Audit 03 03 Grant Claims

8/4/2019 Audit 03 03 Grant Claims

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Public Sector Special ReportingEngagements Grant Claims

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This guidance is issued by the Audit and Assurance Faculty of the Institute of Chartered Accountants

in England & Wales in September 2003 to assist reporting accountants when asked

to provide reports to public sector entities. This guidance does not constitute anauditing standard. Professional judgement should be used in its application.

This guidance also reflects good practice for sponsoring bodies and grant paying bodies

in relation to requests for accountants reports on grants.

Section Contents Paragraph

Numbers

Glossary of Terms

1 Introduction 1 16

2 To whom does an accountant report? 17 27

3 Engagement terms 28 67

4 Access to an accountants working papers 68 72

Appendices Page Numbers

1) Roles and responsibilities 12 13

2) Example of a tri-partite engagement letter 14 15

3) Example of standardised terms of engagement (agreed as part

of the grant conditions instead of a tri-partite engagement) 16 18

4) Illustrative contents of a report 19

5) Examples of types of wording or opinions that are unacceptable

to accountants providing special reports 20 21

6) Example of a disclaimer notice for an accountants report 22

7) Example of a liability cap for an accountants reporting engagement 22

8) Authorisation letter (to be signed by the grant recipient) allowing

the accountant to give access to his working papers and report

on the grant claim 239) Release letter (to be signed by the body requiring access) confirming

that the accountant does not owe it a duty of care or responsibility 24

AUDIT 03/03

No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in thetechnical release can be accepted by the Institute.

Throughout this technical release, the male pronoun has been used to cover references to both the male and the female.


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Terms Meaning

Accountant(s) The term Accountantrefers to an individual accountant, firm of accountants, partner, director, or engagementleader who is the individual responsible for the reporting engagement. The Accountantprovides the requestedreports separately from the audit of the annual financial statements of the client. The term Accountantistherefore also used to differentiate from auditors who audit the annual financial statements.

Clients The grant recipients.

Committee of Public The Committee of Public Accounts is a Select Committee of the House of Commons. Historically, the primaryAccounts (PAC) purpose of the PACs enquiries was to satisfy itself on the accounting for and regularity and propriety of public

expenditure. The PAC retains its interest in these matters, but it also explores matters related to economy,efficiency and effectiveness of government business. The Committee consists of sixteen members, in partyproportions similar to those in the House of Commons. The Audit Committee of the National Assembly for

Wales performs the Committee of Public Accounts function within its devolved context.

Grant In this guidance, reference to grant monies is in relation to payments made by the grant paying body to otherbodies where the grant is to be used for a specific purpose and the grant paying body seeks to impose detailedcontrol over the expenditure.

Grant in aid Grant in aid is where a government department (sponsoring body) finances all or part of the costs of anorganisation through paying grant in aid, but the body operates at arms length and the sponsoring body

does not seek to impose detailed controls over the expenditure.

Grant paying bodies These are the bodies that are providing the funding directly to grant recipients.

Grant recipients These organisations receive the funding from the grant paying bodies.

The Panel The Public Sector Special Reports of Accountants Panel set up by the Audit and Assurance Faculty of theInstitute of Chartered Accountants in England and Wales.

Private arrangements These are the arrangements under which the reporting accountant contracts with his client or both the clientand the grant paying body through an engagement letter to provide a report on those grants outside of thearrangements agreed by the Audit Commission.

Propriety Linked to regularity, it is the requirement that expenditure and receipts should be dealt with in accordancewith Parliaments intentions and the principles of parliamentary control, including the convention agreed

with Parliament (and in particular the Committee of Public Accounts).

Public sector For the purpose of this guidance only, the public sector is defined as:

government departments and their executive agencies;

the National Assembly for Wales and their sponsored bodies;

trading funds;

bodies not administered as government departments but which aresubject to Ministerial and departmental control, for example NDPBs;

local authorities and other local government bodies; and

National Health Service bodies.

This definition does not include public corporations (except where they are NDPBs) or the nationalisedindustries. The first four parts of the definition are collectively referred to as Central Government.

Additionally, it applies to bodies that receive government grants for specific purposes although they arenot public sector bodies:

Higher education institutions; and

Further education colleges.

Regularity Linked to propriety, it is the requirement for all expenditure and receipts to be dealt with in accordancewith the legislation authorising them, any applicable delegated authority and the rules of GovernmentAccounting 2000.

Special reports In the context of this guidance, these are specific reports provided by an accountant to grant recipientsand/or other parties in relation to work performed on grant claims or returns. The work carried out underthese special reports is under a separate arrangement from the statutory audit.

Sponsoring bodies These are the bodies that provide the initial allocation of funding to a grant paying body to distributethe funds to grant recipients.

Statutory arrangements Some reports to public sector bodies are put in place through requirements of legislation.

Glossary of Terms


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SECTION 1

Introduction

1. The Audit and Assurance Faculty of the Institute of Chartered Accountants in England and Wales issuedTechnical Release Audit 1/01, Reporting to Third Parties, in September 2001. As the scope of that Technical Releaseexcluded reports to public sector entities, a separate panel the Public Sector Special Reports of Accountants Panel(the Panel), was set up by the Faculty, to consider the issues relating to reporting to such bodies and the

application of the principles outlined in Audit 1/01 to such reporting.

2. In conducting its work, the Panel has involved representatives from:

the accountancy profession, including the ACCA, CIPFA, ICAEW, ICAS;

audit agencies, including the National Audit Office, the Audit Commission, and Audit Scotland;

Government departments: Department for Education and Skills, Department for Environment, Food and RuralAffairs, Department of Trade and Industry, Department for Works and Pensions, HM Treasury, Office of theDeputy Prime Minister; and

National Assembly for Wales.

3. Accountants and grant paying bodies both recognise the need to achieve consistency in the principles adoptedin reporting on grant claims and returns in the public sector. There is a need for guidance in respect of the reportsthat accountants provide and also a need to take account of the statutory, regulatory or propriety requirementsthat grant paying bodies have to observe when requiring such reports. This guidance is therefore intended to helpboth those involved in providing special reports on grants and returns to the public sector and those public sectorbodies that receive such reports.

Background

4. The public sector is responsible for the provision of public services and for the proper use of public funds.Government departments are accountable to Parliament for ensuring that public business is conducted inaccordance with the law, and meets the requirements of propriety and regularity.

5. Many organisations, both in the private and public sectors, receive grant in aid and grants from a number of

government departments and other funding agencies (grant paying bodies). Grant schemes are administered bygrant paying bodies in different ways and often with differing reporting requirements, which in some cases maybe laid down in statute. When an organisation receives grant in aid, it is effectively being financed for all or a majorpart of its costs by the grant paying body. A typical example of this is the framework set up by the Learning SkillsCouncil (LSC), whereby it may fund a large proportion of the total costs of a college. The college remains at armslength from the LSC which does not impose detailed controls over the expenditure. Instead it requires a regularityassertion to be given on the specific use of the grant in aid as part of the overall audit opinion on the financialstatements. This requirement is built into the financial memorandum with which each college is required to comply.

6. In contrast, other grants are provided to organisations for specific purposes and the grant paying body, whenallocating the grant monies, seeks to attach detailed conditions to the expenditure. In this case, it requires aseparate report on the eligibility and/or use of the grant monies.

7. The guidance contained within this document does not apply to situations where a grant paying body hasawarded grant in aid or grants and requires a regularity opinion on the use of these funds. It refers only tosituations where a grant paying body has awarded a grant for specific purposes and it has requested that a specialaccountants report be provided.

8. Guidelines covering eligibility and/or use of such grants are usually outlined in the terms and conditions of theparticular grant schemes under which the monies are received. Recipients are responsible for ensuring that theymeet the eligibility criteria and that funds received are used in accordance with the terms and conditions attachingto the grants.

