Briefing / Year-end working papers
A good practice guide
Good working papers are an essential part of the accounting records of NHS organisations. They are particularly important during the year-end process when they are relied upon by both NHS organisations and their external auditors. They reduce the likelihood of errors in the annual accounts, provide confidence in the underlying information, make high quality review easier and help maintain corporate memory. They also contribute to a smoother, more efficient external audit reducing the number of queries to resolve and enabling the auditor to focus their time more appropriately.
To support finance teams and auditors, this briefing provides a reminder of what good year-end working papers look like; what arrangements need to be in place to enable staff to prepare them; and some key issues to consider for the 2023/24 year-end.
Introduction
Good working papers are an essential part of the accounting records
As highlighted in the HFMA’s Year-end survey 2022/23
To support finance teams and auditors, this briefing provides a reminder of what good year-end working papers look like; what arrangements need to be in place to enable staff to prepare them; and some key issues to consider for the 2023/24 year-end.
What does a good working paper look like?
The basics
All figures within the accounts, whether prepared internally or through support from third parties (such as external valuation specialists), are ‘owned’ by and should be fully understood by the NHS organisation. Working papers are a key tool in both achieving and demonstrating this.
The main purpose of a working paper is to substantiate a figure or disclosure in the annual accounts to the ledger and the supporting evidence it is based upon. This includes areas where the figure is nil or there is no disclosure. This provides necessary assurance for the accountable officer and those charged with governance to approve the annual accounts, as well as the external auditor to give an opinion on the annual accounts.
The fundamentals of year-end working papers are:
Using the acid tests below, the preparer should put themselves in the shoes of someone trying to review the working paper to assess whether it provides the required information:
- is there the ability to drill down from the figure or disclosure in the financial statement to the underlying transactions that it represents and its supporting evidence?
- does the narrative tell the story that helps to understand the figure?
- could someone else not involved with the detailed process understand and follow what has been documented?
Working paper expectations were summarised by an auditor as follows at the 2024 pre-accounts planning conference.
Supporting analysis
For each working paper:
- It is essential that the working paper uses the figures in the annual accounts and in the ledger (duly reconciled). Where appropriate, the figure in the annual accounts should be supported by a detailed analysis of what is included in that figure and why they are valid rather than just a listing of all the entries that form part of the balance. For example, providing a list of year-end debtors totalling £10m, rather than all the entries in and out of the debtors control account during the year, will make the paper easier to review and enable auditors to quickly apply the drill down method used for sample testing.
- The detailed analysis should be cleansed of extraneous details (for example reversing journals, contras) so that it totals to the figure in the annual accounts. Breaking down the figure in the annual accounts as part of the working paper may identify issues in the underlying systems or an inaccuracy in the figure included and will make the paper easier to review.
- The working paper should include a narrative explaining where the figures come from and how they have been calculated (particularly if there is a detailed spreadsheet supporting the figures). If the underlying data is too big or complex to hold with the working paper, details to allow easy reference to where it is held is needed. This narrative is also helpful to demonstrate the considerations made where an item has not been included, such as a related party transaction. Ultimately any accountant should be able to read the working paper and come to the same conclusion as the preparer, by following the evidence trail.
- The working paper should include references to third-party evidence that supports the entry in the accounts – this could be an invoice, contract, report or agreement. It may even be an email or other correspondence. It may help those preparing working papers to be aware of the criteria used by auditors as to audit evidence (see ISA 500 extracts below) within the bounds of sufficiency and appropriateness.
- Where the entry in the annual accounts involves a judgement or estimate, the working paper needs to explain the source data used and assumptions made, again with reference to the information used to make that judgement. Such evidence will be more complex than that from prime records and needs to demonstrate the validity of the source data and assumptions as well as their application. Where estimates are made as a result of considering a range of potential outcomes, the working papers should explain why the particular point on the range was selected and comment on any estimation uncertainty behind it.
- Where there are reconciling differences, these should be explained and not just listed (for instance due to timing differences) with evidence to support them. For some reconciling items, on bank reconciliations for example, the following year’s bank statement may be suitable evidence that the item has now been cleared in the bank.
- Any acronyms should be defined and explained.
