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The rules have been designed to make it very difficult to avoid a qualified report. Therefore a qualification should not be too alarming, provided that it does not indicate misappropriation of client money.
Below is a list of audit areas that may be tested. This list is not comprehensive.
Bank
Client Payments
Client Receipts
Office Payments
Office Receipts
Bills delivered
Client to Client Transfers
Client to Office Transfers
Client Files
Interest
Professional Indemnity Insurance
Compliance Procedures
Bank
This is the most difficult audit area, especially if there are many bank accounts.
The auditor will look for inappropriate bank accounts or recording and reconciliation not properly performed and authorised.
The auditor will ask for the bank reconciliation statements for each bank account, including individual client deposit accounts. They will be agreed to the cashbook balance and bank statement balance of each account. The total cash held in client accounts will be agreed to the matter listings for at least two dates in the period being tested (six months or a year), which are switched at each audit visit.
Matter listings and bank records will be scrutinised for bank accounts without the word ‘client’ in them (a surprisingly common breach), client accounts in the name of a Principle of the firm, overdrawn client accounts and suspense accounts with unallocated payments or receipts in them.
Old matters still open and containing client money will be identified by comparing lists at different dates and will be investigated. The auditor will look for clients who use client accounts as investment accounts. There have been instances of benefit fraud uncovered where the client was hiding savings with the solicitor.
The date of each reconciliation statement is checked to ensure they are performed every five weeks, and evidence of approval by a suitable Principle of the firm is required.
A common error is to exclude interest up to and including the date of reconciliation, and although it should not lead to an audit qualification, it will be shown as a difference on the report followed by an explanation. Exclusion of more than five weeks’ interest may indicate that reconciliation is not performed on a timely basis, which is a reportable breach and will be further investigated.
The auditor will proceed by agreeing all outstanding payments and receipts on the bank reconciliation to the bank statements as they are presented at the bank after the date of the reconciliation (see bank summary section on this site). The auditor will ask for explanations and supporting documentation for items that take a long time to clear, especially six months or longer. This is to ensure all client payments shown in the ledger are legitimate.
Bank statements will be scrutinised for large and unusual payments for which explanation and supporting documents will be required. Overdrawn accounts will be reported.
Client Payments
The auditor usually performs transaction testing on at least 25 client payments by using random sampling methods (for example, every tenth payment in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
The auditor will test whether the payment was made with regard to the correct client and matter code, on the correct date, and will agree it to the original cheque returned from the bank, or the microfiche copy supplied by the bank. The payment will be agreed with supporting documentation to ensure it was paid in accordance with client instructions. The client ledger card for each payment will be scrutinised to ensure the payment has been made from the correct account and matter code.
If the client ledger card shows a debit balance at any point, the circumstances will be fully investigated and reported.
Client Receipts
The auditor usually performs transaction testing on at least 25 client receipts by using random sampling methods (for example, every tenth receipt in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
The auditor will be looking for receipts banked in incorrect bank accounts or recorded in incorrect client ledger cards. The auditor will test whether the receipt was promptly banked, in the correct account and in accordance with client instructions. The auditor will ensure that the receipt was recorded on the date received (not the date presented at the bank) and recorded in the correct client ledger card. The receipt will be agreed to the cashbook and the individual client account ledger card.
Office Payments
The auditor usually performs transaction testing on at least 25 office payments by using random sampling methods (for example, every tenth payment in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
The auditor will ensure that the payment was genuinely for office purposes or an unpaid disbursement, and that client money is not banked in the office account and subsequently paid to third parties or transferred to client accounts.
Office Receipts
The auditor usually performs transaction testing on at least 25 office receipts by using random sampling methods (for example, every tenth receipt in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
A common error is to bank money received for disbursements not yet paid in the office account. They should be banked in the client account and only transferred to the office account once the solicitor has paid the disbursement from the office account. This will provide a full and accurate record of the matter transactions.
Another common error is not to transfer mixed receipts to the correct accounts within fourteen days of banking.
Bills Delivered
The auditor usually performs transaction testing on at least 25 client bills by using random sampling methods (for example, every tenth bill in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
The bills are agreed to individual client ledger accounts to ensure that they have not been raised after transfers from client to the office bank accounts have been performed.
If office accounts are overdrawn, the auditor will perceive a risk of using client account funds to finance the office overdrafts.
Bills are also checked for inclusion of unapproved, regulated investment business.
Client to Client Transfers
The auditor usually performs transaction testing on at least 25 transfers by using random sampling methods (for example every tenth transfer in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
Written consent will be required from both clients by the auditor, unless it can be shown that the matters are for the same client, in which case a written instruction for the transfer will be required.
Solicitors should only arrange loans between clients in exceptional circumstances.
Client to Office Transfers
The auditor usually performs transaction testing on at least 25 transfers by using random sampling methods (for example every tenth transfer in each month). This method is continually changed to ensure that no person can predict individual transactions that will be tested.
The test can be time consuming if batch transfers made are unusually large and difficult to trace to individual bank receipts or client ledger cards. Careful recording is required to ensure that the auditor does not perceive a limitation of scope where there is not enough information available to base an audit opinion on.
Client Files
The auditor usually performs transaction testing on client files for each independent fee earner and each area of work covered by the practice. Auditors may haphazardly pick files from cabinets or matter lists. This method is continually changed to ensure that no person can predict individual files will be tested.
The sample may be amended if a file is picked that was tested in the previous reporting period or has no transactions for the current period.
Ledger cards will be requested for each file selected and both will be inspected to ensure that each transaction is properly authorised by the client and the solicitor. The auditor ensures that engagement letters and identification of clients are on file, and that no waiver of interest clauses are contained in the engagement letters.
Anything unusual will require explanation and verification.
Interest
The auditor usually performs transaction testing on ledger cards and designated deposit accounts to ensure interest is paid in accordance with the rules. Interest breaches are not reportable, but could indicate risk of misappropriation of client funds or that reconciliation has not been properly performed.
Professional Indemnity Insurance
The auditor will check whether an approved Insurer has been used, as listed on the Law Society website and that cover of at least £1m has been obtained per claim.
Compliance Procedures
Auditors review office records to ensure that all individuals responsible for authorising, administering and recording client money have sufficient knowledge of the latest Solicitors’ Accounts Rules. The auditor may ask to inspect the office copy of the Rules.
The auditor will also assess office procedures for keeping cash, cheque signing, opening the post and authorising payments and receipts. An assessment will be made of whether staff members are sufficiently informed about accepted procedures and The Rules.
If it is found that client money transactions are authorised by a member of staff without a valid practising certificate, it is considered a serious breach reportable to the Law Society. Auditors can usually assess this by looking at authorisation slips and asking questions about individual transactions to assess which person has knowledge about client affairs.
Procedures for authorisation of transactions whilst a Principal is away from the office will be inspected to ensure that another solicitor is available to authorise transactions.
Accountants do not report on matters relating to Code of Conduct, but serious breaches found by auditors may lead to an investigation by the Law Society.
The Auditor should prepare a management letter with recommendations to Principles and the Accountants’ Checklist once the report has been filed with the Law Society.
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