9. A grant recipient often asks an accountant to provide assurance on the eligibility of amounts claimed and/or onthe use of grant money and to sign special reports that have been requested by the grant paying body fromwhich the grant recipient receives a grant. However, before requesting an accountants report, the grant payingbody may wish to consider whether obtaining an accountants report is the most appropriate form of gaining the

assurance they require, and particularly whether the expected cost and relative administrative burden of obtainingan accountants report is disproportionate to the level of grant. Whilst the grant paying body may still need tohave some assurance in these instances, in some cases self certification by the grant recipient may provide sufficientassurance. The grant paying body may still wish to reserve the right either to seek an accountants report or tocarry out its own investigations on a sample basis of smaller claims or when it has concerns about whether thegrant monies have been spent in accordance with the terms and conditions of the grant.


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10. Where special reports are requested, the accountant wishes to assist the grant recipient, if possible, in providingthese reports. In many cases, the accountant is also the external auditor of the grant recipients financialstatements. However, the grant recipient may also ask another accountant for such special reports. The grantrecipient should ensure that sufficient notice is given to the accountant to allow this work to be planned into hiswork programme. Where the grant recipient chooses to use another accountant the external auditor should beinformed.

11. These special reports fall within a range of frameworks (depending on legislation), the nature of the grant payingbody, the grant recipient, and the audit regime for the grant recipient. In some parts of the public sector, thisassurance is obtained using statutory arrangements. In local government and the National Health Service inEngland and Wales these statutory arrangements currently fall within the remit of the Audit Commission. Outsideof this framework, private arrangements exist between the grant recipient and the accountant. Appendix 1 outlinesthe various roles and responsibilities of the bodies and individuals that are involved in the public sector specialreporting process.

12. Good practice suggests that the grant paying body may wish to consider its requirements in the following areasin relation to grant claims and returns:

the level of assurance and when it is required;

the form of report; and

levels of materiality.

13. It is important that the accountant, the grant recipient and the grant paying body discuss and clarify expectationsabout the scope of work, the form of report, level of assurance required and the timing of the work before theaccountant agrees to take on the engagement. It is essential for the accountant to have an understanding of therequirements of the grant paying body at an early stage in his relationship so that he can consider whether or nothe wishes to take on the engagement. Otherwise, there is a risk that the accountant may not be able to providethe assurance required with the result that the grant paying body may decide that it cannot pay the grant orwhere the grant has already been paid, require repayment of part or all of it.

14. This guidance concentrates on how the terms of these special reporting engagements and the forms of reportcan be discussed and agreed with all parties that enter into the engagement. It is not intended to provide guidanceon how these engagements should be carried out in practice. Building on the principles outlined in Audit 1/01,Reporting to Third Parties, this guidance seeks to establish a framework for reporting on the eligibility and/or useof specific grant monies to grant paying bodies in the public sector. It aims to provide consistency for thoserequesting and receiving such reports and for those providing the reports.

15. The guidance is not intended to apply to those arrangements that are governed by a statutory framework otherthan the wording of the reports where they should be applied as consistently as possible throughout the publicsector subject to legislative requirements. In addition this guidance does not cover:

statutory audit engagements (audit of financial statements which are governed by the APBs Statementsof Auditing Standards);

corporate finance engagements;

reports required under UK company legislation (APB Practice Note 8, Reports by auditors under companylegislation in the UK, should be referred to);

simple requests for references on clients financial status and their ability to service loans (guidance on theserequests is provided in Audit 2/01, Requests for references on clients financial status and their ability to serviceloans);

requests for reports in connection with loans and other facilities to clients and related covenants (guidance onthese requests is provided in Audit 4/00, Firms reports and duties to lenders in connection with loans and otherfacilities to clients and related covenants;

reports to non public sector organisations (guidance on these requests is provided in Audit 1/01, Reporting toThird Parties); and

areas covered by other APB Practice Notes e.g. reports on landlords service charges within Practice Note 14.

Effective Date

16. The reporting arrangements outlined within this guidance will apply from September 2003. The Treasury will alertgovernment departments about the publication of Audit 3/03, Public Sector Special Reporting Engagements GrantClaimsthrough a Dear Accounting Officer (DAO) letter and will also include a cross-reference to it in its guidanceGovernment Accounting 2000.


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SECTION 2

To whom does an accountant report?

Who uses an accountants report and for what purpose?

17. The first step in providing a reporting framework within the public sector is to understand why reports arerequested, to whom an accountant reports and what use the report is put to. This will then help in determininghow best to apply the normal principles of reporting to these special reports.

18. In arriving at this understanding, there are three distinct categories that an accountant will need to consider whenhe is reporting. These are those that:

receive and are entitled to rely on the reports, (and could therefore suffer a direct loss);

have a need to see the reports to make judgements, are entitled to place reliance on them for monitoringpurposes, but may not suffer a direct loss (e.g. National Audit Office); and

have access to reports through legislation but may not make judgements or are not entitled to place relianceon the reports.

Recipients of reports who are entitled to rely on them and may suffer a direct loss

19. A grant paying body usually requires assurance that:

the grant recipient meets the eligibility criteria for receipt of grant monies (which could mean that monieshave not yet been fully received); and/or

the grant monies have been spent in accordance with the terms and conditions of the grant.

20. An accountant is therefore asked to provide such assurances in a report, not only to the grant recipient, but alsoto the grant paying body, which may then seek to place reliance on it. Even when the accountant is not providingthat report directly to the grant paying body, nevertheless that body may place reliance on the report. In eithercase there is an expectation that the accountant may have a duty to take reasonable care in preparing andproviding the report on the eligibility and/or use of grant monies.

21. Good practice therefore suggests that the accountant enter into an engagement with both the grant recipientand the grant paying body, acknowledging the duty of care to both parties. Appendices 2 and 3 are examplesof possible engagement terms.

22. In addition to his duty to the grant recipient and the grant paying body, an accountant may also owe a duty ofcare to a sponsoring body which has a particular need to satisfy itself of the regularity and propriety of grantsdistributed by the grant paying body for which it is ultimately accountable. It is likely therefore that the sponsoringbody specifies that an accountants report is required.

23. If the sponsoring body has indicated that it will seek to rely directly on the accountants report, it should alsobe bound into the engagement separately. However, realistically, due to its remoteness from the grant recipient,the sponsoring body is unlikely to want a direct relationship with the accountant and will instead seek to relyon the grant paying body to provide it with the required assurances that the grants have been spent for the

purposes intended.

Recipients of reports who may use them, are entitled to place reliance on them, but will not suffer a direct loss

24. In the public sector, these might typically be:

audit agencies connected with any of the above parties, including the National Audit Office and, possiblyEuropean Commission Auditors;

Parliament, in particular the PAC; and

sponsoring bodies (where they have made clear that the grant paying body is accountable to them and havetherefore not entered into an engagement with the accountant).

25. Other bodies may want to have access to the accountants report or may have a statutory right of access. However,the extent to which these other bodies may be placing reliance on the report is not always clear and the impactthat this reliance could have on the accountant providing the report. Reasons for requiring access will vary betweenbodies. Some bodies may want to place direct reliance on the report by acting on the information containedwithin it. Others will require access to the report as part of an overview process and for the purpose of dischargingtheir statutory duties, and may need to place reliance on it.


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26. The accountant may stipulate in his report that it must not be disclosed to any other person (except to those whomay have a statutory right of access) and so the grant recipient or the grant paying body would need to seek theaccountants consent to release the report to another person. The accountant should establish at the outset withthe grant recipient and the grant paying body which other parties may have statutory rights of access to his report.This may avoid unenforceable stipulations on disclosure/release of reports being included within the accountantsreport.

General access to reports through legislation where no entitlement for reliance may be placed

27. It is unreasonable to consider that an accountant should accept a duty of care to anyone who may see a reportwhere that report is freely available. The wider availability of these reports is a requirement of government ratherthan the choice of the accountant and availability will be through the grant paying body. If another body writesto the accountant in an attempt to indicate reliance on a report, the accountant should consider whether it isreasonable to accept that such reliance should exist. Where it is not, a disclaimer should be sent to that body inwriting. Access to an accountants report may be based in statute, but the accountant is able to limit his liabilityto other third parties through appropriate engagement arrangements. This matter is dealt with in more detailin Section 3.