- All breakdowns, analysis and documentary evidence must be cross-referenced.
A8 More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually. For example, corroborating information obtained from a source independent of the entity may increase the assurance the auditor obtains from audit evidence that is generated internally, such as evidence existing within the accounting records, minutes of meetings, or a management representation.
A9. Information from sources independent of the entity that the auditor may use as audit evidence may include confirmations from third parties, analysts’ reports, and comparable data about competitors (benchmarking data). Financial Reporting Council
Analytical review
Working papers should include an analytical review to act as a ‘sense check’ of the figures. This could be as simple as a comparison to the previous year, with a narrative explanation and supporting evidence for the variance (not just a note of the percentage change, but rather a narrative reason for that change). For instance, with payroll, the impact of salary increases or tax/pension changes can be used to ‘prove in total’ a large element of any variance. However, this analysis may need to be more detailed where year-on-year comparison is not necessarily comparing like to like (for example when related to activity).
This should be no different to what is done on a monthly basis as part of reviewing the work done for month-end to make sure the figures make sense and ‘tell the story’. The year-end working paper is just the formal documentation of the thought process.
A comparison to the budget is an alternative, but a variance analysis would need to review the robustness of the budget as well as the actuals. Anything unusual about the figures should act as a prompt for additional analysis and explanation. This might include any prior year adjustments or particular changes. It is better to pre-empt the obvious questions, as they are likely to be raised during internal reviews or during the audit.
It is helpful to start to prepare the analytical review in advance of the year end, for example using management accounting narrative descriptions to collate analytical review information supporting year on year changes, such as contract income changes, service developments, inflation etc.
Preparers often report that by completing a robust analytical review as part of the accounts working papers, identifies potential errors in mapping or the figures themselves.
Year-end adjustments
Any adjustments agreed after the closure of the trial balance should (with agreement between management and auditors) either be reflected in the working paper, and the working paper updated for such changes as they are made, or in a separate schedule that contains all adjustments.
Clear arrangements for version control are needed. These schedules are also helpful as summaries for audit committees to explain, and provide assurance on, key changes between draft and audited accounts.
Judgements and estimates
Particular issues arise where the figures in the accounts are subject to judgements, such as provisions and valuations, or relate to unusual transactions. In these instances, the level of narrative and explanation needs to be increased to ensure that the working paper provides a full explanation of both the thinking behind the judgement as well as setting out the supporting evidence.
Part of this evidence will be the relevant accounting policy, or relevant extract, and any supporting documentation about why and how that policy is applied. Where relevant, this should also include reference to national guidance.
Particular attention is needed where that policy, or its interpretation, has changed from prior years. In addition to writing and updating clear working papers, early engagement with external audit is important to identify any potential issues.
Use of experts
ISA 500 confirms that if the information to be used as evidence has been prepared using the work of a management’s expert, then the auditor should:
- evaluate the competence, capabilities and objectivity of that expert
- obtain an understanding of the work of that expert
- evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
Recognising that the annual accounts are owned by the NHS organisation, it is important that management have processes in place to assess the completeness and accuracy of figures provided for estimates and that they are fully understood and can be explained.
Common and high value examples are property, plant and equipment valuations where it is important to ensure figures are challenged, considering areas such as movement in valuations, area calculations and indices applied. HFMA's briefing, Property, plant and equipment: accounting and valuation issues
It is also vital to ensure that time to obtain, review and query any external experts’ reports is carefully planned into the year-end timetable.
Journals
Evidence and appropriate authorisation of supporting journal entries can be a particular focus for auditors, given the inherent risk of management over-ride of controls auditors will specifically plan to review and test for this. However, the management of journals is also critical for the completeness and accuracy of the annual accounts.
The ability of the reviewer/authoriser of the journal to assure themselves of its completeness and accuracy, from the supporting evidence, should go a long way to meeting the similar requirements of auditors. Evidence needs to be maintained all year for manual entries into the accounting ledgers, particularly if those entries are not general reversing entries.
