My name is Constance Kawelenga and I am a registered Chartered Accountant and Auditor, and today we’re going to talk about the main issues that we as auditors pick up when we audit the trust accounts for attorneys.
The trust audit for an attorney is guided by the International Standard on Assurance Engagements (ISAE) 3000 (Revised) for reasonable assurance engagements.
“Reasonable” in audit describes the degree of confidence and means that the auditor has obtained sufficient appropriate audit evidence to reduce the audit risk to an acceptably low level.
What is the assurance referring to in this context? Well – the fact that the trust accounts were maintained in compliance with the Legal Practice Act and the Rules.
What are the issues auditors usually pick up?
1. The treatment of VAT on bank charges is incorrect
The treatment of VAT on bank charges is important because it is pivotal to the calculation of the bank charges to interest ratio (required reporting), as well as the request for audit fee and bank charges refund.
In simple terms:
a) If you are a registered VAT vendor, you claim the VAT on bank charges from SARS, therefore you should exclude the VAT amount from your bank charges reported.
b) In the Attorney’s Annual Statement on Trust Accounts, we are required to report the percentage of bank charges to interest. If we incorrectly include VAT, then this ratio is overstated. It reflects how much of bank charges can be recovered.
c) In the request for a refund of bank charges and audit fees, we are also required to indicate the bank charges. If an attorney is VAT registered and they incorrectly include VAT, then essentially they are double dipping (getting a refund both from Legal Professions Council and SARS).
2. Books are not balanced monthly
In our audit report, we have to expressly stated that the attorneys’ books are balanced monthly after observing this. For that reason, the audit covers the period beyond the year end, up to the last monthend before the audit sign off.
That means if the books for the month before that are not balanced, the auditor cannot state otherwise. Same reason why the attorney cannot bring their bank statements and ask the auditor to (a) compile their books and (b) sign off the audit.
Besides the conflict of interest from doing both, there is the ethical fact that the auditor cannot lie and state that the books were balanced monthly when they know for a fact that the attorney only brought the bank statements just before the audit.
3. Creditors’ reporting is not strong
For creditors reporting to be adequately strong, the following criteria needs to be met:
a) Transactions were appropriately identified as trust account transactions;
b) Trust account transactions were made in accordance with mandates and supported by adequate documentation and narrative to identify from whom funds were received, and for whose credit;
c) Deposits and withdrawals from the trust bank accounts were to, or for, a trust creditor; and
d) Transfers to the legal practitioner’s business bank accounts were only in respect of monies to be due to the legal practitioner.
4. Ledgers are not structured for optimal reporting to the Legal Professions Council
For us to be able to do that clearly, we need to ensure that your ledgers distinguish trust creditors from all other creditors (in other words, creditors from whom you receive money in advance and whose funds should be kept safely in the trust account unless there is a justifiable reason for moving it).
A common problem is the inability to pull a monthly report of trust creditors, which means we often have to do manual workarounds. When we do the audit we need to compare monthend balances of trust funds vs trust creditors, so if trust creditors are not clearly identifiable that is problematic.
5. Attorneys leave it until late to have their audits done
An annual audit report is prepared and must be submitted within 6 months of the attorneys’ financial year-end. For a firm that is commencing practice for the first time, then it must also be submitted within 6 months of commencing practice.
Unfortunately, many attorneys leave the audit preparation until literally the last minute then expect auditors to either bend over backwards to do an audit on time or lie. Remember, like we said before, we have to state that the trust books are maintained in the correct format, updated monthly and that the rules and act are adhered to.
For that reason, an attorney who brings bank statements at the 11th hour and request an audit report is simply signalling that they have not complied with the requirement to maintain monthly records, and therefore they should expect a qualification to that effect on the audit report.
Conclusion
In conclusion, I would advise attorneys to do the following at least in order to enhance their chances of a clean audit:
- Set up appropriate bank accounts for their trust type
- Appoint an accountant who understands the rules and act accounting requirements and can set up the records in such a way that compliance is easy
- Start preparing for an audit as soon as possible after the end of year, and develop a standard pack for their auditor.