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SECTION 3

Engagement terms

Duty of care and liability

To whom does an accountant owe a duty of care?

28. As established earlier (paragraphs 17 to 23), the accountant may owe a duty of care to those who receive andsubsequently are entitled to rely on a report. Since the expectations and/or scope of the work will be determinedby parties to the engagement (although, in some cases, it will be prescribed by the grant paying body), it maybe considered unreasonable for the accountant to accept a duty of care to third parties whose interest in the workmay not have been known at the time that the work was accepted and performed.

29. The accountants understanding of the risks involved in providing a report underpins the decisions he makes aboutwhether to accept the engagement and on what terms. The flowchart overleaf provides a route map of thedecision making process. Depending on the circumstances, an accountant can either:

a) accepts that he may owe a duty of care to the grant paying body and enters into an engagement with boththe grant recipient and the grant paying body, including provisions limiting liability if appropriate; or

b) proceeds with an engagement with the grant recipient but, before allowing the grant paying body access

to his report, requires the grant paying body to acknowledge in writing that the accountant owes the grantpaying body no duty of care; or

c) proceeds with an engagement with the grant recipient but disclaims or limits any liability or duty to the grantpaying body by notice in his report; or

d) refuses to accept the engagement.

30. If the duty of care is expected to be extended further to others such as the sponsoring body which is allowedaccess to the accountants report, these other parties may need to be brought into the discussions about thewording of the report. The accountant needs to distinguish clearly between those who are permitted access andto whom a duty is owed, and others who may see the report but to whom there is no responsibility.

31. Some grant paying bodies limit their requirement to sight of the report and are willing to accept in writing that theaccountant does not owe them a duty of care. In other cases, the accountant might regard the report as low riskbecause the grant paying body could suffer little or no loss. In both scenarios, there might not be a formalengagement between the accountant and the grant paying body. The accountant may wish to notify the grantpaying body of the proposed scope of work and the wording of the report and the basis on which it will beprovided prior to performing the work.

Agreeing the terms of the engagement

32. Once it is clear which parties are entering into the engagement, the terms can then be discussed and agreed.Agreeing engagement terms in writing should ensure that all parties understand the nature of the relationshipand their respective responsibilities.

33. The grant recipient has the ultimate responsibility for meeting the eligibility criteria of the grant, for expenditure

financed by the grant funding and for being able to demonstrate that it has used the grant for its designatedpurpose. The grant paying body has responsibility for ensuring that its eligibility criteria, terms and conditions ofthe grant and the expectations of the reporting accountant are clear and not open to misinterpretation and thatit can be satisfied that the grant was used for the agreed purposes. The accountant has the responsibility for givingan opinion on the eligibility and/or use of grant, through the processes agreed.

34. Appendix 2 is an example of a model tri-partite engagement letter which accountants, grant recipients and grantpaying bodies may use to agree engagement terms separately on individual grant claims. This is the preferredoption as all parties have the opportunity to enter into the dialogue to clarify expectations, scope of work andthe agreed form of report.

35. However, where there are likely to be a large number of grant recipients for a particular grant scheme, the grantpaying body may feel unable to negotiate and agree individual engagement letters with individual accountants.It may therefore choose to issue standardised terms of engagement under which it is willing to engage. Appendix 3

sets out a suggested format for standardised terms of engagement. Under this type of engagement, the grantpaying body agrees to enter into an engagement with the grant recipient and the accountant on the basis set outin its standard terms of engagement. The grant recipient and the accountant consider the standard terms set bythe grant paying body. If both agree that the terms are reasonable and acceptable, they enter into theengagement as set out by the grant paying body. In some cases, it may be necessary to tailor the terms outlinedwithin the grant paying bodys standard engagement to accommodate individual circumstances and, if this is the


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Flowchart illustrating the process an accountant reporting to the public sector followsin response to requests for reports from a grant paying body

Allow access to those withstatutory rights



Report in accordance withengagement letter and disclaim

to other third parties

Report in accordance withengagement letter to grant payingbody including disclaimer to other

third parties

Report in accordance withengagement letter with effective

disclaimer to third parties

Plan, perform and document work Plan, perform and document workPlan, perform and document work

Prepare engagement letter Prepare engagement letterPrepare engagement letter

Bi-partite engagementTri-partite engagement or

standardised contractBi-partite engagement

Obtain acknowledgement fromgrant paying body that no duty

of care is owedIs engagement low risk?

Will grant paying body

acknowledge that no duty of careis owed?

Will grant paying body sign upto engagement?

Modify report to reduce scopeConsider not accepting

engagement

Is (further) modified reportacceptable to grant paying body?

Are fees acceptable to client?

Determine scope and feesCan report be (further) modified

so that you can sign it?

Can you sign the reportrequested?

Determine who wants your reportand for what purpose

No Yes

Yes

No

No

No

No

Yes

Yes

Yes

Yes

No

Yes


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case, the grant recipient and the accountant will need to discuss the revised terms with the grant paying bodyprior to the accountant accepting the engagement and carrying out the work.

36. If the grant paying body refuses to engage with the accountant through either the tri-partite engagement letter ora standardised terms of engagement, or the accountant feels unable to enter into the standardised terms laid outby the grant paying body and the grant paying body is not willing to discuss or negotiate revised terms, then theaccountant may choose not to accept the engagement.

37. An engagement letter should include the following:

a clear unambiguous description of the expectations of the engagement agreed by the grant recipient and,where party to the engagement letter, the grant paying body, the level of assurance, and/or the scope ofwork to be performed (where the grant paying body agrees the procedures);

the form of report to be provided (the words of which have been agreed in advance) using defined termswhere appropriate to avoid misunderstanding;

a description of all parties obligations and their responsibility for the information (in accordance with therequirement of the scheme) on which the accountant reports;

clarification that the engagement is separate from the audit of the annual financial statements and thatthe accountant has no duty of care to any third party in relation to their audit of the financial statements(if they are also auditors of the grant recipient);

an appropriate liability cap, agreed having regard to the nature and scope of the work being performed, thelevel of the grant, the fees charged and other relevant factors. Any limitation of liability must be negotiatedand agreed with the grant recipient and, where party to the engagement letter, the grant paying body,(and, in both cases, in England and Wales, must be fair and reasonable in compliance with the UnfairContract Terms Act 1977); and

details of the addressee for the report, limitations as to the purpose for which the report is prepared andrestrictions on who is entitled to see and rely upon the report and the distribution of it.

38. If, after work has commenced, it is necessary to depart from the terms of the engagement letter, an amendedscope of work should be agreed, in writing, with all parties to the engagement letter.

Liability

39. Accountants in England and Wales are advised to address their reports to grant paying bodies only when the basisand extent of their liability to the grant paying body is clear and agreed within an engagement letter. In decidingand agreeing appropriate engagement terms in England and Wales, accountants should refer to the guidance inStatement 1.311 of the Institutes Members Handbook, Managing the professional liability of accountants andconsider the consequences of the Contracts (Rights of Third Parties) Act 1999. They should also refer to TechnicalRelease Audit 4/00, Firms reports and duties to lenders in connection with loans and other facilities to clients andrelated covenants.

40. If a disclaimer is used, accountants will need to consider whether it is reasonable and therefore likely to be effectivetaking account of the requirements of the Unfair Contract Terms Act 1977. It should be noted that disclaimers arenot always effective. Accountants are advised to seek their own independent legal advice on the effectiveness ofany disclaimers that they intend to include within their reports.

41. Possible ways of arriving at a liability limit are:

to limit the liability to the amount of the grant or cap it at a fixed monetary amount; or

by separate negotiation.

42. In most cases, the grant paying body will seek to recover losses from the grant recipient directly and may only seekto recover losses from the accountant where it believes that the accountant has been negligent in carrying out hiswork, and/or in providing the report and/or where the grant paying body has suffered a direct loss by relying onthe report.

43. It is becoming common practice now to limit liability to that proportion of the loss or damage suffered by thegrant paying body for which the accountant has contributed to the overall cause for such loss or damage, as

agreed between the parties or, in the absence of agreement, as finally determined by the courts (subject toan upper limit).


