Audit Objectives
Initial Meeting
Where an initial meeting is conducted, auditors will
- explain the aims and objectives of the inspection
- outline the format of the inspection
- explain the basis and method of sampling and the intended levels of
confidence and accuracy
- confirm that the appropriate members of staff will be available during
the period of the inspection, and
- confirm that the records requested in the notice of inspection and/or
pre-inspection questionnaire are available for inspection.
Auditors will record the points discussed at the meeting.
Review of systems and controls
Auditors will undertake a review of systems and controls to
- establish the nature and extent of the systems in place
- identify any internal controls, and
- assess whether the systems and controls in place enable the institution
to administer the scheme being inspected.
When undertaking the systems review, auditors will ascertain, by discussion
with the appropriate members of the institutions staff
- the system(s) in place
- the internal controls relating to each audit objective, and
- test the internal controls to establish their effectiveness.
Auditors may also follow one transaction through each system from beginning
to end - a 'walkthrough' test.
Auditors will record details of
- each system identified and its internal controls either by means of
narrative notes or flowcharts
- the results of any walkthrough tests
- the way in which internal controls have been tested, and
- their assessment of the effectiveness of the internal controls.
Sampling
Auditors normally select a general sample for each type of ISA from the
annual information return, however, other methods of sampling, for example,
samples taken at regular intervals, may be used depending on how managers'
records are kept.
In addition to the general sample, auditors take particular samples from
those areas of PEP or ISA business which sometimes give rise to specific
problems. These include, for example, non-qualifying investments, cash on
deposit, death of investors (ISAGN12.7),
and voiding subscription(s) (ISAGN12.23).
The size of the sample will depend on the number of ISAs held. The sample
will be large enough to enable auditors to determine whether there is evidence
suggesting that claims may have been made incorrectly, or that the manager
has failed to comply with his obligations under the regulations, and to
provide the basis of agreement of the amount of any overclaim. Auditors
will always explain the basis of sampling.
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Objective 1 - Application Forms - Terms & Conditions
and Procedures
To check
- fully completed and correct applications are held
- the correct procedures for accepting or rejecting applications are
being followed
- applications specify which component part of the ISA is being subscribed
to, and
- terms and conditions held by the manager satisfy requirement of the
regulations.
Sample
Auditors will select a sample of ISAs from the most recent annual information
return or may use a full client listing or other information provided by
the manager.
Auditors may sample from all components of ISAs.
Procedure
For each ISA, auditors will
- check an application is held
- check the application has been completed in full
- check the manager was entitled to accept the application
- check that the ISA was not opened before the end of the 'cooling-off'
period (where appropriate), and
- check terms and conditions comply with ISA requirements
ISA subscriptions must not be accepted without a completed application
(ISAGN5.08).
Where an application contains an inconsequential error (such as incorrect
titles etc), auditors will not treat the ISA as invalid.
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Objective 2 – Subscriptions - Main Test
To check
- subscription limits are not being breached
- subscriptions are not accepted if investors cease to meet the residence
qualification
- subscriptions are allocated to the correct component of an ISA
- Account opening date is correct
- Subscription is in cash, and
- 'bed and ISA' procedures dealt with correctly.
Sample
Auditors will select a sample of 10 ISAs from the general sample selected
for Objective 1. Auditors will also select an additional 10 ISAs from the
general sample of mini ISAs selected for objective 1 where the ISA manager
offers mini ISAs.
Auditors will, in addition, select 10 ISAs where a cash subscription was
funded by a share exchange, or surrender (or part surrender) of an existing
non-ISA policy.
Procedure
For each account, auditors will
- check the subscription limits have not been exceeded
- check that the shares were sold and the proceeds invested in the ISA,
where the cash subscription was created by a share exchange
- check the investor has not subscribed to more than one ISA (or one
ISA of the same component type where applicable) in the same year where
ISA(s) relating to the same investor are identified
- check there is no information on the application or the investor's
file which suggests that the investor was not resident or ordinarily resident
in the United Kingdom at the time of subscription, and
- check investors are reminded annually that they may not subscribe to
another ISA of the same type for any year in which subscriptions are received
and obtain evidence of the issue of the reminder (where applicable) in
accordance with the procedure at ISAGN10.40.
