Our primary responsibility as your auditor is to form and express an opinion as to whether the financial statements prepared in accordance with the Statement of Recommended Practice: Accounting for Further and Higher Education show a true and fair view [if the college is a company] and comply with the Companies Act 2006.
[If the college is a company] - We also report to you whether, in our opinion, based on the work undertaken in the course of the audit, the information given in the Governors' Report and the incorporated Strategic Report is consistent with the financial statements and the Governors' Report and the incorporated Strategic Report has been prepared in accordance with applicable legal requirements. We are also required to state, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, whether or not we identified material misstatements in the Governors' Report and the incorporated Strategic Report.
Our other responsibilities comprise:
- Reporting to you where the governors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate or where the governors have not disclosed in the financial statements any material uncertainties that may cast significant doubt about the College's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
[If the college will prepare accounts on a basis other than going concern due to dissolution at the reporting date or in the foreseeable future] - However, the College has dissolved / is expected to dissolve and in accordance with UK GAAP the College is preparing financial statements on a basis other than going concern as the College has / expects to transfer activities, assets and liabilities prior to dissolution and therefore the Corporation has concluded that the College is not a going concern. In these circumstances our responsibilities include considering whether the basis of preparation is appropriate and whether all of the necessary disclosures have been made.
- [Reporting to you in accordance with the Office for Students (‘OfS’) Regulatory advice 9: Accounts Direction whether in our opinion:
- where applicable, funds from whatever source administered for specific purposes have been properly applied to those purposes and managed in accordance with the relevant legislation;
- where applicable, funds provided by the OfS, UK Research and Innovation (including Research England), the Education and Skills Funding Agency and Department for Education have been applied in accordance with the relevant terms and conditions; and
- the requirements of the OfS’s accounts direction have been met.]
- Reporting to you in accordance with the ACoP if, in our opinion:
- adequate accounting records have not been kept; or
the financial statements are not in agreement with the accounting records; or
we have not received all the information and explanations required for our audit.
- adequate accounting records have not been kept; or
We will also form and express an opinion as to whether the individual subsidiary financial statements show a true and fair view and comply with the Companies Act 2006.
We also report to you whether, in our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and the] Directors’ Report is consistent with the financial statements and the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. We are also required to state, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, whether or not we identified material misstatements in the Strategic Report and the Directors’ Report.
Our other responsibilities comprise:
- Reporting to you where the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate or where the directors have not disclosed in the financial statements any material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
- Reporting to you if, in our opinion:
- adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or
- the financial statements are not in agreement with the accounting records and returns; or
- certain disclosures of directors’ remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit; or
- [if small] - the directors were not entitled to prepare the financial statements in accordance with the small companies regime and take advantage of the small companies exemption from the requirement to prepare a strategic report or in preparing the directors’ report.In addition, we will coordinate the work performed by other firms of auditors who are responsible for the audit(s) of subsidiary companies.
In addition, we will coordinate the work performed by other firms of auditors who are responsible for the audit(s) of subsidiary companies.
The ACoP includes the framework for the regularity assurance reporting.
The regularity assurance framework is a limited assurance framework which gives a lower level of assurance than an audit. As this is not a reasonable assurance audit engagement, we will not be giving an opinion, but rather a regularity assurance conclusion, which will continue to be addressed jointly to the College and the Secretary of State for Education acting through the Education and Skills Funding Agency (“ESFA”).
Our responsibility is to form a conclusion that during the course of our work nothing has come to our attention which suggests that in all material respects the expenditure disbursed and the income received has not been applied to the purposes intended by Parliament and the financial transactions do not conform to the authorities which govern them.
We will plan our work with a view to ensuring:
- minimum disruption to your staff and operations;
- that reports submitted to you are constructive and clear, focusing on the issues that matter; and
- that surprises are avoided and that good communications are maintained with you throughout the assignment.
Our engagement letter sets out in detail our respective responsibilities.
Reliance on internal controlsDuring the planning phase of our financial statements audit and regularity assurance engagement we will re-confirm our understanding of the business environment, including internal controls established by College management, where these are relevant to the financial statements and regularity. Where we plan to place reliance on internal controls, we will test the operation of those controls. If our examination of internal controls leads us to believe there may be significant deficiencies therein, we will report our findings to you. We will report, as soon as practically possible, any major weakness or breakdown in the accounting or other control framework, of which we become aware, to the Department for Education as required under the ACoP.
