TRUST AUDIT

A Trust audit is usually done by a certified auditor to ensure the proper mintenance of financial records of this Trust or NGO and be legal standards.

 

Who performs the audit of the trust?
Typically, trust audits are conducted by a professional auditor or accountant. The following is a stepwise analysis of the whole procedure.
 

• Duties of the Trustees: People or groups who are responsible for the management of a trust property are called trustees. They are also responsible for the safekeeping and presentation of all relevant documents and compliance with the rules governing the trust operations.
   

• Appointment of an Auditor/Accountant: After creation of the trust, the trustees may engage an auditor/accountant for purposes of financial management. This step may be mandatory as provided in the governing document of the trust (trust deed), or it may be petitioned by the beneficiaries.
   

• Independent Evaluation: Here, the role of the auditor or accountant of the trust is purely for assessment of the financial activities of the trust as an external third party. The objective is to confirm that all is in order and that the assets of the trust are in the right hands, that of the designated trustees.
   

• Preparing the Report: After the auditor does the above processes, he or she will be required to write a report that states the findings of that review. Where these concerns are regarding whether or not funds are under proper management, the trustees as well as the Master of High Court, when necessary, should be warned.
   

• Right to Audit: Every beneficiary of the trust has the right to demand an audit of the trust even where this is not provided in the trust deed. This is done so because it is expected that their interests will not be ignored and that the accounts are presented accurately.
   

In other words, it can be said that trust audits are aimed at examining the effectiveness of trustee management and reporting of trust assets by an auditor or an accountant.
 

Why is a trust audit important?

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A trust audit is essential for a number of factors that promote the success and honesty in the management of trust property. Here’s a look at why these audits are necessary:
 

1. Guarantees Abidance by the Relevant Rules and Regulations
Trusts are expected to follow certain rules and regulations to be able to function. A trust audit will confirm that all transactions for the trust are done within the legal scope in a bid to avoid any penalties or legal issues.
 

2. Promotes Openness
Proper trust audits contribute to openness in the control of the trust funds. This enables the beneficiaries to see how their funds are being spent and creates confidence in the trustees from the beneficiaries. There is a need to avoid any doubts or disagreements in trust management; hence there is a need for openness.
 

3. Safeguards the Rights of the Beneficiaries
It is the responsibility of the trustee to ensure that the beneficiary gets the maximum benefit from the trust. An audit evaluates how effectively the trustee’s duty is performed when it comes to asset allocation and other important decisions for the trust’s beneficiaries.
 

4. Detects and Corrects Misappropriation or Misuse
Trust audits can disclose any form of neglect or mishandling of trust property and assets. In the event of mismanagement or delays caused by the mismanagement of funds, which create adverse effects, an audit can pinpoint the error or catch the deficiency and make fixes before it creates more trouble.
 

5. Increases Trust
Trustees tend to be more careful and prudent in the management of the assets of the trust when they know that there will be an audit of the trust’s activities. This concern helps to make them perform their duties in a more responsible manner.

6. Provides Economic Assessment

Further, a trust audit helps in one’s understanding of the financial status of the trust. It analyzes whether the investments are worthwhile, and it also identifies the possibility of improving management for the funds.
 

Therefore, addressing enforcement of regulations, eliminating vagueness, protecting the rights of the beneficiaries, identifying errors, enhancing accountability, and rendering economic analysis are some of the reasons as to why carrying out a trust audit is very important.

 

Who conducts the audit?

Professional auditors or audit-focused firms conduct audits of the financial records. Break down those professionals into two broad groups of auditors:
 

External Auditors. These are the auditors who render services to the management of the firm but are not its employees. Generally, such professionals come from large, well-known certified public accounting (CPA) firms. The corporations hire these specialists to ensure that the financial statements prepared comply with certain laws and other regulations as prescribed. The primary advantage of such external auditors, who are not attached to that particular company, is that they will give an objective view of the financial standing of that particular entity.
 

Internal Auditors. These are the auditors who are taken as workers in a particular organization. They are concerned with the appraisal of the respective internal systems and processes as well as the regulatory framework of the organization. Internal audit assists management in establishing possible improvements in the organization geared towards operational effectiveness.

In conclusion, it must be emphasized that an audit is performed either by outside professional auditors who are not employees of the organization or by internal auditors who are employed by the organization.

 

How often should a trust be audited?

 

It is, in most instances, a condition attached to the trust that it should be audited at least once within every financial year. This is aimed at assuring that all financial transactions of the Trust are carried out in an orderly manner and in compliance with the relevant laws.

The following illustrates in detail how the above is done stepwise.
 

Necessity of the Audit: The rationale for the need of an audit on a trust is to make sure that all transactions are recorded and that expenditures do not exceed the limitations set down by the trust deed. This is the aspect, that ultimately protects the interests of the beneficiaries.
 

