7. The audit of client monies - CPA Australia · PDF fileclient bank accounts or trust...

7. The audit of client monies

7. The audit of client monies 7:2

Introduction 7:2

Key definitions 7:2

Annual audit requirement 7:3

Methodology 7:3

Audit objective and methodology 7:3

Performing an audit 7:3

Reporting 7:4

Appendices 7:5

Appendix 7A – Example letter to request approval for a new auditor 7:6

Appendix 7B – Example letter and reply for trust money circularisation 7:7

Appendix 7C – Example member representation letter 7:8

Appendix 7D – Example independent auditor’s report – as per Appendix 1 to APES 310 7:9

Appendix 7E – Example audit programs 7:11

Small entities audit manual 2013

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Introduction This chapter provides guidance for auditors of client monies held by members in professional practice in either client bank accounts or trust accounts and should be read in conjunction with Chapter 5 – Compliance Audits.

This chapter does not deal with the responsibilities of a member who is dealing with the client monies on a daily basis, other than the reference to these responsibilities in the audit procedures.

The audits of client monies are governed by the requirements of:

• APES 310 Dealing with Client Monies (issued by the Accounting Professional and Ethical Standards Board (APESB));

• ASAE 3100 Compliance Engagements; and

• its overriding standard, ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information.

APES 310 was issued in December 2010 with an effective date of 1 July 2011. APES 310 superseded APS 10 Trust Accounts and GN 3 Operation of Trust Accounts.

The scope of APES 310 and therefore the associated audit requirements are broader than the predecessor guidance since APES 310 covers situations not only where a member is handling client monies through a trust account, but also where a member has been appointed as a signatory to a client bank account,.

The annual audit of the member’s compliance with the requirements of APES 310 will therefore address both the member’s operation of their practice’s trust account and of client bank accounts.

Some relevant definitions from APES 310 are reproduced below to assist in determining whether your engagement is within the scope of this standard.

Key definitions

Monies Cash, foreign currency, any negotiable instrument and any security, the title to which is transferred by delivery (for example, bills of exchange and promissory notes), including delivery by electronic funds transfer.

Client monies Any monies (in whatever form) coming into the control of a Member in Public Practice or any of the Member’s Personnel which are the property of a Client and included Monies to which the Member or the Member’s Personnel have no present entitlement.

‘Control’ means where a Member or any of the Member’s Personnel, acting either solely or in conjunction with one or more people, can authorize the transacting of Client Monies.

Examples of Client Monies include:

• client tax refund cheques negotiated by the member with the client’s written authority;

• monies received that are associated with insolvency engagements;

• money advanced by the client for the costs associated with the incorporation of a company or in the preparation of a trust deed;

• rental revenue collected on behalf of the client;

• money received in advance from the client to meet future liabilities, e.g. to pay the client’s income tax assessment while the client is overseas; and

• prepayment of professional fees for the member’s services where no request for payment has been made to the client, e.g. audit fees.

Trust account An account opened by a Member in Public Practice or by another party on behalf of the Member with a Financial Institution which is kept for the sole purpose of Dealing with Client Monies. A Trust Account can be in the form of:

• One of more accounts Dealing with Monies of one Client; or

• One or more accounts Dealing with Monies of Multiple Clients.


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Auditor of client monies

A Member in Public Practice who:

• Has been engaged to perform an audit engagement of another Member in Public Practice’s compliance with APES 310; and

• Holds a certificate of public practice from one of the Professional Bodies (e.g. CPA Australia).

Deficiency A deficit or shortfall of client monies, as disclosed by records maintained by a member in public practice or in the records of a financial institution at which an account is held. However, it does not include any deficiency which the auditor of client monies is satisfied was caused solely by an error of a financial institution which has been subsequently rectified.