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Clarification of expectations

44. There are currently no UK auditing standards on the types of engagements covered by this guidance. There areinternational standards in place, which cover levels of assurance and agreed upon procedures1. However, thesedo not apply in the UK. In agreeing public sector reporting engagements, these are the options:

agreed upon procedures; and

assurance engagements:

high level assurance; and

moderate assurance.

45. In agreeing the expectations of the reporting assignment, there may be a conflict between the level of assurancerequired by the grant paying body and the amount of work required of the accountant to support such assurances.

A grant paying body may seek a high level of assurance although the accountant prefers an agreed uponprocedures assignment as this seeks to minimise risk by providing more clarity about the work to be carried out.

46. The level of testing carried out depends on the type of engagement required and agreed with the grant recipientand/or the grant paying body at the outset of the engagement. The grant paying body should also considerwhether everything that it wants a report on is capable of verification e.g. whether or not receipt of a grant haspositively resulted in certain events occurring such as the number of jobs created or safeguarded. The higher thelevel of assurance required, the more detailed will be the testing. The more testing that is carried out, the morelikelihood there is of any errors being detected. It is worth noting that, however detailed the testing, not all errorswill necessarily be detected.

47. The amount of grant involved is also a key factor in determining the level of assurance. The grant paying bodyshould consider the amount of grant that it requires a report on and clarify within the terms and conditions amateriality level that determines the level of error and/or risk that they are prepared to accept. In some cases,the total expenditure on the project will equal the total amount of grant received and the grant paying body mayrequire a report on the total expenditure. In other cases, the actual grant given may only be a percentage of thetotal expenditure and the grant paying body may have set conditions about the expenditure reaching a certainlevel before grant is given e.g. the grant recipient may be required to spend at least 10 million before a 5milliongrant is allocated. Therefore, it may only want a report to confirm that at least 10 million has been spent on thespecific project. The accountant should ensure that assignments are scoped in relation to the level of assurance,the amount of grant and the materiality level that is specified and required.

48. An accountant is willing and generally able to provide the level of assurance required by the grant recipient andthe grant paying body, but the level of assurance impacts upon the cost of such work. Generally, the higher thelevel of assurance required the higher the level of testing performed and the higher the cost and administrativeburden for the recipient incurred. This factor should be taken into consideration when determining what isabsolutely necessary to confirm that the grant recipient is eligible to receive the funds and/or that funds havebeen spent in accordance with the terms and conditions of the grant scheme.

Agreed upon procedures

49. An agreed upon procedures assignment involves performing certain specified procedures, the results of whichthe grant paying body uses to derive its assurance. The procedures to be performed are agreed in advance andset out in the engagement letter. The accountant tailors the engagement letter and report to reflect the specificrequirements of the grant paying body and the circumstances of the engagement. He also attaches to the

engagement letter a draft of the type of report that will be issued.

50. Audit 1/01, Reporting to Third Parties, suggested that, in most situations where an accountant is asked to provide areport to a third party, an agreed upon procedures engagement will best meet the expectations of the third partyand the client regarding the work the accountant performs. These engagements serve to lessen the scope formisunderstanding about the work to be performed, the nature of the results and the assurance provided within thereport. However, grant paying bodies have expressed concern that they may not have sufficiently trained staff withthe requisite knowledge and/or expertise to agree procedures with the accountants and are therefore reluctant toagree procedures with individual firms of accountants. Instead, they expect to rely on the accountants professionaljudgement in determining the appropriate procedures to provide the level of assurance required.

51. Where a grant paying body feels unable to agree procedures with the accountant, it may be possible to carry outa high or medium level of assurance engagement which will still require the grant paying body to meet certaincriteria, clarify its expectations and agree the form of report.

1 ISA 100 Assurance Engagements provide guidance on levels of assurance and ISA 920 Engagements to perform agreed upon procedures on factual information provides some guidance on agreedupon procedures. Both will be reviewed by the International Audit & Assurance Standards Board with its review of all International Standards of Auditing.


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Assurance engagements

52. For an engagement to provide a specific level assurance it needs to exhibit all of the following elements:

a) a three party relationship involving:

a professional accountant;

a responsible party; and

an intended user.

b) a subject matter;

c) suitable criteria;

d) an engagement process; and

e) a conclusion.

53. For an accountant to provide a level of assurance, the grant paying body has to identify suitable criteria againstwhich the accountant can make his judgement. If a grant paying body requires an assurance engagement, it needsto ensure that its staff are able to identify suitable criteria, clearly interpret and properly define the terms andconditions of the grant and define and agree the form of words required on reports. When considering the level ofassurance required, the grant paying body will have regard to the likely number of transactions. If the grant paying

body is unable to meet all the requirements of an assurance engagement, the accountant should not agree to carryout this type of engagement.

High levels of assurance

54. Many grant paying bodies require a high level of assurance. A high level of assurance is usually regarded asproviding a conclusion expressed in positive terms such that, in the opinion of the accountant, the grant eligibilitycriteria has been met and/or grant monies been spent for the intended purpose. To express a positive opinion anaccountant might have to perform a significant amount of detailed testing in order to satisfy himself that all of thegrant monies have been expended as intended. In some cases, under a high level assurance engagement, it maybe necessary for the accountant to carry out 100% testing. For example, a requirement to ensure that a granthad been used in a particular way, e.g. towards a particular fixed asset could mean a low number of transactions(even as little as one invoice) and therefore it would be relatively easy to provide a high level assurance.

Moderate assurance

55. Agreeing a moderate assurance engagement is a potential solution to any concerns from either party over thebalance between assurance and other factors. A moderate level of assurance requires all of the above elementsof an assurance engagement to be met, but a limited amount of detailed testing. This type of engagement wouldprovide a negative assurance opinion in the style of having carried out the procedures stated, nothing has cometo our attention to suggest that the grant has not been spent for the intended purpose . This opinion would reflectthat the accountant has performed limited procedures and has not carried out the level of detailed testing thatis required by a high level of assurance.

Audit of the financial statements

56. An accountant may also be the auditor of the grant recipients annual financial statements. If he agrees to providean accountants report on a grant claim or return, he will need to clarify with both the grant recipient and thegrant paying body that this engagement is separate from the audit of the annual financial statements2. Thisclarification may be provided within the engagement letter if the grant paying body is a party to the engagementletter and/or by including appropriate wording in the form of the report to this effect.

57. The auditing standards that need to be complied with in order to sign off an audit opinion on a set of annualfinancial statements / statutory accounts are not fully applicable to these types of special reporting engagements.Accordingly it is not appropriate for the terms of the engagement or the resulting accountants report on a grantclaim to make a reference to the standards used for the purpose of the audit of the financial statements.

Form of report

58. Agreeing the words and form of report at the outset helps to avoid disagreements with the grant recipient or thegrant paying body at a later stage. An accountants report should reflect the agreement set out in the engagementletter and be supported by the work he has carried out. The report should make clear:

for whom it is prepared, who is entitled to rely upon it and for what purpose;

that the engagement was undertaken in accordance with the agreed engagement terms;

the work performed and the findings; and

2 The audit of the financial statements is carried out under a separate engagement for specific statutory purposes and work is performed for specific objectives using the Auditing Practices BoardsStatement of Auditing Standards that are specifically designed for the purpose of the audit of the annual financial statements.


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who is permitted to have access to the report.

Appendix 4 includes illustrative contents of a report.

59. The grant paying body, when determining the terms and conditions of the schemes and the level of assurancethat it may require from an accountants report, needs to consider carefully the form of words that it may require.In doing so, it should bear in mind the responsibilities of the various parties in the process and consider whetherthe assurances it requires are those that would be the responsibility of the grant recipient rather than theaccountant. For example, responsibility for using a grant for its intended purpose lies with the grant recipientand hence assurance may be most appropriately obtained from them on this.