Legislation & Guidelines: In most of the jurisdictions around the world, provisions have been made in the laws for a mandatory annual audit of trusts. This type of information ensures better control of the trust, as well as the trust management is held responsible.
 

Trustee Duties: Great care should be taken in the execution of the office of the trustee or the trust managing agent. This is also due to the management of the trust, which has in place an annual third-party appraisal.

Uncovering Problems: Problems or issues are most of the time encountered in the course of the work but are mitigated through systematic checkpoints; hence, they can be managed by persons concerned before they escalate to serious problems.

 

Comfort to the Beneficiaries: The very fact that the trust will still be in control and supervision of the finances does not pose any risk to the beneficiaries. In fact, their trust in the administration of their assets will only increase.

At the end of the day, there should be an audit every year because trust needs to be validated that it is effectively managed.

 
How is trust audit carried out?
 

1. Trust Accounts Defined
A trust account is a type of specialized bank account into which clients’ funds are deposited and held in trust by a legal practitioner, usually a lawyer. The practitioner thus must take special care in dealing with these funds to guarantee that the clients only benefit from these amounts.
 

2. Supplying Defence Records Requisite Still Awaiting
The legal practitioner responsible for the said trust account shall keep and maintain the most accurate and current records of all activities undertaken. This entails accounting for every deposit and every withdrawal, as well as any charges incurred in the process. These records are critical in the auditing process.
 

3. Reports’ Modifications along with Honoring Their Timeframe Post Completion of Statutory Requirements
After the completion of the records, the next stage is to prepare the books and present them to the external auditor. The external auditor verifies the records submitted for purposes of ascertaining the correctness of the recording as well as the compliance with relevant laws.
 

4. Performing Tests
Several tests are performed by the auditor on trust accounts for which the auditor has to provide a reasonable assurance:

 

-Current assets of trust and current liabilities of trust: The auditor believes that, during the period of trust naira transactions, the closing balance of the trust cash book is equal to the trust ledger client amount due for the period.
 

-Cash book to bank reconciliation: The auditor reconciles the closing balance in the cash book (a book of records of transactions) with the closing bank balance and ensures the balances agree.
 

-Ledger Cleansing: The auditor looks at the trust account balances for each client, ensuring that there are no negative balances, as only positive or zero balances should exist in relation to trust accounts.

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5. Management Deficiencies Last But Not Least
Should these records show discrepancies or differences between them, this is a cause for concern or “red flags.” This may indicate something more serious, like transactions that were supposed to be recorded but weren’t or erroneous journal entries that need correction.

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6. Issuing an Audit Report :Contents of the audit findings are presented in a formal report, which follows the completion of the review by the auditor. This report is then forwarded to a competent authority like the Legal Practice Fidelity Fund, which ensures compliance with trust account requirements.

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7. Continuous Monitoring
The same should apply to legal professionals, who should self-examine their record and documents within the year instead of postponing the same to the audit. Self-examination in this manner is significant as it helps in flagging problems early enough and ensures that rules are properly adhered to.

To put it all together, a trust audit entails detailed record keeping and work of a third party, that is, the auditor, the performance of certain tests of accuracy, the resolution of possible findings, and the preparation of the report of compliance.

 
What happens if the trust fails the audit?

 

When a breach of audit standards occurs in regard to a trust, it can be regarded, figuratively, that a positive audit status is not earned because there are suspicion issues that relate to the finances or operations of the trust in general. In this way, simple happenings are outlined below in order of occurrence:

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Monetary Damages: Whenever fault exists—and comes to be known after the audi, it would probably be well that financial damage may figuratively ensue. This may prevail in the event that the inaccuracy of information led the organization to undertake irrational investments or in the case of laxity of investment management.

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Loss of Goodwill: The image of the public will be negatively influenced whereby the trust will be regarded as unredeeming and poorly managed, for its credibility will be drained. Such a situation will subsequently pose problems in attracting more donors, clients, or associates since everyone will be reluctant to trust the organization.

Trust-Based Investigation AU audits and assessments of effective utilization of state property financial resources will involve a trust. Assets more so where the parties have their claims with the use of trust, and the trust is dissolved after a failed audit performance.

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Required Corrective Actions: There will most likely be some adjustments that shall be required in the trust’s activities after the completion of the audit. This may go as far as changing the entire financial systems in the organization, improving on how records are kept, or even making internal systems better in order to prevent the occurrence of such issues again.

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Legal Liability: There are scenarios whereby such trustees may face threats in terms of legal actions from various stakeholders. This will happen if there is any evidence that the trust has been poorly managed or there is gross negligence in the management of the said trust.

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Repercussions on the Beneficiaries: Beneficial purpose trusts are usually subjected to audit, and more so, if an audit fails, legal and financial implications will be experienced by the trust in question, and such difficulties will be instantly felt by the beneficiaries of the said trust.