Annual audit requirementAn audit of the client monies is required each year within 3 months of the year end date, except in the following circumstances:

• where trust accounts are maintained and audited under federal or state legislation (for example, the Trust Accounts Act (Qld) 1973);

• where trust accounts are maintained by a member in their capacity as scheme manager, receiver/manager, liquidator or administrator under the Corporations Act 2001 or registered trustee in bankruptcy under the Bankruptcy Act 1966. Trust accounts in these circumstances are subject to regular inspection by the relevant authority.

The auditor is required to adhere to the principles contained in ASAE 3000 Assurance engagements other than audits or reviews of historical financial information and the specific requirements of ASAE 3100 Compliance Engagements.

Methodology

Audit objective and methodologyThe objective of the audit of client monies is to determine whether the member dealing with the monies has complied with APES 310.

To achieve this objective, the auditor needs to be satisfied that client monies are properly accounted for, and only paid or applied as directed by the clients.

The methodology for compliance audits is documented in Chapter 5 of this guide, however specific requirements relating to the audit of client monies have been provided below

Planning the audit

The auditor gains an understanding of the legislative requirements for handling client money and the requirements of APES 310.

The nature, timing and extent of audit procedures will vary, depending on the:

• services provided by the member and client monies received as a result of these services;

• nature of the member’s business, i.e. whether the member is a sole practitioner or a member of a large practice;

• volume of transactions affecting the client monies;

• average size of transactions affecting the client monies; and

• existence of segregation of duties.

The above factors should be taken into account in the auditor’s assessment of risk and documentation of the planning process.

Performing an audit

Sampling

Where a member has relatively few clients for who client monies are received, and there are a limited number of transactions, it may be more efficient to perform testing on a 100 per cent basis. However, where there are a large number of clients and numerous transactions, the auditor should select and test samples to obtain sufficient


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appropriate audit evidence in an efficient and effective manner in accordance with the guidance included in the sampling section of Chapter 5.

Reporting

Written representation by management

The auditor should also obtain a written representation from the client as part of the audit evidence. An example representation letter can be found in Appendix 7C of this chapter.

Timing

Client monies need to be audited annually within 3 months of the applicable year–end date.

Reporting to the Professional Body

The Auditor is required to report the following to the Members Professional Body:

• Any deficiency of client monies within 5 business days of becoming aware of the deficiency; or

• Within 10 business days of becoming aware of any material:

+ failure by a Member to comply with paragraphs 6.1 or 6.9 of APES 310 – relating to receipt or disbursement of funds within 3 days;

+ uncorrected errors reflected in a statement issued by a Financial Institution; or

+ circumstance where client monies have not been transacted or maintained in accordance with APES 310.

Modified opinion

If the auditor’s report contains a modified opinion, the Auditor of Client Monies is required to lodge the report with the applicable Professional Body (e.g. CPA Australia) within 15 business days of completion of the audit.

Example audit opinion

Appendix 1 of APES 310 contains an example of an audit report which should be put onto the Auditors letterhead which has been reproduced in Appendix 7D to this chapter.


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AppendicesThe Appendices include the following example documents:

Appendix 7A – Example letter to request approval for a new auditor.

Appendix 7B – Example letter and reply for trust money circularisation.

Appendix 7C – Example member representation letter.

Appendix 7D – Example audit report.

Appendix 7E – Example audit programs.


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Appendix 7A – Example letter to request approval for a new auditorPer paragraph 8.7 of APES 310, a member in public practice who proposes to change the existing auditor of client monies shall first obtain the approval of the applicable professional body (e.g. CPA Australia).

Public Practice Manager

CPA Australia

Level 20,

28 Freshwater Place Southbank

VIC 3006

[Date]

Dear Sir/Madam

Change of an auditor of client monies

I/We [name of member and membership number] request approval from CPA Australia to change the auditor of my/our clients monies from [existing auditor name] to [proposed auditor name, address] due to [insert reasons].

_____________________________________

[Signed]

_____________________________________

[Name and membership no.]