60. In considering the form of words that it may require, a grant paying body will need to bear in mind that theaccountant is not bound to sign any form of report (pre-printed or otherwise) that has not been discussed withthe accountant. Nor does any form of report that has been endorsed as being acceptable by the accountantsprofessional body bind an accountant but the accountant should carefully consider the reasons behind theagreement by the professional body before deciding not to agree to the requested form of words.

61. Good practice suggests that all parties including the reporting accountant should be involved in the process ofagreeing the wording on the report rather than having standard forms of words that may not be justified by anylevel of work carried out. The form of report requested should take into account the terms and conditions ofthe grant, the level of assurance required, the amount of work to be performed to provide the form of report,the risk attaching to the work and the cost and relative administrative burden of the work.

62. It is important that, before commencing work, the accountant discusses with both the grant recipient and thegrant paying body the form of report that the grant paying body has requested and whether he believes he willbe able to provide this. If the grant paying body wishes the accountant to exercise his professional judgement incarrying out procedures to provide a level of assurance that they require, then it must also be appropriate for theaccountant to exercise his professional judgement in considering the forms of words that he uses in the opinionhe gives, based on the work performed.

63. An accountants report should not include undefined terms such as review or reasonable without specifyingclearly what the terms mean. Similarly, he should not use open-ended wording, without indicating the scope ofthe work that has been performed by reference to an engagement letter or relevant guidance. This is crucial whenproviding high or moderate levels of assurance. Such wording may lead to confusion as to the precise extent ofwork, and therefore the assurance that can be taken from their reports. Examples of wording that an accountantis advised not to accept or use when providing special reports are shown in Appendix 5.

64. An accountant signs reports when he has performed sufficient work and obtained sufficient evidence to supportthe opinions and/or conclusions that he is asked to give in the report. It can be difficult for an accountant to signopinions in relation to the reasonableness of a bodys value for money arrangements, or satisfaction that thesystems of internal control are appropriate as these could be interpreted as the accountant confirming that thegrant recipient is actually achieving value for money or that systems of internal control are adequate. By signingsuch reports misunderstandings may arise in relation to the meaning of opinions made by the accountant andso care should be taken to ensure the meaning of the opinion sought is clear before accepting such assignments.

65. An accountant might however be able to provide an opinion on whether the grant recipient has actively putarrangements in place, to seek value for money if the grant paying body has provided clear criteria against whichsuch a judgement can be made. An opinion such as this might take the following form, as at [date], we havecarried out procedures as set out by the [grant paying body] to gain evidence that the [grant recipient] has taken stepsto seek value for money in line with the guidance provided to it by the [grant paying body].

66. An accountant should bear in mind that some wording included within prescribed forms of report might bewording that is enshrined in legislation. If this is the case, the grant paying body should define clearly these wordsto avoid any misunderstandings later. In all cases, the accountant has a right not to accept any engagement if he

feels that the required wording is too onerous or where it has not been properly defined. Where he does not feelable to accept such responsibility he should decline this work.

67. Sometimes, the grant paying body may amend its terms and conditions for the grant or require a higher level ofassurance than previously agreed. This may require a different form of words for the report. If the wording in a

form of report is to be changed at the request of the grant paying body or the grant recipient, then the accountantneeds to:

consider whether he can sign the new form of report, based on the work already performed;

consider what additional work needs to be performed, if the new form of report cannot be signed; and

discuss and agree a revised engagement letter (with the grant recipient and, where party to the engagementletter, the grant paying body), if appropriate.

10


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SECTION 4

Access to an accountants working papers

68. Some government departments or audit agencies may require access to the accountants working papers to eitherclarify or confirm the processes put in place by the grant paying body to allocate and verify the use of grantmonies or because they have a statutory duty to report to Parliament matters of significance which arise out oftheir review.

69. The accountants working papers are his legal property, and he has a right to restrict or decline access to them.The working papers may contain confidential information about the grant recipient and, by permitting access tothem, an accountant could be acquiring a significant legal risk. However, refusing access could be unhelpful tothe grant recipient and those requiring access. An accountant is usually prepared to permit access to the workingpapers, provided the issues below have been addressed. Before permitting access to others, such as a governmentdepartment or audit agency, to review these papers, an accountant needs to establish the reasons for the accessand agree a protocol with the government department or audit agency on how access to working papers may beobtained so that the interests of all parties can be protected.

70. Prior to allowing access to the working papers, an accountant will consider such issues as ownership andconfidentiality of the working papers as well as whether or not such access creates an additional duty of care.The accountant should not provide access to his working papers or provide explanations until he has obtained:

an authorisation letter signed by the grant recipient giving authorisation for the accountant to permit accessto the working papers and provide explanations of the working papers where appropriate as well as agreeingthat the accountant has no liability to the grant recipient or other parties as a result of providing this access(Appendix 8); and

a release letter signed by the body requiring access, stating the purpose of the access and agreeing that theaccountant does not assume any duties, liabilities, or obligations as a result of allowing access (Appendix 9).

71. The accountant should take care to restrict explanations to the working papers and should avoid giving oralrepresentations or warranties about any matters arising after the date of their report.

72. Access to the accountants reports and working papers is granted on receipt of a suitable letter from the grantpaying body acknowledging that this does not extend a duty of care or responsibility to them. To this end, it is the

responsibility of the person requiring access to determine the extent to which he relies on the accountants reportor working papers. The accountant should not accept any responsibility for any reliance that the person choosesto place on the judgements and conclusions formed by the accountant. It should be a condition of access that theperson does not disclose to any other party, any findings that do not relate to the grant and which might arise

from their review of the report and working papers.


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APPENDIX 1

Roles and responsibilities

This Appendix outlines the various roles and responsibilities of the bodies and individuals that are involved in thepublic sector special reporting process:

Sponsoring bodies;

Grant paying bodies;

Grant recipients;

Accountants;

Comptroller and Auditor General and the National Audit Office;

Auditor General for Wales;

Audit Commission;

H M Treasury; and

National Assembly for Wales.

Sponsoring bodies

Sponsoring bodies are the ultimate funders of an activity. However, they may pass the funding through a single grantpaying body or a chain of grant paying bodies rather than directly to the grant recipient. Examples are where agovernment department funnels grant through non-departmental public bodies to the private sector, or whereGovernment Offices for the Regions are a focal point in the region for schemes funded by different departments.Sponsoring bodies have a duty to ensure that all monies paid out in grants to grant recipients are fully accounted forand are utilised in line with grant conditions. As they need to be satisfied that the grant paying body has properlydisbursed public funds, they often set a framework and terms and conditions that grant paying bodies must abide byin order to receive this overall funding. This may specify that an independent accountants report is required or mayleave grant paying bodies discretion to establish the most appropriate assurance arrangements. Sponsoring bodies

may review grant paying bodies systems to see if the grant paying body is properly implementing and monitoring theallocation and use of funds. Sponsoring bodies can be European Union bodies, Government departments or agencies.

Grant paying bodies

Grant paying bodies have a duty to ensure that all monies paid out in grants to grant recipients are fully accountedfor and are utilised in line with the grant conditions. The grant paying body dealing directly with the grant recipientis accountable to and may owe a duty of care to the sponsoring body for ensuring that it has disbursed the grantaccording to central criteria, whilst looking to the grant recipient to provide assurance of eligibility to receive grant andto confirm that it has been used for designated purposes. To assist them in meeting these responsibilities many grantpaying bodies require grant recipients to provide an independent accountants reports providing assurance on theeligibility of the grant recipient to receive the grant and/or that grant monies have been spent in accordance withthe terms and conditions of the grant scheme. Grant paying bodies have a responsibility to ensure that the terms andconditions are specified, reasonable, practicable, robust and achievable.

Grant recipients

Grant recipients are responsible for ensuring that they meet the eligibility criteria for the grant and that funds receivedfrom grant paying bodies have been used appropriately, in accordance with the terms and conditions of the grant.They are also responsible for establishing and maintaining effective administrative and financial systems to supportand record the transactions in relation to these funds and for preparing the claims or returns accurately.