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Objective 3 - To Check ISA Accounts NOT Subscribed to
in Previous Year
To check
- new application form received for year following year of no subscription
- new application taken at appropriate time, and
- new application fully completed in accordance with Objective 1.
Sample
Auditors will select a sample of ISAs from the draft listing or other
information provided by the ISA manager.
Procedure
For each ISA, auditors will
- check an application is held
- check the application has been completed in full
- check the ISA manager was entitled to accept the application
- check that the ISA was not opened before the end of the 'cooling-off'
period (where appropriate), and
- check terms and conditions comply with ISA requirements.
An ISA subscription must not be accepted without a completed application
(see ISAGN5.08).
Where an application contains an inconsequential error (such as incorrect
titles etc), auditors will not treat an ISA as invalid.
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Objective 4 - Annual Notice (Continuous Applications Only)
To check
- an annual notice has been issued to ISA investors where required by
ISAGN10.40.
- the annual notice is specific to the ISA component subscribed to, and
- the annual notice was issued at the correct time.
Sample
The auditor will check 10 investor records.
Procedure
Auditors will
- establish ISA managers procedures for identifying investors who require
a notice
- ensure the correct notice is issued to the investors, and
- ensure an annual notice was issued at the correct time.
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Objective 5 - Subscriptions – Share Options, Profit-Sharing
Schemes and Employee Share Ownership Plans
To check
- shares obtained under an approved all-employee savings-related share
option scheme are transferred to ISAs within 90 days of the date on which
the option was exercised
- shares obtained under a profit-sharing scheme are transferred to ISAs
within 90 days or the earlier of the date on which they emerged from the
scheme, or the third anniversary of the date on which the shares were
appropriated
- shares obtained under an employee share ownership plans are transferred
to ISAs within 90 days of the date on which the shares ceased to be subject
to the plan, and
- that evidence of emergence is held.
Sample
Auditors will select a sample of 10 ISAs from information provided by
the manager of ISAs funded by shares obtained under approved all-employee
savings-related share option or profit-sharing schemes, or employee share
ownership plans.
Procedure
For each ISA, auditors will
- check the manager has obtained documentary evidence that the shares
were acquired by members of approved all-employee savings-related, profit-sharing
schemes or employee share ownership plans
- check the shares were transferred into the ISA within 90 calendar days
of the date of exercise of the option (in the case of a share option scheme)
- the date the shares ceased to be subject to the plan (in the case of
an employee share ownership plan), or the third anniversary of the date
of appropriation of the shares (in the case of a profit sharing scheme),
and
- check the subscription limit for the year is not exceeded.
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Objective 6 - Interim Claims
To check interim claims made to SPS
- are correct
- relate to PEP or ISA products only
- are made at the proper time and are in respect of income paid in the
year of claim, and no earlier than 6 months before the end of the period
of claim
- are fully supported by vouchers
- are based on the rate of tax in force for the tax year of claim, and
- exclude equalisation payments, notional tax credits, and non-UK income
tax.
Sample
Auditors will check interim claims for PEPs and both maxi and mini ISAs.
Auditors will
- establish the manager’s procedures when completing claims
- check the claim is based on the rate of tax in force for the year of
claim
- confirm the amount claimed agrees with the total United Kingdom tax
on the manager’s records, and
- review all the vouchers where the manager registered “global”
investments, a particular sample of the vouchers supporting the claim
where the manager registers each individual holding.
Auditors will check interim claims are accurate and the procedure for
making interim claims is satisfactory. Auditors will sample check component
parts of the interim claim.
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Objective 7 – Investments in the PEP and ISA
1) Stocks & Shares and Cash
2) Insurance
To check
- PEPs and ISAs include only qualifying investments, and
- policies of life insurance are valid for ISA business.
Sample
Auditors will
- select a sample from a listing of all PEP or ISA investments held by
the manager, and
- select a random sample of 10 policies of life insurance.