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Appendix 7B – Example letter and reply for trust money circularisation

[Date]

[Auditors name and address]

Dear Sir/Madam

[Name of member’s practice] statement

Enclosed is your statement showing monies held by our above-named client as at [period end date].

We are performing our regular audit of the client monies records and wish to verify this account from an independent source.

Would you please sign and indicate on the form below whether or not this statement is correct. If the statement is not correct, please note the differences on the form below.

A reply paid envelope is enclosed for your use. Your prompt attention to this request would be appreciated.

Yours faithfully

_____________________________________

[Name of Auditor]

* * *

To [Name of auditor]

Dear Sir/Madam

[Name of member’s practice]

The balance of [$amount] on the above statement of monies held on my/our behalf is: (strike out whichever is not applicable)

a) correct; or

b) incorrect (complete section below).

The correct balance of the monies held by [name of member’s practice] on my/our behalf is $__________.

Yours faithfully,

_____________________________________

[Name of client]


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Appendix 7C – Example member representation letter[Name and address of auditor]

Dear Sir/Madam

Representation letter

In connection with your audit of the client monies records of [name of member’s practice] for the year ending [date], we confirm, to the best of our knowledge and belief:

• I/We have complied with all requirements of APES 310 Dealing with Client Monies.

• I/We have made available to you all accounting records pertaining to the client monies, and other records and files pertaining to the practice and its clients.

[Add any other representations as applicable.]

_____________________________________

[Signed]

_____________________________________

[Name of member]

____________________

[Date]


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Appendix 7D – Example independent auditor’s report – as per Appendix 1 to APES 310This independent auditor’s report is based on the version of APES 310 effective as at January 2013, APES 310 should be reviewed to ensure this is the most up to date version.

Where the audit opinion is qualified or modified, it is to be sent to the CPA Australia Divisional Director in the state where the member practises.

To [the applicable professional body]

Report on the compliance of [name of member or firm etc.] with the requirements of APES 310

We have audited the compliance of [name of member or firm etc.] with the requirements of APES 310 Dealing with Client Monies (APES 310) for the [year ended …./…./….].

The responsibility of [member or firm] for compliance with APES 310

[name of member or firm etc.] is responsible for compliance with the requirements of APES 310. This responsibility includes establishing and maintaining internal controls relevant to compliance with the requirements of APES 310.

Auditor’s responsibility

Our responsibility is to express a conclusion on [name of member or firm etc.]’s compliance with the requirements of APES 310. Our audit has been conducted in accordance with applicable Standards on Assurance Engagements including ASAE 3100 Compliance Engagements and with APES 310, in order to state whether, in all material respects, [name of member or firm etc.] has complied with the requirements of APES 310 for the [year ended …./…./….]. Our procedures included examination, on a test basis, of evidence supporting [Member or Firm]’s compliance with APES 310. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. ASAE 3100 also requires us to comply with the relevant ethical requirements, including independence requirements of APES 110 Code of Ethics for Professional Accountants.

Limitations on use

This audit report has been prepared for CPA Australia in accordance with APES 310. We disclaim any assumption of responsibility for any reliance on this report to any persons or users other than CPA Australia, or for any purpose other than that for which it is prepared.

Inherent limitations

Because of the inherent limitations of any audit, it is possible that fraud, error or non compliance may occur and not be detected. An audit is not designed to detect all instances of non compliance with the requirements of APES 310, as an audit is not performed continuously throughout the year and the audit procedures performed are undertaken on a test basis. The conclusion expressed in this report has been formed on the above basis.

Independence

In conducting our audit, we have complied with the independence requirements of APES 110 Code of Ethics for Professional Accountants.

Conclusion

A. Unqualified

In our opinion, <<name of member or firm etc.>> has complied, in all material respects, with the requirements of APES 310 for the [year ended …./…./….].