Accountants

An accountant reviews the information contained within the claim or return in accordance with the appropriateprocedures for such special reports and provide an accountants report. For local government and the National HealthService grant recipients in England and Wales, the accountant will carry out this work under the statutory arrangementas separate engagements, as agents of the Audit Commission.

Comptroller and Auditor General and the National Audit Office (NAO)

The Comptroller & Auditor General (C&AG) is the statutory auditor of all government departments and agencies.Most of the work to support him in this responsibility is carried out by the NAO, which performs both financial auditand value for money audit work. The C&AG reports to Parliament, and in practice the Public Accounts Committee,on the results of his audit work. In so doing, he will draw to the attention of Parliament any significant matters arising

from his work.


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In completing his financial audit work, the C&AG will consider the arrangements put in place by departments to meettheir responsibilities for the regularity of public expenditure. It is likely that this consideration will include examinationof the arrangements in place for departments to satisfy themselves that grants are distributed and consumed for theirdesignated purposes, especially where a department provides substantial grant funding to external bodies. As auditorto a range of government bodies, including non-departmental public bodies, the C&AG is also requested in certaininstances to report to third parties on specific engagements.

Auditor General for Wales

The Auditor General for Wales (AGW) is the statutory auditor for National Assembly for Wales and all Assembly

sponsored public bodies and considers the arrangements in place by the Assembly and its sponsored public bodies tomeet their responsibilities for the regularity of public expenditure. The AGW reports to the National Assembly for Waleson the results of his audit work.

Audit Commission

Under section 28 of the Audit Commission Act 1998 (the Act), the Audit Commission shall, if required by bodies subjectto audit under the Act, make arrangements for certifying claims and returns in respect of grants or subsidies made orpaid by any Minister of the Crown or public authorities to any body subject to audit under the Act.

The responsibilities of grant paying bodies, other bodies subject to audit under the Act, the Audit Commission and theauditors it appoints to undertake claims and returns work are set out in the Audit Commission publication Statementof responsibilities of grant-paying bodies, authorities, the Audit Commission and appointed auditors in relation to grantclaims and returns (February 2002) (www.audit-commission.gov.uk). Under these arrangements it is not necessary

for auditors to have a separate engagement letter as the Statement of responsibilities acts as a memorandum ofunderstanding between all parties. As part of the arrangements the Audit Commission develops certification instructionsafter discussion and agreement with grant paying bodies. These confirm the nature and scope of individual grant claims,the form and wording of the report, the format that a qualification letter might take and the circumstances under whichone might be issued.

H M Treasury

The Treasury has set out the over arching accountability requirements for English government departments inGovernment Accounting 2000 (www.government-accounting.gov.uk), by stating that, Government Departmentsare responsible for ensuring that grants are spent for the purposes for which they were provided.

In particular, Government Accounting 2000 also requires Accounting Officers3 in England to be responsible for ensuringthat the grant is consumed by the recipient on the specific services for which it is authorised. It follows that the

Accounting Officer has to be satisfied that systems are in place within the department to ensure this principle isadhered to.

National Assembly for Wales

In Wales, Government Accounting 2000 is adhered to as a model of best practice. The Treasury has appointed thePermanent Secretary of the National Assembly for Wales as its Principal Accounting Officer (PAO) and his responsibilitiesare laid down in his letter of appointment. The PAO in turn appoints the Chief Executives of the Assembly sponsoredpublic bodies as Accounting Officers.

3 An Accounting Officer is the senior official, normally the permanent head of a government department, who is personally accountable to Parliament for expenditure incurred by his orher department.


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APPENDIX 2

Example of a tri-partite engagement letter

Where a sponsoring body is to be bound into the engagement process, then all references to the grant paying bodyshould also include references to the sponsoring body.

Government Grant Claim/returns the model tri-partite agreement

Addressee details:

(i) The [grant paying body]

(ii) Grant Recipient

Dear Sirs

Government Grant reports/confirmations

We are writing to confirm the terms and conditions on which you have engaged [name of firm] to providereports/confirmations in connection with [description or name of grant] paid by [grant paying body] to [grant

recipient]. These terms and conditions will apply to the reports/confirmations to be supplied for the period [ended/ending ... ] and for subsequent periods unless otherwise agreed in writing. We will write separately to the grant recipientregarding practical matters such as the timing of our work, staffing and our charges. Our invoice will be addressed to[Grant Recipient], who will be solely responsible for payment in full.

Scope of our work

We will complete the relevant work specified below on the schedule (as defined in the offer letter). The schedule is to beprepared by, and is the sole responsibility of [grant recipient].

Our work will comprise the following:

[Details of planned work relevant to the nature of the claim or grant, level of assurance and form and content of reportrequired]

[High level assurance] On the basis of the detailed tests carried out, we will report whether, in our opinion, we haveobtained sufficient appropriate evidence that the amounts shown in the schedule are [presented fairly in all materialrespects in the context of reporting upon this grant claim and in accordance with the terms and conditions set by the grantpaying body].

[Moderate assurance] We will report whether anything has come to our attention arising from the limited tests carriedout (as specified in the schedule) to suggest that the amounts shown in the schedule have not been spent inaccordance with the terms and conditions set by the grant paying body.

[Agreed upon procedures] We will complete the specified limited scope procedures set out below on the attachedschedule. Upon completion of the procedures, we will provide you with a report of our findings. You have both agreedthat the scope of our work, as specified below, is sufficient for your purposes.

[Preparation of any document that [Grant recipient] may be required to submit to [grant paying body] in connectionwith our work will be the responsibility of [Grant recipient]s Directors4, who will also be responsible for ensuring that[Grant recipient] maintains proper accounting records and such other records as may be required by [grant payingbody]. [Grant recipient]s Directors will on request supply us with confirmation of matters affecting our work whichare dependent on the Directors judgement.]

Save as set out above, we will not seek to establish the accuracy, completeness or reliability of any of the information ordocumentation made available to us. Our work will not amount to an audit of financial statements and will not give thesame level of assurance as an audit.

Our audit work on the financial statements of [Grant recipient] is carried out in accordance with our statutory obligations andis subject to separate terms and conditions. This engagement will not be treated as having any effect on our separate dutiesand responsibilities as [Grant recipient]s external auditors. Our audit report on the financial statements is intended for the sole

benefit of [Grant recipient]s shareholders as a body, to whom it is addressed, to enable them to exercise their rights as a bodyin a general meeting. Our audits of [Grant recipient]s financial statements are not planned or conducted to address or reflectmatters in which anyone other than such shareholders as a body may be interested for such purpose.5

4 All references to Directors in this model mean either Directors, Partners, Proprietors, Board Members, Trustees. Company Secretary, or other Authorised Signatory, as appropriate.5 This paragraph is necessary in those situations where the accountants are also the auditors of the grant recipient.


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To the fullest extent permitted by law we do not and will not, by virtue of our reports/confirmations or otherwise,assume or accept any duty of care or liability under this engagement to [Grant recipient] or to [grant paying body]or to any other party, whether in contract, negligence or otherwise in relation to our audits of [Grant recipient]s

financial statements.

Having carried out our work we will issue reports/confirmations addressed to [grant recipient] and [grant paying body]in the form set out in the appendix to this engagement letter, if our findings support this. In determining the form ofour report we will take into account, (though without being bound by it) any form of reporting that the [grant payingbody] has suggested or agreed with the Institute of Chartered Accountants in England and Wales following consultationwith them. We will deliver copies to [Grant recipient] at the same time. This letter will be identified in our reports/confirmations as the tri-partite agreement under which our reports/confirmations have been issued. Our reports/confirmations will be released on the basis that they are not to be copied, referred to or disclosed, in whole or in part,to any other party without our prior written consent, which may be conditional. If we need to qualify our opinion,we will issue a qualified report but will continue to use the agreed form of report for all aspects that are not qualified.

Other matters

Our duties and liabilities in connection with this engagement owed to [Grant recipient] and to [grant paying body]will differ.

[Detail any exclusions and limitations on the firms liability to both the grant paying body and the grant recipient andany relevant qualifications required to satisfy statutory reasonableness criteria. Consider the guidance in the ICAEWsguidance in Technical Release Audit 3/03 on Public Sector Special Reporting Engagements Grant Claims.]. [See suggested

wording in Appendix 7.]