Procedure
For each investment, auditors will check the investment is
- in a company listed on a recognised stock exchange
- a 'qualifying security'
- a government security
- units in authorised unit trust
- shares in an open-ended investment company
- shares or securities of an investment trust
- units in or shares of a “relevant UCITS”
- shares transferred directly from an all employee approved savings related
or profit sharing scheme, or
- depositary interests representing one of the above, and that ISA managers
have not purchased new issue shares by way of placings or intermediaries
offer.
For each ISA, auditors will check
- it is a qualifying policy
- there is no evidence of a connected policy, and
- there is no evidence of a loan on the policy.
(See Guidance Notes for PEP managers for investments held prior to 6 April
2001)
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Objective 8 - Cash on Deposit in PEPs or ISA Stocks &
Shares, and Insurance Components
To check
- cash is held in a PEP or ISA designated account
- cash is held for investing in other qualifying investments, and
- income is reinvested or paid out to the investors.
Sample
Auditors will select a sample of 10 PEPs or ISAs from 'interest allocation
listings' provided by the manager where it appears, from the amount
of interest paid, that substantial amounts of cash are being held within
a PEP or ISA stocks and shares and insurance components for lengthy periods
of time.
Procedure
For each PEP or ISA, auditors will
- check bank statements to ensure that PEP cash is held in accounts designated
“PEP Account” and ISA cash is held in accounts designated
“ISA Account” (ISAGN7.47)
- establish the amount(s) of cash held on deposit and the periods for
which the cash was held on deposit
- check the manager is monitoring the PEPs and ISAs to ensure that cash
is being held only for the purpose of reinvestment, and
- determine whether the manager has complied with his obligations under
the regulations where cash is not being held for the purpose of investment
in qualifying investments (ISAGN10.32).
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Objective 9 – Interest Credited and Interest Withdrawals
from a PEP
To check
- interest credited on uninvested cash has suffered a flat rate charge
- the flat rate charge is correctly calculated and paid to HMRC
- in PEP accounts interest is credited in accordance with the terms &
conditions, and
- a deduction for tax is made from withdrawals of interest in excess
of £180 per year arising on cash deposits held in PEPs.
Sample
Auditors will use the sample selected for Objective 8. Auditors will undertake
this test only where ISA managers pay or credit interest on uninvested cash.
Auditors will select a sample of 10 PEPs from a list provided by the PEP
manager of PEPs in which the investor has withdrawn interest arising on
cash on deposit.
Procedure
For each ISA, auditors will
- obtain the bank statements for the period covered by the 'interest
allocation listings'
- compare the interest paid or credited on the bank statements with the
total shown on the interest allocation listing
- compare the interest due to the ISA as shown on the 'interest
allocation listing' with the amount credited to the ISA, and
- check annual claims are adjusted to reflect the payment of the flat
rate charge, or ensure charge is remitted to HMRC on form CT61(Z), and
ensure the correct rate of flat rate charge has been applied.
For each PEP, auditors will
- check the withdrawal of interest arising on cash on deposit in the
year exceeds £180
- check the PEP manager has made a deduction for tax, at the basic rate
in force for the year from all the interest arising on cash on deposit
withdrawn in the year, and
- accounted for the tax deducted where the interest withdrawn exceeds
£180.
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Objective 10 –TESSA Only Accounts
To check
- a valid application form is held for all TESSA only accounts
- cash (other than matured TESSA Capital) has not and cannot be deposited
in the TESSA only account
- only the maturing capital from the TESSA account is transferred to
the TESSA only account
- that transfer of funds takes place within 6 months of the TESSA maturing,
and
- that adequate documentation (fully completed maturity record or certificate)
is held.
Sample
Auditors will select an initial sample of no more than 10 TESSA only accounts
from information provided by the ISA manager.
Procedure
For each TESSA only ISA the auditor will
- check the ISA manager has adequate systems in place to prevent capital
amounts (other than matured capital) being subscribed to the account
- check the account only has amounts not exceeding the maturity value
credited
- check the opening of the account was within the 6 month time limits
and no further capital amounts have been added after that date, or
- check the ISA manager holds a fully completed maturity certificate
or record.