Agreement of balances
Expectations of evidence to support the national agreement of balances (AOB) exercise is an area that can often be unclear – both in terms of discrepancy levels investigated and evidence required. Thresholds for review of mismatches may differ between the auditor and those set in the AOB guidance
Auditors are also required to report variances above a certain level to the National Audit Office (although all such variances are not required to be investigated) as part of their whole of government accounts exercise and as such will often focus on this level.
AOB working papers should consist of schedules recording the AOB exercise, along with supporting evidence for mismatches above an agreed level. Organisations should also ensure that on a monthly basis (outside of the formal AOB exercise) that they have established confidence in their intra NHS balances and resolved issues, rather than waiting for the AOB exercise.
Annual report
While much of the guidance above is focused on the figures in the annual accounts, working papers are required to support the full annual report and accounts, including the remuneration report and annual governance statement. This includes new disclosures or where there have been changes in prior year figures to provide assurance that the revised calculation is appropriate. These need the same rigour of explaining where the information has come from and narrative of any major issues.
The remuneration report includes personal information and it is good practice to share working paper details with those whose details are disclosed in advance of submission of the draft accounts. Common related errors include changes in key personnel being missed or mis-stated.
Where the figures in the annual report are also included in the annual accounts, or vice versa, then the working paper should reference both entries. Where the numbers are not the same, probably because the annual report is reporting a high-level view, then the working paper should include a reconciliation.
Review
Each working paper should be reviewed, for its quality, by a senior (and separate) member of the accounts team. An annotated copy of the review should be retained to show that it has taken place, with a clear key to show the checks performed. This review will quickly identify any weaknesses in the trail or obvious inconsistencies. It should be clear who created the working paper, and who reviewed it, so that any queries can be directed to the right person (who should be available during the external audit).
Before being presented for sign off, working papers should be reviewed by the person who created them. One way of looking at the working paper is to ask the question – would someone looking at this working paper understand the transaction or disclosure it supports? Putting yourself in the shoes of the reader of the working paper – the reviewer, a team member, an auditor or even yourself in the future – is a helpful way of determining whether it is a quality paper or whether it needs more work.
Challenges
It is helpful to note some of the challenges faced in producing good quality year-end working papers, in order to identify the best ways to mitigate them. These are explored below.
Timeliness
The timetable for the production and audit of the annual report and accounts is tight. This has practical implications, with organisations increasingly preparing some or all of their working papers after the draft annual accounts are prepared, rather than as part of the process. This could result in undetected errors and also leaves very little time for an effective review before the working papers are passed to the external auditors, leading to poor quality papers that then needed time spent correcting them.
Accounts and audit teams need to work together to develop a timetable that is not only achievable but owned by both sides. It is also important that the key drivers of achieving the timetable (in this instance good quality working papers) are recognised and owned.
Some auditors have observed that it is better to delay an audit by one or two days, so that working papers are high quality, than to start on time and then using that time sub-optimally because working papers are poor.
Audit expectations
In recent years the audit profession has been under intense scrutiny, which has led to a significant increase in the expectations on external audit by regulators and standard setters. Depending on the size of the body auditors are subject to audit quality review (AQR) inspections from the Financial Reporting Council (FRC) or ICAEW’s Quality Assurance Department.
These inspections support the continued registration of an audit firm and have become more demanding on the level of audit evidence needed, including evidence of the challenge and depth of investigation, with the results of the review personal to the auditor and the firm’s reviews published. Each year, the FRC publishes its report on major local audits,
Unsurprisingly, this scrutiny has resulted in auditors across all sectors needing to do more work to meet these standards and has put upward pressure on fees. This has led to demands from auditors for better working papers which has, in turn, highlighted issues with the quality of those papers that might not have been picked up in prior years. This is particularly so in areas including judgements, estimates and valuations, where auditors focus on the detail and challenge of the assumptions that management are making. For more information on the wider context of external audit appointments the HFMA has published The NHS external audit market: an update on current issues.
As part of accounts planning, along with updates in accounting standards, it would be useful for accounts teams to have updates on auditing standards, with a focus on the implications for the accounts production process. In recent years, revisions to International standard on auditing (ISA) 315 Identifying and assessing the risks of material misstatement
It is good practice to have a debrief workshop with auditors after the completion of the final year audit, including potential working paper improvements and changes in requirements. For example, items expected to be under particular scrutiny as highlighted in the FRC’s report on major local audits. Agreed action plans resulting from this debrief, along with working paper requirements for new or particularly sensitive areas, should then be revisited as part of ongoing planning conversations.
