Trustees should challenge whether the annual report, reserves explanation and fund balances give a fair, consistent account of the charity’s position. The finance team and accounts preparer can assemble the information, but the board needs to understand the significant judgements before approval.
For many charities, the annual report and accounts are one of the most important public accountability documents the organisation produces. They are read by trustees, funders, donors, regulators, banks and other stakeholders who want to understand not only what the charity spent, but how well it is governed, how funds are being used and whether the charity is financially sustainable.
For trustees, this means charity audit and annual reporting need to be approached with proper planning.
A well-run audit process should not feel like a last-minute scramble at the end of the year. It should help trustees and management identify reporting issues early, strengthen financial oversight and present the charity’s position clearly.
The Trustees’ Annual Report matters
The Trustees’ Annual Report should not be treated as a standard document copied forward each year.
It should explain the charity’s story clearly.
A good report usually helps the reader understand:
- what the charity exists to do;
- what activities it carried out during the year;
- what it achieved;
- how funds were used;
- what risks trustees considered;
- how reserves are being managed;
- and what the charity is planning next.
The report does not need to be promotional. In fact, the most credible charity reporting is often balanced, specific and honest.
If a charity has faced funding pressure, staffing challenges, falling reserves or operational change, the report should explain those matters clearly. If the charity has delivered strong impact, that should also be supported by evidence rather than broad statements.
This is where audit readiness and good reporting discipline are closely connected.
If the Trustees’ Annual Report tells one story but the accounts suggest something different, stakeholders may lose confidence. For example, if the report says the charity is financially strong but the accounts show falling reserves and cash-flow pressure, trustees should explain the position properly.
Reserves reporting needs to be more than a standard paragraph
Reserves are one of the most important areas in charity reporting.
Trustees should be able to explain:
- what level of free reserves the charity holds;
- why that level is considered appropriate;
- whether reserves are above or below target;
- what action trustees are taking where reserves are outside the target range;
- and how restricted funds affect the overall reserves position.
A generic reserves policy is rarely enough.
Funders, donors and regulators want to see that trustees have thought carefully about the charity’s financial resilience. This is especially important where the charity depends on restricted grants, short-term funding, fundraising income or public-sector contracts.
A charity audit firm can challenge whether the reserves policy is properly explained and whether the narrative is consistent with the numbers in the financial statements.
Restricted fund accounting is a common area of difficulty
Restricted funds are often one of the most challenging areas for charities.
The accounting itself can become complicated where the charity has multiple grants, funder conditions, project restrictions or income received in advance.
Common issues include:
- restricted income not being tracked separately;
- expenditure being charged to the wrong fund;
- funder conditions not being clearly documented;
- carried-forward restricted balances not being properly explained;
- and differences between internal project reports and the statutory accounts.
These issues can cause delays during the audit.
They can also affect funder confidence if the charity cannot demonstrate how restricted money has been used.
Trustees should ensure that restricted funds are monitored throughout the year, not reconstructed after year end. Good fund accounting makes the audit smoother and gives trustees better visibility over the charity’s obligations.
Internal controls are part of trustee governance
Internal controls are not just a finance-team matter.
They are part of good governance.
Trustees remain responsible for ensuring that appropriate controls are in place to safeguard the charity’s assets, manage risk and support reliable financial reporting.
In practice, this does not mean creating unnecessary bureaucracy. Many charities operate with limited resources and small finance teams.
But trustees should still ask practical questions:
- Who can authorise payments?
- Are bank reconciliations prepared and reviewed regularly?
- Are restricted funds monitored separately?
- Are grant conditions tracked properly?
- Are budgets compared to actual results?
- Are payroll and pension submissions reviewed?
- Are expenses and supplier payments properly approved?
- Are conflicts of interest and related-party transactions recorded?
Where controls are informal or heavily dependent on one person, the charity may be exposed to avoidable risk.
A good audit process can help identify weaknesses and provide practical recommendations for improvement. The auditor does not take over trustee responsibility, but audit findings can help trustees strengthen oversight.
Frequently asked questions
When does a charity need a statutory audit?
Whether a charity requires a statutory audit depends on factors such as income, assets, legal form, governing document requirements and the rules applying in the relevant UK jurisdiction.
The thresholds can change, so trustees should check the latest Charity Commission guidance and take professional advice before concluding whether an audit or independent examination is required.
What is the Charities SORP?
The Charities Statement of Recommended Practice sets out how charities preparing accruals accounts under UK GAAP should prepare and present their accounts.
It covers areas such as fund accounting, income recognition, expenditure, trustees’ annual reports, reserves and disclosure requirements.
Does SORP 2026 apply to all charities?
SORP 2026 applies to charities preparing accruals accounts under UK GAAP for accounting periods beginning on or after 1 January 2026.
Charities preparing receipts and payments accounts are outside the SORP framework, although trustees should still ensure their reporting is clear and compliant with applicable rules.
What should trustees do if the auditor raises internal control weaknesses?
Trustees should consider the findings carefully, agree appropriate actions, assign responsibility and monitor progress.
Not every control point will require a complex solution. Often, practical improvements such as clearer approvals, better reconciliations or stronger review processes can make a significant difference.
How often should a charity review its reserves policy?
A charity should normally review its reserves policy at least annually as part of the reporting and budgeting cycle.
The policy should reflect the charity’s circumstances, funding model, risks, commitments and future plans.
Ask trustees to resolve the judgement, not reproduce the schedules
The finance team and external accountant can prepare supporting schedules. Trustees should focus on the assumptions, significant uncertainties and decisions that require their approval. Ask whether unrestricted resources cover commitments, whether restricted funding has been used correctly and whether the annual report explains the financial position fairly.
Use the approval meeting to resolve the important judgements
Ask whether the narrative fairly explains the financial position, whether reserves calculations and restrictions support the plans described, and which uncertainties need disclosure. Record the reasons for material decisions. Trustees should challenge the conclusions rather than reproduce schedules already prepared and reviewed by the finance team or accountant.
A financial statement audit considers controls relevant to its purpose. It is not a comprehensive assurance opinion on governance or every internal control. Agree any additional review separately. Use our preparation checklist for records and timetable, and the SORP transition guide for first-year reporting changes.
Discuss your next step
Tell us your charity’s year end, funding arrangements and approval timetable. We can discuss audit scope and preparation responsibilities with your finance team and trustees. Explore Accendo’s charity audit service
Reviewed 26 September 2026. General guidance; the appropriate approach depends on your organisation and circumstances.
Check the Charity Commission’s September 2026 threshold update and use our detailed charity audit preparation checklist.
Related guide: What affects the cost of a charity audit?.
Editorial structure reviewed 21 October 2026. Technical guidance was last reviewed on the date stated above; check current official guidance for your reporting period and circumstances.