Welcome to part eight in this series. In this eighth part of the series, we will be focused on external reporting obligations. 

First, we'll review the financial reporting obligations the organisation has to the ACNC and other external stakeholders. Second, we'll discuss what directors are confirming in the responsible persons' declaration, which is part of the financial reporting to the ACNC, including the question the directors should ask before agreeing to sign the declaration. Finally, we'll discuss the purpose of an external audit and the types of audit opinions that may be provided. 

To begin, directors need to be aware of all of the external reporting obligations that the organisation has, including the processes in place to ensure compliance. Organisations registered with the ACNC must report annually to the ACNC. In addition, under the terms of funding agreements, organisations will likely have reporting obligations to government funding agencies such as Creative Australia or state or local government authorities and private foundations or donors. These obligations may extend beyond financial statements and include other metrics such as box office receipts, audience numbers, or artist engagement. 

Let's take a closer look at the important annual reporting obligations to the ACNC. First, all organisations registered with the ACNC must lodge an annual information statement or AIS, annually. The AIS includes basic financial information such as revenue and assets, and other operational details, such as a description of the organisation's activities and governance arrangements. The standard reporting period is the financial year, 1 July to 30 June, unless the organisation has obtained approval to lodge for a different period. The AIS must be lodged within six months of the end of the reporting period. 

In addition to the AIS, organisations that are classified as medium or large organisations by the ACNC, must also lodge an annual financial report or AFR. Small organisations are exempt from this requirement. The revenue of the organisation determines whether it is classified as small, medium, or large. At the time of recording, organisations with revenue under half a million dollars are small. Those with revenue between $500,000 and 3 million are medium, and those with revenue greater than 3 million are large. Check the ACNC guidelines for the current revenue thresholds. 

Like the AIS, the AFR must be lodged within six months after the end of the reporting period, and must include the following. First, the three primary financial statements being the statement of profit or loss and other comprehensive income, the statement of financial position, and the statement of cash flows. We have discussed these in other parts of this series. Second, a statement of changes in equity. We have not discussed this statement, but it simply explains the changes in equity section of the balance sheet during the year. Third explanatory notes to the financial statements, which outline the basis on which the accounts have been prepared and the key accounting policies used. Finally, a responsible persons' declaration. 

This is a critical declaration that every director is jointly responsible for authorising the signing of. In this declaration, the directors are confirming a few key matters. First, that the financial statements have been prepared in accordance with the requirements of the ACNC Act, including complying with Australian accounting standards. Second, that they give a true and fair view of the organisation's financial position and performance for the year. Third, that there are reasonable grounds to believe that the organisation will be able to pay its debts as and when they become due and payable. This is known as the solvency declaration. 

Authorising the signing of the responsible persons' declaration is one of the most important duties of a director. While the board may elect to delegate to a board subcommittee, such as the Audit and Risk Committee, the duty to perform a detailed review of the financial statements, ultimately, every single director is jointly responsible for making the declaration. Therefore, it's critical that every director engages in the process to review and approve the AFR. You cannot leave it to the accountants of the board, the members of the Audit and Risk Committee, or indeed the external auditor. 

To assist you with this process we'll now review some questions a director should ask of management or matters they should consider before agreeing to sign the declaration. Has the AFR been prepared in accordance with ACNC requirements and the Australian Accounting Standards? As a director, do I understand and support the major estimates and judgements that management have made in preparing the financial report? 

With regards to the solvency declaration, have management prepared a cashflow forecast that shows that the organisation will have enough cash to pay its debts as and when they fall due over the next 12 months. If the cashflow forecast includes assumptions about receipts from sponsorships, donations, or government grants, have these been secured in written agreements? If not, is there a reasonable basis to believe that the funds will be provided? 

You should also ask management to confirm that all obligations with respect to taxes, employee superannuation, ACNC lodgements, grant acquittals are up to date. Finally, the director should discuss the draft financial statements with the auditor, to learn if any issues or concerns have been raised during the audit. 

When the AFR is lodged with the ACNC, it must be accompanied by a report from an external auditor. So what is an external audit and what is its purpose? The purpose of an external audit is to give an independent opinion as to whether the financial statements have been prepared in accordance with the requirements of the ACNC Act, including complying with Australian accounting standards and give a true and fair view of the organisation's financial position and performance for the year. The directors confirm this when they sign the Responsible Persons' Declaration. 

An external audit provides an independent opinion on these matters for the members or shareholders of the organisation. It is important to note that the directors sign the responsible persons' declaration before the auditor signs their audit opinion. This is done deliberately to ensure that directors take prime responsibility for the financial statements. The interests of directors and the auditor are aligned, but you cannot just rely on the opinion of the auditor. You must make whatever inquiries are necessary to form your own view. 

Under ACNC rules, the AFR for large organisations must be audited, and for medium organisations, it must either be audited or reviewed by an auditor. What is the difference between an audit and an audit review? An audit provides reasonable assurance that the financial statements are free from material misstatement. The auditor will provide a positive opinion regarding this. For example, in our opinion, the financial statements give a true and fair view. An audit review, on the other hand, provides lower level of limited assurance. The report from the auditor will provide a negative opinion. For example, based on our review, we are not aware of any material misstatements. 

Due to their limited scope, audit reviews are generally faster and lower cost than a full audit. However, directors of medium sized organisations should also consider the requirements or expectations of other stakeholders, such as government funding bodies or grant providers, when deciding whether to have an audit or audit review performed. 

With an audit, different types of opinions may be given by the auditor. An unmodified opinion otherwise known as an unqualified or clean opinion is the best outcome. The auditor is confirming that the financial statements give a true and fair view in all material respects. 

When the audit opinion is qualified, this means that the auditor has identified a specific issue that is material, but only affects us part, and not all, of the financial statements. This typically occurs when there has been a departure from an accounting standard or where the auditor cannot get sufficient evidence in a particular area. 

An adverse audit opinion is very serious, as it means that in the opinion of the auditor, the financial statements do not give a true and fair view, and therefore are fundamentally unreliable. A disclaimer of opinion is also very serious and occurs when the auditor cannot provide any opinion. This may occur if the financial records are missing or incomplete or the auditor has been restricted from accessing the records, or where significant uncertainty exists that cannot be resolved. 

As part of their audit procedures, an auditor will test the adequacy and effectiveness of the organisation's financial and technology internal controls. The auditor will report their findings to management and the directors. 

To summarise the key learnings from this part of the series. First we reviewed the financial reporting obligations the organisation has to the ACNC and other external stakeholders. Second, we explored what the directors are confirming in the responsible persons' declaration and questions or matters a director should consider before agreeing to approve the signing of the declaration. Finally, we learned the purpose of an external audit and the types of audit opinions that may be provided.