Stability of finance function and pressure on teams
Changes in accounts teams creates pressure at the year-end, exacerbated by the need to balance other duties such as business planning for the year ahead. This has become more acute in the ‘less resourced’ finance teams. It can be partly resolved by greater flexibility in the team (for example use of secondments as development opportunities), but it needs to be recognised that the most effective accounts teams have sufficient and well-planned resource.
High quality working papers can help ease the pressure on finance teams because the prior year accounts and the associated documentation are a useful starting point for the preparation of the current year accounts. If the basis for the calculation, or the reason for the entry in the prior year, is clear this makes the assessment of the current year position much easier.
Relationship between auditors and finance teams
In some instances, the combination of pressure on finance teams and the greater expectations on, and from, auditors has led to a ‘them and us’ atmosphere with greater levels of friction. There is a need to recognise the pressure on both parties and respect each other’s professionalism. Early and ongoing engagement is key.
Critical success factors
The most effective (and efficient) accounts teams embed the processes mentioned above, commonly enabled by the following key success factors:
- Senior involvement: The active involvement of, and leadership from, a senior finance officer (at least at deputy level) in the accounts production process is critical in setting the positive culture and tone of the process. That tone needs to permeate through the finance team, audit committee and chief executive who signs the annual accounts.
- Pride and ownership: The annual accounts belong to the NHS organisation and as such significant changes, such as in asset valuations provided by management experts, should be understood and challenged. Producing quality accounts should not be seen as a chore, but as a significant achievement, key to good stewardship, that is recognised and supported.
Planning: A clear, pragmatic and owned timetable is needed, setting out who is responsible for each area. Planning can also include a high degree of pre-population of working papers ahead of the year-end, so that the actual year-end work can focus on the quality of the final numbers and trail, as well as the analysis. Usually, auditors will provide some form of working papers requirement schedule and planning should allow for the ability to check with auditors, during the preparation of working papers, if there is any uncertainty or confusion.
Planning also includes building a detailed understanding of the needs of each stakeholder in the process, both in terms of information as well as resource and sequence. This also needs to take account of dependencies (for example the required date for the stocktake and the time to resolve issues) and link into the detailed year-end close-down plan.
- Control: Tight control of the accounts process, effective planning and senior management ownership, can be embedded in a shared workbook that is accessible to all involved and provides the full detail to project manage the year-end. This can particularly ensure that dates and responsibilities are clear, as well as helping to ensure that the plans of the accounts team and auditors are aligned.
- Learning from the prior year: All teams should, once the prior year’s accounts have been put to bed, conduct a lessons learned exercise on how the process can be improved for the next year. This should be done both within the finance team as well as in a joint session with the auditors, including specific reference to feedback they have received in their prior year audit reports. Auditors should report any issues in the quality of working papers to audit committees. Once the lessons have been learned then they need to be applied and the improvements embedded into the year-end system.
- Prior year unadjusted errors: While prior year unadjusted errors might not be adjusted in the ’current’ annual accounts, a decision needs to be made on their treatment, not least because of the cumulative impact that they will have on the balance sheet and comprehensive income and expenditure statement. This will need to be clearly documented and, where not adjusted, the rationale for this needs to be clear, as well as the impact of not doing so fully understood.
- Month 9 rolled forward: Using month 9 as a basis for the production of the accounts and rolling it forward, can allow the year-end process to be less onerous. This ranges from early clearance of reconciling items or AOB, to the production of narrative in support of a figure.
- Ongoing engagement (within finance and between finance and auditors): Frequent points of engagement should be scheduled between auditors and the finance team to ensure consistency of expectations. In particular, early consideration and transparent engagement with the auditor, for new or changed accounting arrangements (particularly if they are innovative in nature) is essential. Frequent conversations between those involved in accounts preparation is also important to be clear on who is doing what and where everyone is in the process. These can also be used to foster collaboration and team work, providing the opportunity to share concerns and say thank you.
