to obtain information and explanations in order to provide us with sufficient appropriate evidence to express a negative conclusion on regularity. A limited assurance engagement is more limited in scope than a reasonable assurance engagement and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in a reasonable assurance engagement. Accordingly, we do not express a positive opinion. Our engagement includes examination, on a test basis, of evidence relevant to the regularity and propriety of the academy trust s income and expenditure. Technical Release 08/12AAF 15
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE Conclusion [Summary of work undertaken, demonstrating application of the principles outlined in this guidance. See section 8.1.] In the course of our work, [except for the matters listed below] nothing has come to our attention which suggests that in all material respects the expenditure disbursed and income received during the period 1 September 2011 [or earlier if relevant] to 31 August 2012 has not been applied to purposes intended by Parliament and the financial transactions do not conform to the authorities which govern them. [Matter 1: Matter 2: ] ABC LLP Chartered Accountants Address Date 16 Technical Release 08/12AAF
APPENDIX 2: TESTING TO SUPPORT A REGULARITY CONCLUSION: EXAMPLES This is not a comprehensive review of all the testing options available but an illustration of some ways in which statutory audit testing and regularity assurance work can dovetail. The extent of work performed will be based upon the professional judgement of the accountants performing the engagement, informed by an assessment of the risk of material irregularity, impropriety and noncompliance. Objective General (new activities) Testing Confirm that new activities conform with the Academy Trust s framework of authorities. Identification of these can be by review of minutes, management accounts, discussion with the accounting officer and other key management personnel. General (regularity of activities) Analytical review could be used as part of the consideration of whether general activities of the academy trust are within the academy trusts framework of authorities (although on their own are unlikely to provide sufficient appropriate evidence). Consideration of the evidence supporting the accounting officers statement on regularity, propriety and compliance which may include review and corroboration of the most recent Financial Management and Governance Evaluation or equivalent. Evaluation of the general control environment of the academy trust, extending the procedures required for financial statements to include regularity. Assessment and testing of a sample of the specific control activities over regularity of a particular activity. When performing sample testing of expenditure, consider whether the activity is permissible within the academy trust s framework of authorities. Confirm that each item has been appropriately authorised in accordance with the academy trust s delegated authorities. Confirm that the internal delegations have been approved by the governing body, and conform to the limits set by the Department for Education. Formal representations obtained from the governing body and the accounting officer acknowledging their responsibilities including disclosing all non-compliance with laws and regulations specific to the authorising framework, access to accounting records, provision of information and explanations, and other matters where direct evidence is not available. Delegated authorities (special payments) When testing payroll, eg for substantive assurance for the statutory audit, or in respect of disclosures around senior staff, confirm whether any extra-contractual payments have been made (such as for severance), and confirm that appropriate Technical Release 08/12AAF 17
REGULARITY REPORTING FOR ACADEMIES 2011-12: GUIDANCE departmental authority was obtained. The Academy Accounts Return (AAR) prepared for the Education Funding Agency consolidation includes data on exit packages and other payroll disclosures. Borrowings Review documentation such as the bank confirmation letter(s), board minutes or other documentation for evidence of the academy trust borrowing, and confirm that approval has been obtained from the Department for Education. Sales of assets When performing substantive testing of fixed assets, confirm whether Department for Education approval was obtained for any disposals of land, buildings or grant funded assets in line with funding agreement terms. Cash and credit cards (propriety of activities) Ascertain what credit cards are used by the school and the internal control procedures relating to expenditure on these cards. When performing sample testing on credit card expenditure, review for any indication of purchases for personal use by staff / Head / Governors. A review of cash payments for unusual transactions may also be performed. Purchases (regularity and propriety of activities) When performing sample testing of expenditure, review against specific terms of grant funding within the funding agreement. Review the list of suppliers, consider whether supplies are from related parties (for example persons connected to Head / Finance manager / Governors). Review minutes for evidence of declaration of interest, and whether or not there was involvement in the decision to order from this supplier. Other income (regularity and propriety) For example, sports lettings: When performing sample testing of income, in addition to testing whether activities are permitted within the academy trust s charitable objects, consider whether lettings to related parties are made at favourable rates. 18 Technical Release 08/12AAF
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