OR

B. Qualified

In our opinion, except for [provide details of exceptions], <<name of member or firm etc.>> has complied, in all material respects, with the requirements of APES 310 for the [year ended …./…./….].


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_____________________________________

[Auditor name]

_____________________________________

[Address]

_____________________________________

[Date]


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Appendix 7E – Example audit programsThe following audit programs provides guidance for auditors on the steps involved in the audit of client monies held by a member in professional practice.

The steps should be adapted to the circumstances of each engagement, taking into account factors such as:

• the adequacy of internal controls within the member’s practice as a whole, and whether these are adequate to ensure that all client money transactions are properly recorded within the trust account system;

• the adequacy of internal controls over transactions involving client monies, and the extent to which these should be tested;

• the extent to which reliance is to be placed on the internal control system, and the extent of substantive testing to be performed; and

• the complexity of the accounting system and associated records.

This in turn is affected by the volume and complexity of client money transactions. For example, where there are few transactions the records for a particular client may consist only of an engagement letter and a photocopy of the cheque. When there are a large number and range of transactions, individual client trust ledger accounts may be used.

The relevant paragraph from APES 310 have been shown after each test, where applicable.

Internal controls Done by and date

W/P ref/ notes

Document the internal controls and procedures in place in respect of the operation of a Trust Account and a Client Bank Account. (4.5)

Do the internal controls achieve the following objectives:

a) Client Monies are dealt with in accordance with the Client’s instructions and APES 310;

b) A Trust Account is properly safeguarded and accounted for; and

c) A Client Bank Account is properly safeguarded against unauthorised access or use.

For a sample of accounts, review the reconciliation of the Trust Account Records to the Trust Account.

Confirm that this reconciliation has been performed at least every 25 business days.

Review documentation to show the correct any differences or errors within 5 business days. (7.7)

Review bank reconciliations, ensuring the following:

• bank reconciliations are performed on a periodic basis (e.g. monthly);

• large and unusual reconciling items have been followed up;

• there are no recurring reconciling items;

• there is evidence of independent review.


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Administration of client monies Done by and date

W/P ref/ notes

Have all Client Monies been kept separate from all other Monies of the Member? (4.4)

Confirm that the Member has not obtained any benefit from Dealing with Client Monies, including benefits deriving from the deposit and/or investment of Client Monies, without prior written authority from the Client. (4.6)

Confirm that professional fees in respect of Dealing with Client Monies have only been charged in accordance with Section 240 Fees and Other Types of Remuneration of the Code. (4.7)

Review the Trust accounts to confirm there have been no Financial Institution, statutory or other government charges in respect of a Trust Account. (4.8)

These charges should be borne by the Member.

Where the Member has deposited their own funds to a Trust Account, confirm this was only:

a) to meet any charges made to the Trust Account where the Financial Institution has made such charges to the Trust Account in error, instead of to the Member’s general bank account; or

b) to meet a Financial Institution’s prescribed minimum requirements for an ongoing account balance. (4.9)

Determine the processes in place so that the Member in Public Practice does not:

a) receive or pay into a Trust Account or a Client Bank Account; or

b) disburse out of a Trust Account or a Client Bank Account

any Monies if the Member believes on reasonable grounds that they were obtained from, or are to be used for, illegal activities or that Dealing with the Monies is otherwise unlawful. (4.11)

Determine whether there were any such cases during the period.