Audit process is embedded in accounts production: Where the production of the accounts anticipates what the auditor needs, the process will be more efficient, producing a quality set of accounts that are a true and fair view of the organisation. It is helpful to recognise the importance of good relationships between finance teams and external auditors. Good communication throughout the year is essential. For example, if the auditor is clear on why they will be asking for something, appropriate evidence is more likely to be provided.
Also, where a working paper sets out reasons for significant judgements or estimates, unusual or complex transactions, these should be raised early in the process for discussion. HFMA’s briefing, The external audit: best practice in working well together
HFMA, The external audit: best practice in working well together, March 2024 provides further support on practical actions that can be taken to work more effectively together, ensuring a ‘no surprises’ approach .- Disclosure checklist: The use of a disclosure checklist is valuable, both in planning and in checking on the completeness and accuracy of the annual accounts. Many elements can be completed early. HFMA’s Year-end reminders 2023/24
HFMA, Year-end reminders 2023/24, March 2024 is helpful to identify issues that are expected to impact on the annual accounts. - Anticipating queries: Auditors are required to be professionally sceptical, defined in the auditing standards
Financial Reporting Council, International standard on auditing (UK) 200, May 2022 as ‘an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.’ Good working papers anticipate the obvious questions that will be asked by auditors and provide the narrative explanation and evidence to answer these. The most likely of these arise with unusual transactions or significant changes from prior year or budget. - Accounting standards: All working papers should refer to the relevant accounting manual extract, accounting standard and national guidance, and how that standard has been interpreted and reflected in the accounts. Best practice working papers will also consider alternative options to that interpretation, and why they have not been adopted. This allows both management to agree this decision, but also auditors to understand how the assumptions have been tested.
- Assurances: Where there has been work during the year that provides assurance on an area, for instance internal audit work on a related control environment, working papers should reference this work, since it will support (or not) the assessment of the quality of the underlying data. Similarly, where briefings have been given to the audit committee (or board) on particular accounting issues and treatments, these should also be referenced.
Audit committee: The audit committee plays an important role in the oversight of the accounts. As set out in HFMA’s NHS audit committee handbook,
HFMA. NHS audit committee handbook, March 2024 the committee will review the work and findings of the external auditors and consider the implications and management’s responses to their work. The interpretation in practice of the requirements in this area, as set out in the terms of reference, can be variable. This is particularly so when the role of the committee is to act as the ‘honest broker’ between management and auditors on areas of disagreement. It is important, particularly if a ‘them and us’ culture has developed, that the audit committee remains independent and objective in its deliberations.The best audit committees are pro-active in looking at papers on accounting policies, judgements and estimates ahead of the year-end, understanding the implications of any differences and reaching clarity. This consideration can then be captured in a working paper. HFMA’s briefing, How to review and scrutinise the annual accounts,
HFMA, How to review and scrutinise the annual accounts, June 2022 sets out key questions to ask.Training: Having focused training ahead of the year-end can have a significant positive impact on how smooth the year-end is. As well as covering the planned approach and timetable for working papers, there is the need for technical updates, particularly as accounts are getting increasingly complex, and this can be done in conjunction with the auditors.
HFMA’s annual pre-accounts planning conference
HFMA, Pre-accounts planning 2024, February 2024 is a valuable source of information and guidance. Other training can start from an honest ‘gap analysis’ of skills and expertise, particularly where there may be new or inexperienced members of the team, but can also cover issues of culture (‘doing the right things’), auditor liaison, lessons learned from prior years or the logistics of delivery.
Current issues for 2023/24 year-end
The HFMA has produced a number of resources to support finance team with the 2023/24 year end.
- new and significant items
- areas requiring judgements and estimates such as accruals and provisions.
- areas impacting on performance against financial targets such as income recognition and capitalisation.
Specific areas for 2023/24 working papers are explored below.