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Objective 11 - Transfers In / Transfers Out
To check
- procedures for transfers are correct
- documentation is fully completed, and
- notification of transfer has taken place within 30 days.
Sample
A sample of the most recent 5 transfers in and 5 transfers out will be
selected.
Procedure
For each transfer out the auditor will check
- the notification of transfer sent to the new manager has been fully
completed
- was made within 30 day time limit
- any attachments sent refer to the investor, and
- account details of the new manager are held.
For each ISA transfer in, the auditor will check
- amounts transferred in are correctly allocated to the correct ISA component
- that subscription limits are observed where a current year is involved
- where previous years have been transferred, an application has been
obtained for any subsequent subscription, and
- the correct account opening date is recorded.
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Objective 12 - Death of Investor
To check whether following notification of the death of the investor
- the PEP or ISA has been closed without delay
- claims have not been made in respect of income with a payment date
after the date of death
- interest paid after the date of death on cash on deposit has been subject
to the rate of tax in force at the date of payment, and
- where notification was received late, any tax claimed on income with
a payment date after the date of death has been repaid to HMRC.
Sample
Auditors will select a sample from the PEPs or each ISA component offered,
of 10 PEPs or ISAs from a list provided by the manager of cases where the
PEP or ISA holder died during the year.
Procedure
- For each PEP or ISA, auditors will
- check the PEP or ISA has been closed
- check the date of termination of any ISA policy of life assurance and
the difference between the surrender value immediately before death and
the benefit paid
- check interest arising or credited to the deceased's account after
the date of death has been subjected to tax at the rate in force at the
date of payment, and
- check claims have not been made on income with a payment date after
the date of death.
Where the manager has made claims auditors will check the tax repaid has
been reimbursed to HMRC.
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Objective 13 - Void Letters
To check that letters issued by SPS asking managers to void subscriptions
have been actioned.
Sample
A sample of 10 ISAs selected from SPS records (which show SPS have issued
a void letter to the manager).
Procedure
- For each ISA auditors will
- check that the manager has acted without delay
- check voiding has been carried out correctly
- check tax on interest and recovered tax credits have been set off in
a PEP10, PEP14, ISA10, ISA14 or CT61(Z), and
- check that a void report has been sent to SPS.
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Objective14 - Annual Information Return
To check that end of year returns are complete and correct.
Procedure
APSS Audit Unit
- will provide details of any significant problems with the information
provided on end of year returns of information.
Auditors will
- discuss with the manager any errors or irregularities that have become
evident in the end of year information returns
- select a maximum of 20 ISAs and follow the audit trail to the annual
returns of information to ensure the information returned is correct,
and
- ensure rectification of any previous problems has taken place.
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Objective15 - Statistical Returns
To check that quarterly and annual statistical returns are complete and
correct.
Procedure
Auditors will
- select a maximum of 20 ISAs and follow the audit trail to the quarterly
and annual statistical returns of information to ensure the information
returned is correct, and
- ensure rectification of any previous problems has taken place.
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Objective 16 - General Scrutiny
To note any odd or unusual items that come to light during the audit.
Sample
For each odd or unusual item, which comes to light during the audit, the
auditor will make an entry on the 'general scrutiny' sample sheet,
recording
- The PEP or ISA number
- The name of the PEP or ISA
- the date on which the PEP or ISA was opened, and
- the reason for selection.
Procedure
Auditors will investigate thoroughly any odd or unusual item, which comes
to light during the audit using available records.
Auditors will
- record on the sample sheet details of any checks or reconciliations
made, and
- discuss any cases or doubt or difficulty with the manager and seek clarification
as appropriate.
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Conclusion
Auditors will arrange a final meeting at the end of the inspection. At
that meeting auditors will
- outline the tests they have undertaken
- summarise the inspection findings
- indicate any remedial action required by the institution
- where appropriate, make suitable recommendations for improving the
institution's systems or controls, and
- will record the points discussed at the meetings.
