Audit of Non-Profit Organization | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

• NGOs, which are non-profit organizations, acquire funds from members, donors, or contributors, as well as through the donation of time, energy, and skills. These funds are used to fulfill social objectives such as education, medical care, economic assistance for the poor, disaster management, and emergency response. NGOs can take various forms, including religious organizations, voluntary health and welfare agencies, charitable organizations, hospitals, and research foundations. They may be registered as societies under the Societies Registration Act, 1860, as a trust under the India Trust Act, 1882, or as a company under section 8 of the Companies Act, 2013. In some cases, registration under the Income Tax Act, 1961, and the Foreign Contribution (Regulation) Act, 1976, may also be required.
• NGOs registered under the Companies Act, 2013, are required to maintain their accounts on an accrual basis as per the provisions of section 128 of the Act. However, NGOs not registered under the Companies Act, 2013, have the option to maintain accounts either on an accrual or cash basis.

Sources and Applications of Funds

• Funds for NGOs come from various sources, including grants, donations, fund-raising programs, advertisements, membership fees, technical assistance fees, subscriptions, gifts, and sales of produce or publications. Donations and grants that form part of the NGO's capital or corpus are shown as liabilities in the balance sheet. Contributions towards a revolving fund are meant to be rotated by giving temporary loans to other NGOs or beneficiaries for their projects and then recovering the loans to provide temporary loans again. 
• Interest earned on such loans may be added back to the fund or credited to the Income and Expenditure Account based on restrictions or regulations. Donations and grants for specific fixed assets require the NGO to purchase, construct, or acquire the assets for which the grant is given. NGOs may also receive contributions in kind, such as land, buildings, vehicles, office equipment, and articles related to programs/projects. The areas of application of funds for an NGO include establishment costs, office and administrative expenses, maintenance expenses, program/project expenses, charity, and contributions given.

Audit Provisions

Auditors of NGOs registered under the Societies Registration Act, 1860, or the Indian Trusts Act, 1882, are usually appointed by the Society's or Trust's management. In contrast, auditors of NGOs registered under section 8 of the Companies Act, 2013, are appointed by the company's members. Several statutes, such as the Companies Act, 2013, the Foreign Contribution (Regulation) Act, 1976, and the Income Tax Act, 1961, require NGOs to have their accounts audited and submitted to the relevant authorities. Non-compliance may result in the loss of certain exemptions and benefits. Different statutes may prescribe specific audit reports for NGOs or public distribution agencies (PDAs). For instance, the Foreign Contribution (Regulation) Act, 1976, mandates a specific format for audit reports, which must be submitted to the Ministry of Home Affairs within 60 days of the financial year's end.

When planning an audit, auditors should consider the following:

• Familiarity with the NGO's mission, vision, areas of operation, and operating environment.
• Up-to-date knowledge of relevant statutes, recent amendments, circulars, and judicial decisions.
• Review of the organization's legal form, Memorandum of Association, Articles of Association, and Rules and Regulations.
• Review of the NGO's organization chart, financial and administrative manuals, project and program guidelines, funding agency requirements and formats, and budgetary policies.
• Examination of board/committee meeting minutes to understand the impact of decisions on financial records.
• Study of the accounting system, procedures, internal controls, and internal checks.
• Determination of materiality levels for audit purposes.
• Determination of the nature and timing of reports or other communications.
• Consideration of the involvement of experts and their reports.
• Review of the previous year's audit report.

The audit program should include a systematic review of all assets, liabilities, income, and expenditure, ensuring that no material item is overlooked. Specific areas to be covered include:

• Corpus Fund: Verification of contributions/grants received for the corpus, including donor letters, and checking interest income with investment records.
• Reserves: Verification of transfers from projects/programs, donor letters, and board resolutions, as well as verification of asset sales and adjustments during the year.
• Ear-marked Funds: Verification of donor institution requirements, NGO board resolutions, and scheme rules and regulations.
• Project/Agency Balances: Verification of disbursements and expenditures per donor agreements for each balance.
• Loans: Verification of loans with loan agreements and receipt counterfoils.
• Fixed Assets: Verification of acquisitions/sales, depreciation, and authorizations, as well as donor letters/agreements for grants and verification of immovable property titles.
• Investments: Verification of investment records and physical investments in the NGO's name, as well as verification of investments/disinvestments for approval and bank account references.
• Cash in Hand: Physical verification of cash and imprest balances at year-end.
• Bank Balance: Verification of bank reconciliation statements and details for old outstanding and unadjusted amounts.
• Inventory: Verification of inventory quantities and valuation, with a certificate from management.
• Program and Project Expenses: Verification of donor/contributor agreements for specific programs/projects and verification of contract terms and tax compliance for projects involving contracts.
• Establishment Expenses: Verification of deductions, contributions, and deposits for provident fund, life insurance premiums, and employees' state insurance, as well as verification of other office and administrative expenses.

The audit should also verify the receipt of NGO income in accordance with the following guidelines:

• Contributions and Grants for Projects and Programs: Verification of donor agreements and grant letters to ensure proper accounting of funds received, especially foreign contributions deposited in the designated bank account.
• Receipts from Fundraising Programs: Detailed verification of internal control systems, responsible individuals for fund collection, and daily bank deposits.
• Membership Fees: Verification of fees with the membership register, classification between entrance/annual/life membership fees, and reconciliation of fees received with expected fees.
• Subscriptions: Verification of subscriptions with subscription registers and receipts, reconciliation with the printing and dispatch of publications, and confirmation of subscription rates.
• Interest and Dividends: Verification of interest and dividends received and receivable with investments held during the year.