Our duty to [grant paying body] will be limited to delivery of reports/confirmations in the agreed form to enable it tomeet its statutory obligations. Delivery of such reports/confirmations (or the supply of confirmation that we are unableto do so in the agreed form) at any time will discharge that obligation in full. We will not owe [grant paying body]any other duty, in contract, negligence or otherwise, in connection with our reports/confirmations or their preparation.[See alternative wording in Appendix 6.]

This agreement shall be subject to and governed by English law and all disputes arising from, or under, it shall besubject to the exclusive jurisdiction of the English courts.

[Detail or append any other terms and conditions to apply to this work.]

Please confirm, by signing below, your agreement to this letter. Once you have done so, this letter will form a tri-partitecontract between us in respect of the matters covered. If you wish to discuss any aspects of this letter, please contact[name and telephone number].

Yours faithfully

[Name of accountant]

[grant recipient]

[grant paying body]


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APPENDIX 3

Example of a standardised terms of engagement (offered as part of the grantconditions instead of a tri-partite engagement)

Where a sponsoring body is to be bound into the engagement process, then all references to the grant paying bodyshould also include references to the sponsoring body.

The following are the terms of engagement on which the [grant paying body] agrees to engage accountants toperform [a high or medium level of assurance or agreed upon procedures] engagement and report in connectionwith the [name of grant claim]

An agreement between [grant recipient], its reporting accountants and the [grant paying body] on these terms isformed [grant recipient] and the accountant signs and submits to the [grant paying body] a report as set out inClause 3 herein. [NB: The [grant paying body] will not need to sign anything. By publishing this document the [grant payingbody] makes an offer to engage on these terms. Once the offer is accepted by the [grant recipient] and the accountants thenan agreement is formed. If the terms of the standardised engagement letter are to be revised, the [grant paying body]will need to confirm its acceptance of the new terms before an agreement is formed.]

In these terms of engagement:

[grant paying body] refers to the body that is providing the grant funding;

the [grant recipient] refers to the organisation that is required to submit the report to the [grant paying body];

the accountant refers to the [grant recipient]s reporting accountants.

1 Introduction

The [grant recipient] is required to submit to the [grant paying body] reports as set out in Clause 3 below that are alsosigned by an accountant to provide independent assurance. These terms of engagement set out the basis on which theaccountant will sign the report.

2 The [grant recipient]s responsibilities

2.1 The [grant recipient] is responsible for producing the [information], maintaining proper records complyingwith the terms of any legislation or regulatory requirements and the [grant paying body]s terms andconditions of grant (the grant conditions) and providing relevant information to the [grant paying body]on a basis in accordance with the requirements of the grant conditions. The [grant recipient] is responsible

for ensuring that the non-financial records can be reconciled to the financial records.

2.2 The management of the [grant recipient] will make available to the accountant all records, correspondence,information and explanations that the accountant considers necessary to enable the accountant to performthe accountants work.

2.3 The [grant recipient] and the [grant paying body] accept that the ability of the accountant to perform his

work effectively depends upon the grant recipient providing full and free access to the financial and otherrecords and the [grant recipient] shall procure that any such records held by a third party are made availableto the accountant.

2.4 The accountant accepts that, whether or not the [grant recipient] meets its obligations, the accountantremains under an obligation to the [grant paying body] to perform his work with reasonable care. The failureby the [grant recipient] to meet its obligations may cause the accountant to qualify his report or be unableto provide a report.

3 Scope of the accountants work

3.1 The [grant recipient] will provide the accountant with such information, explanations and documentation thatthe accountant considers necessary to carry out his responsibilities. The accountant will seek writtenrepresentations from management in relation to matters for which independent corroboration is not available.The accountant will also seek confirmation that any significant matters of which the accountant should beaware have been brought to the accountants attention.

3.2 The accountant will perform the following work in relation to reports required by the [grant paying body]:


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3.2.1 Grant return: The accountant will [carry out a high/medium level of assurance assignment or performagreed tests] [as set out in the terms and conditions of the grant] and subject to any adverse findingswill produce a report in the form set out in the attached Appendix (these should be in line withICAEW guidance Audit 3/03 on Public Sector Special Reporting Engagements Grant Claims);

3.2.2 Where a [high/medium] level of assurance is required by the [grant paying body], the criteria isidentified as per the Appendix to this letter.

3.2.3 For an agreed upon procedures engagement, the tests are laid out in the Appendix to this letter.

3.3 The accountant will not subject the information provided by the [grant recipient] to checking or verificationexcept to the extent expressly stated. While, the accountant will perform the accountants work withreasonable skill and care, the accountants work should not be relied upon to disclose all misstatements,

fraud or errors that might exist.

4 Form of the accountants report

4.1 The accountants reports are prepared on the following basis:

4.1.1 The accountants reports are prepared solely for the confidential use of the [grant recipient] and the[grant paying body] and solely for the purpose of submission to the [grant paying body] in connectionwith the [grant paying body]s requirements in connection with [name of grant]. They may not be relied

upon by the [grant recipient], or the [grant paying body] for any other purpose except as provided in4.1.2 below;

4.1.2 The [grant paying body] may only disclose the reports to others who may have statutory rights ofaccess to the report. There may be an actual or potential liability to [other bodies] that may arise out ofthe eligibility and/or use of monies by the [grant recipient], and [the others] who will be entitled to relyon the report;

4.1.3 Neither the [grant recipient], nor the [grant paying body] [nor others] may rely on any oral or draftreports the accountant provides. The accountant accepts responsibility to the [grant recipient], the[grant paying body] for the accountants final signed reports only;

4.1.4 The accountants reports must not be recited or referred to in whole or in part in any other document(including, without limitation, any publication issued by the [grant paying body]) without the priorwritten approval of the accountant;

4.1.5 Except to the extent required by court order, law or regulation or to assist in the resolution of any courtproceedings the accountants reports must not be made available, copied or recited to any other person(including, without limitation, any person who may use or refer to any of the [grant paying body]spublications);

4.1.6 Except as provided by 4.1.2 herein, the firm of accountants, its partners and staff neither owe noraccept any duty to any other person (including, without limitation, any person who may use or refer toany of the [grant paying body]s publications) and shall not be liable for any loss, damage or expenseof whatsoever nature which is caused by their reliance on representations in the accountants reports.

5 Liability Provisions

5.1 The accountant will perform the engagement with reasonable skill and care and acknowledges that it will beliable to the [grant recipient], the [grant paying body] for losses, damages, costs or expenses (losses) causedby its breach of contract, negligence or wilful default, subject to the following provisions:

5.1.1 The accountant will not be so liable if such losses are due to the provision of false, misleading orincomplete information or documentation or due to the acts or omissions of any person other than theaccountant, except where, on the basis of the enquiries normally undertaken by accountants withinthe scope set out in these terms of engagement, it would have been reasonable for the accountant todiscover such defects;

5.1.2 The accountant accepts liability without limit for the consequences of its own fraud and for any otherliability which it is not permitted by law to limit or exclude;

5.1.3 Subject to the previous paragraph (5.1.2), the total aggregate liability of the accountant whether incontract, tort (including negligence) or otherwise, to the [grant paying body] and the sponsoring body,arising from or in connection with the work which is the subject of these terms (including any additionor variation to the work), shall not exceed the amount of[To be discussed and negotiated];


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5.2 The [grant recipient] and the [grant paying body] agree that they will not bring any claims or proceedingsagainst any individual partners, members, directors or employees of the accountant. This clause is intendedto benefit such partners, members, directors and employees who may enforce this clause pursuant to theContracts (Rights of Third Parties) Act 1999 (the Act). Notwithstanding any benefits or rights conferredby this agreement on any third party by virtue of the Act, the parties to this agreement may agree to varyor rescind this agreement without any third partys consent. Other than as expressly provided in these terms,the provisions of the Act is excluded;

5.3 Any claims, whether in contract, negligence or otherwise, must be formally commenced within [years] afterthe party bringing the claim becomes aware (or ought reasonably to have become aware) of the facts whichgive rise to the action and in any event no later than [years] after any alleged breach of contract, negligenceor other cause of action. This expressly overrides any statutory provision which would otherwise apply;

5.4 This engagement is separate from, and unrelated to, the accountants audit work on the financial statementsof the [grant recipient] for the purposes of the Companies Act 1985 (or its successor) or other legislation andnothing herein creates obligations or liabilities regarding the accountants statutory audit work, which wouldnot otherwise exist. [equivalent paragraphs where grant recipient is other than a Companies Act entity].

