Overview of NGO Audit
A non-Profit Organisation (NGO) is an organisation which is operating its social activities with public donations. So, the NGO needs to make accounts and financial statements to show its performance to the general public.
NGOs are established as a public trust under the Trust Laws or Societies Registration Act or a company under the Companies Act, 2013. The NGO requires to receive a foreign contribution for getting its books of accounts audited by the Chartered Accountants (CA).
An NGO gets its accounts audited according to the Incorporation Law depending on its form of Registration. The audit is done as per the Trust Act, Societies Act, Companies Act or Income Tax Act.
Section 12A (b) of the Income Tax Act has made audit mandatory for an NGO in case the total income of the NGO exceeds the maximum amount that is not chargeable to Income Tax in any previous year. The receivables of an organisation are required to be mandatorily audited according to Section 12A (b) of the Act.
Introduction to NGOs
An NGO is established by a group of people to render service without the intention of profit but rather with the sole purpose of helping people in society. The NGO is a non-profit organisation where funds are raised from members, donors, or contributors. In NGOs, funds are also raised through donations and by accomplishing social objectives like giving education, economic assistance to the poor, providing health and medical facilities and dealing with other social issues.
An NGO is established to serve the people and the nation. The source of Income for an NGO is donations from the Government and other donors who are willing to contribute to society. The NGO maintains books of accounts related to the incoming and outgoing funds. The NGO can also get the book audited for their own interest by an independent auditor to assure the donors to rely on the reports. NGOs also file mandatory Income Tax returns.
Benefits of Audit for NGOs
There are so many benefits of audit for an NGO. The most basic benefits of audit for the NGO are as follows:
Types of the Audit for the NGO
Four types of audits are carried out for an NGO to examine its activities of it and verify its working of it as per law and order without any interference, i.e., independently. These audits are as follows:
- External Audit
An independent external auditor executes the external audit. Such an Auditor gives a professional opinion on the fairness and credibility of the financial statements b conducting an examination of samples of the records.
The opinion of this auditor plays a vital role in providing a set of proof of the truthfulness and genuineness of financial reports.
- Internal Audit
The internal audit is executed by the officers and other staff of the NGO or by any professional who is exclusively hired for the audit. The verification of the NGO's policies and procedures is done in an Internal audit.
- Donor Audit
The donor audit is performed by the donor themselves or any external auditors of the NGO. This ensures the donors that their donations are duly utilised.
- Investigative Audit
The investigative audit is performed in a case where the NGO suspects an issue, and the auditor is required to uncover and investigate all the primary and secondary facts.
Purposes of Audits
The different purposes of all types of audits are as follows:
- External Audit
This audit examines the fairness, authenticity and accuracy of the financial statements of the NGO.
- Internal Audit
This audit examines the procedures and policies followed by the NGO.
- Donor Audit
This audit examines all the terms and conditions followed by the NGO.
- Investigative Audit
This audit searches for the evidence connected to the suspected fraud or any other issue.
Forms of Financial Statements for the purpose of NGO Audit
The financial statement forms part of the General-Purpose Financial statements of an NGO:
The fund-based accounting is relevant for the NGO. The Income and Expenditure Account has these three columns to provide income and expenses related to the restricted funds as differentiated from unrestricted funds:
- Restricted funds
- Unrestricted funds (Designated and General Funds)
- Column reflecting the total income and expenses of restricted and unrestricted funds.
The NGO separates designated funds from other unrestricted funds in the internal auditing records. The NGO must take care at the time of publishing the accounts. The NGO also provides an integrated balance sheet at the time of auditing.
The financial statement is prepared only after confirming the accounting standards and other relevant statutory requirements.
Steps were taken by the auditor in conducting the audit
The auditor follows different tasks performed or steps while conducting the audit. Following are such tasks or steps:
Contents of the auditor's report in an NGO Audit
The contents of the auditor's report are as follows:
The format of the auditor's report is as follows:
- The state of affairs of NGO in case of a balance sheet
- The surplus amount in the case of income and expenditure account.
- Payment of the society during the end of the financial year for the receipts and payments account.
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Documents included in Annual Accounts of NGO Audit
The list of documents that are included in audited annual accounts for NGO audit is as follow:
The Audit Procedure for NGO
The NGO carries out its social activities with the help of donations, and so an NGO needs to prepare the financial accounts and statements to showcase the authenticity of its performance and efforts to the general public. When an independent CA audits the accounts, it sums up its validity in the eyes of the public. The procedure for auditing is as follows:
CorpBiz Procedure for NGO Audit
Frequently Asked Questions
The audit report is prepared by the auditor with all facts related to the audit. An audit is an examination of books of accounts based on the regularity, rationality, economy and efficiency. The auditor checks the books of accounts based on the evidence. The auditor prepares the financial statement based on the information collected from examining documents and records presented as evidence. The auditor prepares a record with the facts found in the audit course, known as an Audit Report.
The NGO appoints a CA to audit the books of account. The auditors must visit at least once a year or as per the requirements. The auditor examines the books of account. Then they prepare a balance sheet, income and expenditure, income and receipt and payment accounts that are submitted to the donors and the line departments.
The NGO is required to audit the accounts every year regularly and file income tax returns because the Government, corporate, or other charitable sources ask for the last three years' audit report while providing the grants. According to the IT Act, auditing of accounts is important for having revenue beyond a specific level that may change into a budget.
The NGO must have a CA for consulting on auditing work because they are experts in checking the financial accounts.
It is always the duty of an auditor to check the grants received by the NGO. He checks whether such grants are received as per the legal provisions provided for the same.
The auditor prepares the audit reports addressing the shareholders and presents the same to the concerned department and to the company.
The auditor considers the following facts while preparing the report:
- Addressed to the appropriate authority
- Opinion of Auditor in connection to the financial statements
- Repost should be based on the examination of all books of accounts
- Date showing the duration of the audit
- The report should be clean, qualified and adverse.
- Facts in the report should be clear, correct and concise.