The audit of financial statements prepared ‘on a cash basis’: an example for preparers and their auditor
I suspect that the pairing of a regulatory requirement for a financial statement audit by a professional auditor, with financial reporting on a cash basis, is not common. This is because such an audit is normally only needed when there are users separate from those running the organisation (and the organisation is of some size), and because the cash basis only gives those users limited information. But this is exactly what I struck recently when I looked at the reporting requirements facing the parishes of the Anglican Church in the Diocese of Canberra and Goulburn.
The parishes are unincorporated bodies governed by Anglican Church law – Ordinances passed by the Synod of the Diocese. The Finance and Accounts Ordinance 2003 is the one that’s applicable in this case.
An organisation listed in Schedule 3 of that Ordinance is required to produce ‘annual financial statements’[i]. Not a phrase that would lead one to think cash accounting.
There is no definition of ‘financial statements’ in the Ordinance. The only direct guidance to how they are to be prepared is the instruction, in section 10.3 (a), that they are
to be prepared on a cash basis subject to any directions as to the form or content of such statements which may be given by Bishop-in-Council on the advice of the Finance Committee.
It appears that there has not been any such direction[ii].
The cash basis
There is no definition of the ‘cash basis’ in the Ordinance. Accountants and auditors know it as the system that records transactions only when cash has been paid or received, with no subsequent adjustments to that recording[iii]. There should therefore be only one financial statement when one is using this basis, a Statement of Cash Receipts and Payments[iv].
Other than the direction to use the cash basis, the Ordinance contains only indirect guidance on the meaning of ‘financial statements’[v]. Section 11.1 requires the auditor (via section 9.4 about his terms of appointment) to ‘comply with Australian Auditing Standards’ and to report ‘whether financial statements (sic) give a true and fair view of the affairs of the Organisation’.
Australian Auditing Standards
In the Australian Auditing Standards ‘financial statements’ is short for ‘a complete set of financial statements’ [ASA 200[vi], Para. 13][vii]. But Section 11.1 of the Ordinance applies to all organisations covered by the Ordinance, so in the case of a Schedule 3 organisation using the ‘cash basis’, the auditor would be reporting, following generally accepted accounting principles (GAAP), on one statement only, a Statement of Cash Receipts and Payments[viii].
And because a “single financial statement” includes ‘the related notes’[ix] [ASA 805[x], Para. 6(c)], the auditor would be expecting to find the Statement accompanied by the usual Notes to the Accounts[xi].
So in his report the auditor will opine whether this Statement (and the Notes) ‘give a true and fair view of the affairs of the Organisation’.
‘True and fair view’
The meaning of ‘true and fair view’ should be well known to a professional auditor (for they are, via Section 9, required to be a registered company auditor[xii], and they are all members of one of the three professional accounting bodies). It has implications for what is included in ‘financial statements’ prepared ‘on a cash basis’.
Whether it is a general purpose report or a special purpose report[xiii] that the members of the governing body decide is required – the Ordinance does not specify – the true and fair view requirement means that the cash basis (the ‘applicable financial reporting framework’[xiv] in this case) is further classified as a ‘fair presentation’ framework (as opposed to a ‘compliance’ framework). This requires the members of the governing body to acknowledge that “it may be necessary for management to provide disclosures beyond those specifically required by the framework”[xv].
For the cash basis then, the members of the governing body should first decide whether it is a general purpose or a special purpose report that is needed, then commission a suitable Statement of Cash Receipts and Payments (including Notes), where ‘suitable’ means a statement that complies with any applicable Australian Accounting Standards plus any other information in order to show a true and fair view. Then it’s over to the auditor.
[i]This is because the ‘members of the governing body’ of that organisation are required by that Ordinance to present such statements “to the auditor” [section 10.1]. (This is the auditor required to be appointed by section 9.2 of the Ordinance.).
[ii] As the ‘financial statements’ can be produced either as general purpose or special purpose reports – see the requirement for Schedule 2 and 3 organisations – that is one direction that could usefully be made.
[iii] In Australia, unlike the US, there is no official basis in the middle ground between cash accounting and accrual accounting.
[iv] Note that, because there is only one financial statement under the cash basis, it does not make sense in Section 10.3 (a) (above) to refer to ‘financial statements’ plural for Schedule 3 organisations.
[v] Two other sections have a provision that indirectly affects the meaning of ‘financial statements’:Section 6, Keeping Records, and Section 7, Internal Control. However, these two sections apply to all organisations covered by the Ordinance, and as the cash basis is only required of Schedule 3 organisations, there is no necessary connection between these two provisions and financial statements produced by Schedule 3 organisations.
[vi] Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards, Auditing and Assurance Standards Board, October 2009.
[vii] And a ‘financial report’ means, ‘for purposes other than the Corporations Act 2001, a complete set of financial statements, including the related notes, and an assertion statement by those responsible for the financial report…[ASA 200, Para. Aus 13.3]
[viii] A ‘complete set of financial statements’ includes much more information about the position and performance of the organisation than the limited information conveyed by a Statement of Cash Receipts and Payments. The Synod of the Diocese, in its Governance of the Diocese Ordinance 2000 (Section 3.1), has one of its objectives a system of governance that is “responsible, to ensure that those who direct the affairs of the institutions of the Diocese are accountable for their stewardship”. It would therefore be open to the members of the governing body to decide that they need to be much more accountable and produce a ‘complete set of financial statements’.
[ix] The related notes “ordinarily comprise a summary of significant accounting policies and other explanatory information relevant to the financial statement…”.
[x] Auditing Standard ASA 805 Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, Auditing and Assurance Standards Board, October 2009.
[xi] The situation facing Schedule 3 organisations matches that shown in the last example on page 20 of Explanatory Guide: Auditor’s Reports, Auditing and Assurance Standards Board, February 2010.
[xii] As this is a higher qualification than that required by the Ordinance for Schedule 1 and Schedule 2 organisations, I suspect that the two paragraphs describing the type of auditor required have been accidentally switched.
[xiii] See Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity, Australian Accounting Standards Board.
[xiv]ASA 200, paragraph 13.
[xv]ASA 200, paragraph 13.