6 Fees

The accountants fees, together with VAT and out of pocket expenses, will be agreed with and billed to the [grantrecipient]. The [grant paying body] is not liable to pay the accountants fees.

7 Quality of Service

The accountant will investigate all complaints. The [grant paying body] or the [grant recipient] have the right to takeany complaint to the Institute of Chartered Accountants in England and Wales (the ICAEW). The [grant paying body]or the [grant recipient] may obtain an explanation of the mechanisms that operate in respect of a complaint to theICAEW at www.icaew.co.uk/complaints or by writing to the ICAEW. To contact the ICAEW write to the ProfessionalStandards Office, Silbury Court, 412-416 Silbury Boulevard, Central Milton Keynes, MK9 2AF.

8 Providing Services to Other Parties

The accountant will not be prevented or restricted by virtue of the accountants relationship with the [grant recipient]and the [grant paying body], including anything in these terms of engagement, from providing services to other clients.The accountants standard internal procedures are designed to ensure that confidential information communicated tothe accountant during the course of an assignment will be maintained confidentially.

9 Applicable law and jurisdiction

9.1 This agreement shall be governed by, and interpreted and construed in accordance with, English law.

9.2 The [grant recipient], the [grant paying body] and the accountant irrevocably agree that the courts ofEngland shall have exclusive jurisdiction to settle any dispute (including claims for set-off and counterclaims)which may arise in connection with the validity, effect, interpretation or performance of, or the legalrelationship established by this agreement or otherwise arising in connection with this agreement.

10 Alteration to Terms

All additions, amendments and variations to these terms of engagement shall be binding only if in writing andsigned by the duly authorised representatives of the parties. These terms supersede any previous agreements andrepresentations between the parties in respect of the scope of the accountants work and the accountants report orthe obligations of any of the parties relating thereto (whether oral or written) and represents the entire understandingbetween the parties.


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APPENDIX 4

Illustrative contents of a report

These include:

Addressee(s);

Identification of the applicable engagement letter and specific information on which the work has beenperformed and tests have been applied;

Under an agreed upon procedures engagement, a statement that the procedures/tests performed were thoseagreed with the grant recipient (and grant paying body);

Under an agreed upon procedures engagement, a statement that, had the accountants performed additionalprocedures, an audit or a review, other matters may have come to light that would have been reported;

Under a high or moderate assurance engagement, a statement of the procedures necessary to provide theagreed level of assurance;

Identification of the purpose for which the procedures/tests were performed;

Listing of the specific procedures/tests performed (procedures may include: inquiry and analysis; recomputation;comparison and other clerical accuracy checks; observation; inspection; and obtaining confirmations); and

Description of the accountants findings, including sufficient details of errors and exceptions found;

Statement that the procedures/tests performed do not constitute either an audit or a review;

Statement that the report is restricted to those parties that are bound by the terms of the engagement letter;

Statement that this engagement is separate from the audit of the annual financial statements and that thereport relates only to the matters specified and that it does not extend to the grant recipients annual financialstatements taken as a whole;

Name and signature of reporting accountants; and

Date of the report.


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APPENDIX 5

Examples of types of wording or opinions that are unacceptable to accountantsproviding special reports

1. Wording giving an opinion on a matter as a statement of fact when that matter, by its nature, is inherently uncertainor a matter of judgement

Examples include we certify, wording which accountants would not normally (except where required to by legislation)be in a position to use as it implies complete accuracy. Accountants also avoid using words or phrases such as corrector accurate or we have ensured for assertions that can never be made with absolute certainty. However, accountantscan certify that they have performed an examination in accordance with agreed criteria.

2. The use of the term true and fair when financial information is not prepared under the framework of FinancialReporting Standards

The use of other phrases such as present fairly or properly prepared are avoided unless they are clearly placed incontext, for example, present fairly in all material respects in the context of reporting upon this grant claim in accordancewith....

3. Fair and reasonable opinions

Accountants generally avoid giving fair and reasonable opinions as they are normally associated with investment banks

making recommendations to shareholders in respect of transactions. There is also the risk that they might be construedas valuations, which can give independence problems for accountants.

4. Wording that might suggest that the grant paying body is able to rely on the statutory audit of the grant recipient

Accountants avoid any possibility of a link becoming established between the special report and the statutory auditreport. For example, they avoid phrases such as we audited the accounts and we... or during our audit we ....

5. Opinions that are open-ended or otherwise cannot be supported by the work carried out by the accountants

Accountants avoid phrases that are open-ended unless the scope of the work is clear by reference to the engagementletter or relevant standards or guidance, for example phrases such as we obtained all the explanations we considerednecessary or we have carried out such tests/performed such procedures as we considered necessary are not acceptable.

Accountants do not give opinions that are not supported by the work carried out. For example, assertions aboutcompleteness that cannot be supported by a limited amount of work that has been performed. Accountants could use,we have performed the tests laid out in the schedule/work programme which is attached to the engagement letter. Thesewords would link the report back to the scope of work. Other examples of inappropriate reporting include providingpositive opinions on solvency or prospective information which is inherently uncertain. In the same way, it is impossible

for accountants to be able positively to state whether receipt of a grant has created or safeguarded value for moneycan never be given as VFM is an intangible concept. However, it is reasonable to determine whether or not a client hassought VFM by reference to specific criteria set by the grant paying body. A report can only give assurance on the basisof the information available at the time that it is provided.

6. Opinions which accountants do not have the necessary competence to provide

Accountants avoid opinions that are not within their professional competence, for example an opinion of an actuarialnature or a property valuation, where there has been no input from a relevant expert. Another example of this wouldbe the appropriateness of insurance cover.

7. Opinions on matters beyond the accountants knowledge and experience

Accountants avoid giving any opinion about how appropriate operational information or records being held ormaintained by the grant recipient are, where the information or records relate to matters concerning the specificoperational circumstances of the grant recipient which are beyond the scope of the accountants professional knowledgeand experience.

8. Wording that is open to interpretation

Certain words or phrases might be open to interpretation and these are only appropriate to use in clearly definedcircumstances where the meaning is well established and understood. The word review is best avoided as it can beunclear what has been reviewed and the extent of the work. Words to avoid can also include accounting terms, forexample, net current assetsin sectors where specific adjusting items might be recognised when assessing liquidity.

Accountants always define terms if the meaning might be unclear and do not otherwise use such terms. The word

material is avoided unless this can be referenced to a clear definition.

9. Reports on internal controls

Reports on internal controls are only possible in well defined and well established circumstances, where the reportingarrangements have been agreed in a clear manner. Reports on systems and controls are avoided where there areinadequate criteria specified. Reports include an indication of the limitations of a system and are related to a point


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in time or period. Guidance is given in the APB Briefing PaperProviding assurance on the effectiveness of internal control.It is also useful to clarify in writing the responsibilities of management and in particular, to indicate that they areresponsible for identifying, evaluating and managing new and changing risks on an ongoing basis.

10. Reports without addressees

Accountants do not provide reports where it is unclear to whom the report is being provided.

11. Reports on financial information which is not explicitly approved by the grant recipient

The grant recipient has responsibility for the financial information being provided and it is, therefore, not appropriatefor the accountants to report on financial information unless it is clear that this has first been approved by the grantrecipient.

12. Qualifications in the covering letter only

Accountants provide qualifications in their covering letter where a pre-printed report (with wording that is acceptable)is requested. In this case, a

Audit 03 03 Grant Claims

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Transcript of Audit 03 03 Grant Claims