The domino effect

Auditing a working men’s club is usually an interesting assignment, but it is also high risk. A firm may deal with both incorporated and unincorporated bodies which require an audit. Unincorporated clubs are not covered by the new regulations, even though an audit by a registered practitioner may be a requirement of the constitution of a particular club.

The majority of incorporated clubs will be registered under either the Friendly Societies Act 1974 or, more likely, the Industrial and Provident Societies Act 1965. Work carried out on clubs registered under either of these Acts becomes a special category audits for regulation purposes. This means there is a greater probability that it will be selected for review in the event of a Joint Monitoring Unit visit.

When undertaking a special category audit, the following risk areas should be considered at the planning stage to ensure that a quality file is presented at the end of the job:

Independence

The Friendly and Industrial and Provident Societies Act 1968 and the Friendly Societies Act 1974 preclude a firm from accepting an auditing appointment if it employs an officer or a servant of that club.

Firms need to instigate procedures to ensure that none of their staff, including non-professionals, take up a position with any club for which they act, even in an honorary post. This can cause problems either because they have employees who are attempting to supplement their salary by taking up a position behind the bar, or because a member of staff introduced the club to the practice in the first place through a personal connection.

Stock taking

Although most clubs will have a professional stock valuation, this does not absolve the firm of responsibility for ensuring that the figure is materially correct.

A test programme needs to be designed and the firm must also consider whether it can rely on the stock count undertaken by the external agency. It should be noted that there have been several instances where the steward and the stock-taker have colluded to present false reports in order to cover a fraud.

Income assessment

This is the main audit risk. Most clubs will have many and various forms of income and a large proportion of these will be cash, which can make their audit a nightmare.

To make things even more complex, there is a high incidence of fraud discovered in such audits, often teeming and lading. The auditor must ensure that the tests on income are devised to give maximum opportunity for this to be discovered.

The firm must encourage the club to set up systems for recording income from all sources so as to minimise the risk of defalcation. This will usually involve committee members and/or members of the club checking the income at the time it is being recorded, such as when the fruit machine is emptied, to ensure that it is an accurate record.

In most cases, checking that the system is operating properly, combined with an analytical review, will provide the main audit comfort for completeness of everything except the bar income.

Where the club has an external stock valuation, the regular reports, along with the till rolls, can provide some comfort with regard to completeness of bar income. Nevertheless, the auditor needs to consider whether there is any alcohol being sold which has not been recorded as a purchase in the books. They also have to consider the level of stock deficits, if any, and try to determine whether there are genuine reasons for these or whether they may be caused by sales not being recorded.

Standard statement

Another area of risk stems from the new statement of auditing standard on law and regulations.

The auditor needs to have a working knowledge of the legislation surrounding the club. And not just the Act under which it is registered, but also such things as the Licensing Act 1964, which, if not complied with, could cause significant problems for the club.

The golden rule

Finally, one thing you should always remember is to make sure, before you attend any annual general meetings, that you have a detailed knowledge of the make-up of repairs and renewals and sundry expenses.

My experience on review, backed up by discussions with certain JMU officers, suggests that the quality of the work done by many firms on these assignments is below an acceptable standard. However, if properly planned, there is absolutely no reason why these high risk audits can not be both interesting and rewarding.

Valerie Steward (below) is technical director of consultancy SWAT and the author of the newly-published Clubs and Associations: An Industry Accounting and Auditing Guide, available to readers of Accountancy Age at the special price of #50.00 post free (normal price #55.00) by calling Accountancy Books on 01908 248000 – please quote ref: PG4M.