IFRS 16 Leases
IFRS 16 was implemented in 2022/23 (other than the change relating to PFI liabilities below) and organisations should act on any specific feedback received on their IFRS16 working papers. Some areas for further work across organisations are set out in HFMA’s briefing, Year-end reminders 2023/24
The transition to IFRS 16 measurement of PFI liabilities applies from 2023/24. For those NHS bodies affected, working papers should:
- set out the logic of the changes
- clearly identify what has been changed in the model and the accounts
- set out what controls have been put in place in relation to changes to the model and changes to inputs
- reconcile the new disclosures with the 2023/24 disclosures
Provider code of governance
The Code of governance for NHS provider trusts
Sustainability reporting
NHS bodies that have more than 500 full-time equivalent employees or have total operating income of more than £500m will be required to apply the first of three phases of the task force for climate related financial disclosure (TCFD) in 2023/24. These requirements are in addition to existing requirements to report progress on environmental initiatives. Working papers should support disclosures made.
Reporting the impact of the climate crisis is expected to become more of an issue in future years and auditors are expected to focus on climate related considerations and disclosures, as an area based on judgements and estimates.
Losses and special payments
Losses and special payments is an area of audit and regulator focus and will require working papers to evidence approvals sought in advance of agreements being made. All severance payments (non-contractual departure payments) require approval, regardless of size, and special payments of any kind above £300,000 or that may be considered novel, contentious or repercussive also require approval. Details are set out in NHS England's timetable letter.
IFRS15 Revenue from contracts with customers
Introduced in 2018/19, auditors have highlighted this as an area commonly not embedded in business as usual practices. Auditors will be looking for working papers that provide evidence of signed contracts and that support judgements around income recognition. This is particularly the case for income received towards the end of the financial year. For volume-based contracts, auditors will want to know what systems are used to assess the levels of healthcare provided and how the NHS body gains assurance that the system is operating as expected.
Conclusion
Production of the annual report and accounts is achieved through a combination of parties working together, so that the statutory responsibility is met and there is appropriate accountability to stakeholders.
Good working papers are a key tool that make people’s lives easier during the pressures of year-end - in both the preparation of accounts and a smooth audit process. They provide an indication of the value, effort and pride placed on the production of the annual accounts by the organisation. They are also key to enabling external auditors to do their job swiftly and efficiently.
Based on discussions with finance teams and auditors, this briefing explores the challenges and enablers to the production of good working papers, as well as providing some examples of what a good working paper looks like.
Ultimately, a good set of complete, accurate and timely working papers will clearly tell the story of each entry in the annual accounts, providing a link to further detail and evidence to support this.
Appendix A: key elements of a standard working paper
Heading
Organisation:
Period/Year-end:
Title/area of annual accounts:
Unique working paper reference:
Administration
| Version: | Name/title | Initials | Due date | Completed date |
| Prepared by | ||||
| Reviewed by | ||||
| Cleared for issue to audit |
Annual accounts entry
Extract from annual accounts/TAC schedule:
Link to trial balance/ledger:
Supporting analysis/break-down:
Reconciling explanation/confirmation of cleansing/data validation (if needed):
Disclosure checklist reference:
Year-end adjustments (if applicable):
Link to and explanation of significant journals including its unique reference number (if applicable):
Treatment of prior year unadjusted errors (if applicable):
Analysis
Analytical review (current versus prior period and current versus budget/forecast if appropriate):
Significant issues/answers to expected questions:
Narrative explanation of variances:
Month 9 reference and roll-forward (if applicable):
Areas of judgement and estimation (if applicable)
Key judgements, assumptions and source data used (basis of thinking):
Calculations (basis of calculations and checks):
Challenge/alternatives considered:
Robustness of external reliance on experts:
Evidence
Links to supporting evidence - internal:
Links to supporting evidence – external/third party:
References
Have there been any changes in accounting policy or procedure? (Y/N). Narrative if Y:
Accounting standards/policies:
Guidance (Group accounting manual, HM Treasury, NHS England, etc.):
External audit requirements/expectations (including audit standards – if applicable – or auditors own requirements):
Interpretation/debate on accounting treatment:
Acronyms used (and explained):
Assurances (where applicable)
Other than internal audit reports, any other relevant independent sources of assurance:
Briefing papers to management, board and/or audit committee:
Quality control
Prior-year learning feedback:
Review comments (and clearance):
Lessons to be learned for next year:
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