Qualitative aspects of accounting practices and financial reportingWe will discuss with management and will report to the Audit Committee any areas where our experience as auditor leads us to believe that accounting practices and financial reporting could be improved.
Implication of changes within financial reporting framework, environment, financial condition or activitiesWe will discuss with you any changes in our planned approach to address the implications on the financial statements and disclosures of any significant changes within the applicable financial reporting framework or in the entity’s or group’s environment, financial condition or activities.
MaterialityThe governors have primary responsibility for ensuring that annual financial statements are free from material misstatement or error. In addition, the governors are responsible for identifying and notifying the ESFA of any material irregular or improper use of funds by the College or material non-compliance with the Education and Skills Funding Agency’s terms and conditions of funding under the applicable contracts and grant funding agreement.
In accounting terms, a material error is one that, if it were unadjusted, would cause a user of the financial statements to alter his view of those statements or the results or the financial position of the entity being reported on. Materiality, therefore, is incapable of monetary definition, since it has both quantitative and qualitative elements. It is necessary to consider not only the impact of an error on the financial statements as a whole but also on the individual accounting items affected. Additionally, the cumulative impact of all unadjusted errors must be considered.
In terms of regularity, materiality is a matter of judgement and includes both quantitative (value) and qualitative (nature) considerations. It would therefore be necessary to consider not only the financial value of an irregularity of an irregularity on the financial statements as a whole but also the nature, i.e. a breach of authority, or without authority.
Auditors examine financial statements on a test basis. The level of testing we will carry out is based on our assessment of the risk that an item in the financial statements may be materially misstated (see below). As such, as well as for the reasons stated in the preceding paragraph, it is neither practical nor appropriate to give an indication of the value of an item we would consider to be material although, clearly, we do relatively more work in areas where the risk of misstatement is considered to be high.
We will examine, on a test basis evidence relevant to the regularity of the transactions underlying the College’s financial statements based on our assessment of areas where a material irregularity is likely to arise. Our assessment of areas where a material irregularity or non-compliance is likely to arise will be considered at the same level of materiality as for the financial statement audit.
A key element of our annual audit planning is to make an assessment of the risk that the financial statements might contain material errors, and for regularity assessing the areas where material irregularities or non-compliances are likely to arise. We base this assessment on our knowledge of the College and understanding of its business and of the sector in which it operates. We assess risk both at the overall financial statement and at the individual item levels. Assessments of risks and areas where material irregularities are likely to arise may be amended as the financial statement and regularity assurance engagement progress. The nature and volume of audit and regularity work we will conduct are directly related to the outcome of our assessments of risk assessments and areas where material irregularities are likely to arise.
Going ConcernThe economic difficulties of recent years and the subsequent impact on funding and available credit have resulted in far greater focus, by both those charged with governance and auditors, on the appropriateness of adopting the going concern assumption which is used in the preparation of financial statements. As auditors it is our responsibility to consider management’s assessment of the College’s ability to continue as a going concern together with any relevant disclosures in the financial statements in order for them to show a true and fair view.
When management are aware, in making their assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the ability to continue as a going concern, those uncertainties shall be disclosed. The management’s assessment must cover a period of at least twelve months from the date of approval of the financial statements. As auditors we shall consider the appropriateness of the management’s use of the going concern assumption and related disclosures.
In more recent years Area Reviews have been having an impact on the sector giving colleges the opportunity to put themselves on a on a strong financial health footing. As a result, there has been engagement and intervention for colleges with significant risks to financial health as well as a number of combinations in the sector with the resultant dissolution of a number of colleges.
Where a college pursues a combination this ultimately results in the dissolution of a college. However, this process can be protracted and the dissolution might be anticipated in the foreseeable future but may not have occurred at the next reporting date. In these circumstances and where the dissolution is anticipated in the foreseeable future the college should consider whether it is appropriate to prepare financial statements on the going concern basis. Financial statements should be prepared on a going concern basis unless it is inappropriate to assume that the college will continue in operation. A college is a going concern unless the corporation intends to dissolve or to cease trading, or has no realistic alternative but to do so. Consequently, it is possible that a college might prepare accounts for a number of years on a basis other than going concern.
A college that has dissolved is required by the Accounts Direction and the ACoP to prepare accounts and have those accounts audited for the accounting period in which the College’s activities have been transferred out prior to dissolution. Where a college has dissolved at the reporting end date the financial statements should be prepared on a basis other than going concern.
“Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks - Guidance for directors of companies that do not apply The UK Corporate Governance Code” was issued by the Financial Reporting Council (FRC) in April 2016. The guidance is intended to assist directors of ‘non-Code’ companies in applying the relevant requirements in accounting standards and company law, including the requirements of UK and Ireland GAAP and the strategic report.
Dealing with errorsWe will record and investigate all potential errors that we discover during our work and, except for matters which we judge to be clearly trivial, communicate our findings to management directly responsible for the preparation of the College’s financial statements. These matters will include the adequacy of disclosures made within the financial statements. Management must decide which errors are material and therefore require adjustment if the financial statements are to show a true and fair view. We will ask management to provide us with written explanations supporting any decision not to make adjustments, which we will discuss with them. If we cannot agree with management’s decisions, we will consider the implications for our audit opinion.
In accordance with the requirements of ISA (UK) 260 ‘Communication with those charged with governance’, we are required to report to you all known adjusted and unadjusted errors (including those relating to disclosures within the financial statements) unless they are considered ‘clearly trivial’. We will request written representation that the Corporation is comfortable with any unadjusted errors and the reasons for adjustment not being made.
We will record and investigate all potential irregularities or breaches and discuss our findings with management and the governors. Where matters of irregularity are identified then we will consider whether they also represent a propriety issue. Following those discussions, where they do represent material (by value or nature) irregularities (either individually or on aggregate) then we will report our findings in our audit findings report and consider the implications for our regularity assurance conclusion. At this stage, we may write to the ESFA and ask for a summary of relevant matters, if such information is not directly available to us.
FraudIn accordance with the requirements of ISA (UK) 240, we will consider the susceptibility of the College to fraud, taking account of the business and control environment established and maintained by management, as well as the nature of transactions, assets and liabilities recorded in the accounting records. However, the principal responsibility for the prevention and detection of fraud rests with management with the oversight of those charged with governance, who should not rely on our audits to discharge those functions. We will request a written representation that you have disclosed to us the results of your assessment of the risk that the financial statements may be materially misstated as a result of fraud.
We will report, as soon as practicable, any suspected or discovered fraud which comes to our attention, even if the potential effect on the financial statements is immaterial, unless there is a legal or regulatory requirement to report direct to a third party. We will report, as soon as practically possible, to the ESFA relevant matters in respect of fraud as required by Matters of Material Significance Reportable to UK Charity Regulators. Fraudulent transactions are not by definition, legitimate since they are without proper authority. Fraud that may not be material to the financial statements may be material in a propriety context and may lead to an inclusion in our audit findings report.
Compliance with law and regulationsWe will report, as soon as practicable, any suspected or actual non-compliance with law or regulations which comes to our attention, unless there is a legal or regulatory requirement to report direct to a third party.
Financial statements and regularity assurance engagement scope limitationsShould any factors arise during the course of either the financial statements audit or the regularity assurance engagement that may limit our scope, we will inform you immediately and seek to have the limitation removed.
Information and accessWe will request a written representation that you have provided us with all relevant information and access as set out in the current letter of engagement, and that all transactions have been recorded and are reflected in the financial statements.
We will also request written representations in respect of the regularity assurance conclusion that all relevant accounting records and other relevant information have been made available and all transactions undertaken by the College have been properly reflected and recorded in the accounting records and that any significant matters which we should be aware of have been brought to our attention. We may also require additional written representations in respect of specific areas to support other assurance evidence relevant to these areas.
Financial statement audit report and auditor’s responsibilities for the audit of the financial statements
ISA (UK) 700 (Revised June 2016) Forming an Opinion and Reporting on Financial Statements provides auditors with options as to the location in the audit report of the description of the auditor’s responsibilities for the audit of the financial statements. Those options are:
- Cross refer to the applicable version of a “Description of the Auditor’s Responsibilities for the Audit of the Financial Statements” that is maintained on the Financial Reporting Council website; or
- Include the description within an appendix to the auditor’s report and include a reference to the location of the appendix within the auditor’s report; or
- Include the description within the body of the auditor’s report.It is RSM policy to adopt option (1) unless there is a compelling reason as to why an alternative should be adopted. We believe this policy achieves the objective of brevity within the audit report whilst at the same time providing members with the option to review the detailed description of the auditor’s responsibilities for the audit of the financial statements as promulgated by the Financial Reporting Council on its website.