AA - Audit and Assurance

Smaller Entities and Not-for-Profit Organisations

AUDIT OF SMALLER ENTITIES

Smaller entities may not require a statutory audit in some countries. The reasons for not requiring a statutory
audit are:

● The shareholders are often the directors of the entity;

● Companies may have only a few members of staff;

● Audits are expensive; and

● With fewer resources, the systems may be more straightforward, and not require expert advice from the
auditor.

Note: If a smaller entity requires an external audit, the auditors would ensure that they have an experienced
audit team.

The advantages of such an audit are:

1. It can be a relatively low risk audit;

2. With direct control, the management will have a full understanding and responsibility for the organisation,
and can assist the auditor effectively; and

3. The systems will often be straightforward and easier to understand.

The disadvantages of such an audit are:

1. Shareholders are in a position to manipulate the figures in the financial statement or hide personal
expenses;

2. There is an increased risk of human error which needs to be identified and addressed by the auditor;

3. Having one staff member responsible for an entire control system can increase the risk of fraud; and

4. There is limited amount of written evidence the auditor can obtain from the client.
Summary:

● There may be elements of the audit that are far more straightforward than dealing with a larger
organisation; and

● There will possibly be less substantive testing. However, careful planning is still needed to assess the
risks and review the control systems and any limitations.

AUDIT OF NOT-FOR-PROFIT ORGANISATIONS

Not-for-profit organisations include charities and public sector entities. It is even more important that
specialised audit staff are involved in the audit process for this kind of entity.

The key differences we would see with a not-for-profit organisation are:

● They are not driven by profits;

● They will not have shareholders;

● There will be no dividend payments; and

● A charity would prepare a statement of financial activities which is formatted differently to a statement of
profit and loss.

Auditing not-for-profit organisations comes with its own audit risks and some of these are:

● There may be a lack of segregation of duties and simple systems may not be documented. This could
increase the risk of fraud and error;

● Entities may not have the expertise or time to make good strategic decisions;

● Volunteers are used to keep costs down. They may lack skills and make mistakes, but also, they may
not stay long and then not be available to assist the auditor with explanations;

● Income may depend on external factors (government grants and donations);

● Entities may have very complex regulations to follow. This increases the risk of disclosure notes being
inadequate; and

● Any sudden change in circumstances could affect the entity in the short term.

The audit approach for this type of entity should include:

1. Careful planning;

2. A specialised audit team;

3. Pure substantive testing if controls are not deemed effective; and

4. Analytical procedures.

Note: If there are any issues gathering the evidence needed to form an audit opinion, as always, the auditor may
need to modify their audit report.