Review procedures to confirm that the Member’s Trust account is operated only by either:

• the Member; or

• a person who has been delegated in writing the Members authority, being:

– another Member in Public Practice;

– a solicitor holding a current practising certificate;

– a suitably competent person employed by the Member; or

– a manager of a branch of a Financial Institution. (6.10 and 6.12)

For a sample of accounts, confirm that all interest earned on Trust Accounts has been credited to the relevant Client’s account. (7.2)


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Opening a trust account Done by and date

W/P ref/ notes

Confirm where funds have been received that the Member has open a Trust Account at a Financial Institution in the name of the Member or the Member’s Firm and include the term ‘Trust Account’ in its title, unless the Member has been authorised to operate a Client Bank Account. (5.1)

Review the processes documented by the Member to establish the identity of a Client and the source of Client Monies prior to Dealing with Client Monies. (5.3)

Where a client request was received, confirm that the Member opened and maintains a separate Trust Account. (5.4)

Confirm the terms and conditions relating to Trust accounts opened during the year requires that:

a) all Monies standing to the credit of that account are held by the Member as Client Monies and that the Financial Institution is not entitled to combine the account with any other account, or to exercise any right to set-off or counterclaim against Monies in that account in respect of any sum owed to the Financial Institution on any other account; and

b) any interest payable in respect of the account balance is credited to that account. (5.5)

Review a selection of files to confirm a copy of the terms and conditions of the Financial Institution relating to a Trust Account is included as part of the Member’s Records.

Review evidence to show that a copy to the Client within 10 business days of any request being made by the Client. (5.6)

For a sample of files, review the written correspondence to the client to show:

• no later than at the time of initial deposit into a Trust Account, the details of the Financial Institution at which the Client Monies are to be held; and

• if there is a change to the existing Financial Institution arrangements, the new details of the Trust account sent to the client within 10 business days. (5.7)

Holding and receiving client monies Done by and date

W/P ref/ notes

For a selection of files, confirm that the Member in Public Practice deposited Client Monies into a Financial Institution within 3 Business Days of receipt by tracing to bank deposit slips and bank statements. (6.1)

Confirm, for a selection of files that the Member only held Client Monies in a Trust Account for the period necessary to enable the purpose for which the Client Monies were received to be discharged. (6.2)

If the Member in Public Practice received Client Monies where the payee is no longer a Client, or the intended recipient is unknown to the Member, confirm that the Monies were returned within 10 business days to the drawer or sender as appropriate. (6.3)

If the Member was unable to disburse Client Monies to the Client, payee, drawer or sender, confirm that the Member complied with relevant legislation in respect of unclaimed Monies. (6.4)


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Holding and receiving client monies Done by and date

W/P ref/ notes

For a selection of amounts received, confirm that the following information was recorded (6.5):

a) the name of the person from whom Monies were received;

b) the amount of Monies;

c) the Client for whose benefit Monies are held;

d) the purpose for which Monies were received or other description of the Monies;

e) the date on which Monies were received;

f) the form in which Monies were received; and

g) in relation to Client Monies of a kind referred to in paragraph 6.7, the location where the Monies are held.

For a sample of monies received, confirm that an acknowledgement was issued to the Client within 21 business days or as otherwise agreed with the Client containing the details specified in paragraph 6.5 and stating that the Member has deposited the Client Monies into a Trust Account or a Client Bank Account. (6.6)

Where any funds were received that are not capable of being deposited into a Financial Institution, confirm that the Member:

• safeguarded the Monies against unauthorised use;

• recorded details in an appropriate register; and

• issued an acknowledgement to the Client within 21 business days containing the details specified in paragraph 6.5. (6.7)

Disbursement of client monies Done by and date

W/P ref/ notes

For a sample of disbursements, ensure that the client has given written authority for withdrawal from the trust account/client bank account and that the payment was made within 3 business days of receiving the instructions. (6.9)

Review the records to support transacting electronic funds transfers from a client bank account or trust account. (6.11).

For a selection of disbursements relating professional fees and/or expenses due from a Client to A Member in Public Practice, obtain the Client’s written approval prior to such disbursement. (6.13)

Confirm that no Trust account or Client Bank account is in a debit position at the year end and that no disbursements during the year caused any account to go into debit. (6.14)


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Confirmation of client monies balances Done by and date

W/P ref/ notes

Circularisation

i. Select a sample of individual client trust account balances as at applicable reporting year end, with the member’s approval, and perform a positive circularisation by way of a letter requesting that the client confirm the balance as per that of the annual statement issued by the member. This letter is to be enclosed with the statement – see Appendix 7B.

ii. Follow up non-replies to the circularisation by obtaining the client file, and investigate any major discrepancies.

Ledger accounts

i. Ensure the total of the individual client accounts agrees with the balance of the trust control account.

ii. Agree balances to general ledger and bank reconciliation.

Reporting to clients Done by and date

W/P ref/ notes

Confirm that the following statements (containing details of the Member’s application of Client Monies and any interest earned on Client Monies ) have been issued either to the Client or to such other person as directed by the Client. (7.8):

a) in respect of all transactions, at least annually;

b) upon completion of the matter requiring the maintenance of the Trust Account or Client Bank Account;

c) in respect of any transaction, upon written request from the Client; or

d) when a Trust Account or Client Bank Account is closed or if the Member’s authority to operate a Client Bank Account is revoked.

Were the statements described above issued within the relevant timeframes, being:

a) paragraph 7.8(a) within 30 Business Days of the Applicable Year-End Date;

b) paragraphs 7.8(b) and 7.8(d) within 25 Business Days;

c) paragraph 7.8(c) within 5 Business Days. (7.9)

Where a Client receives Client Bank Account statements directly from a Financial Institution, confirm that the Member has provided to the Client details of transactions undertaken by the Member within 25 business days of the end of each month or as otherwise agreed with the Client. (7.10)


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Documentation Done by and date

W/P ref/ notes

Discuss with the Member, the procedures in place to retain Records that:

a) enable transactions involving Client Monies to be audited;

b) disclose the financial position of Client Monies; and

c) clearly identify the transactions made on behalf of each Client.

Review a sample of client files and confirm that the records achieve the objectives.

Confirm the records in place show:

a) the details of all transactions involving Client Monies, including:

i. details of all Client Monies paid direct to the Client, or to a third party nominated by the Client;

ii. details of all cheques received and endorsed by the Member for disbursement to the Client, or to a third party nominated by the Client;

iii. details of all electronic funds transfers of Monies received, and of Monies transferred direct to the Client, or to a third party nominated by the Client; and

iv. details of any errors in transactions involving Client Monies;

b) the details and basis of calculation of all interest earned on Client Monies held in a Trust Account and that the interest has been applied by the Member in accordance with paragraph 5.5(b);

c) the financial position of a Member’s Trust Account and Client’s Bank Account and the Client Monies therein; and

d) the signatories for each Client Bank Account authorised by the Client.

Review of dormant trust accounts Done by and date

W/P ref/ notes

Procedures

1. Review the trust account ledger for all trust accounts that have remained dormant during the year.

2. Based on the discussion with the responsible staff member and a review of the client’s files, determine the reasonableness of the explanation obtained:

• purpose of the dormant balance;

• the reason why the balance has not changed during the trust year.

(It is important to note that, if no one is reviewing dormant or inactive trust accounts, they are a good target for fraudulent activity.)


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Audit conclusions and reporting Done by and date

W/P ref/ notes

Prepare a summary review memorandum, summarising the findings of the audit.

Prepare a report to CPA Australia within the times noted below where any of the following have occurred

• within five business days any deficiency in trust money or in the trust bank account;

• within ten business days any failure to pay, deposit or account for trust money within three business days;

• within ten business days any error reflected in a statement issued by a financial institution;

• within ten business days any circumstances where client monies have not been transacted or maintained in accordance with APES 310;

• within 15 business days If the audit report contains a modified opinion.

Prepare an audit report in accordance with the example in APES 310 Appendix 1, as shown in Appendix 7D of this chapter. Unqualified and unmodified audit reports are retained by the member. This can be inspected as part of CPA Australia’s Quality Review Program.

Where the audit report is qualified or modified, forward a copy to CPA Australia within three months of the reporting date.

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