Introduction
NGOs are basically formed to serve the nation and its people. The main source of income or receipts of NGOs is donations or the subsidy, the grants from governments and the other donors who are willing to contribute to society. The NGO’s shall maintain the books of accounts pertaining to the incoming and outgoing of the funds. Thereafter, the NGO for their own interest can get the books audited by an independent external auditor to assure the donor that he/she can rely on the reports. The NGO’s are also required to file necessary IT returns as it is a legal entity in the eyes of law. As per the CBI report of 2015, there are more than 31 Lakhs NGOs in the nation.
Forms of NGO
NGOs can choose any option to select the form of their constitution. The different types of form of NGOs are:
- Trust
Trust is organized for the purpose of philanthropic and religious purposes. It could be established by Trust deed. In the formation of trust the charitable endowment act’1890 and Charitable and religious act’1920 have a presence on the establishment of a charitable trust.
- Society
Society is an organization of persons who come together by common assent to act jointly for mutual purposes. The agreement has to be made under the Societies certification act’1860.
- Section 8 Company
Company Act 2013 is the governing act for Section 8 Company which is formed with charitable objectives to help and elevate the society i.e. promoting arts, commerce, education, charity, protection of environment, sports, science, research, social welfare, religion.
Audit Procedure for NGO
Non-profit organizations (NGO) are the social establishments who operate to carry out the social activities with the help of public donations and therefore it is very important for them to prepare the financial accounts and statements so that they can showcase the authenticity of their performance & efforts to the general public. When these accounts and statements are audited by an independent Chartered Accountant, it sums up the validity of the same in the eyes of the general public. The procedure for auditing is very simple.
- Similar to the auditing for accounts of other businesses, the auditor first checks all the books with all previous data, followed by checking accounts and trial balance.
- Checking of receipt & payment accounts and income & expenditure accounts are very important and inevitable phases of the auditing process for NGO. An auditor checks the amount that NGO has received, the sources from these funds are received, its voucher and the different expenses of NGO. He also checks the nature of expenses whether its revenue or capital.
- An auditor prepares the audit report after thoroughly verifying & checking all financial statements including social accounting.
Different steps an Auditor takes to conduct the Audit
- Auditor has to discern the memorandum of the NGO which means an auditor must know and understand the activities that an NGO undertakes for the welfare of the society and the field the NGO operates in.
- Auditors have to check & ensure the legality of the NGO and various compliance under different Acts of such as Income-tax Act, Labour Law, ESIC, etc
- Auditors have to verify & ensure that all the income coming to the accounts of NGO such as Government grants/subsidies, donations etc are from a legitimate source or not out of surplus black money.
- For the government grants, a separate account has to be opened for the proper and organized recording of the grants.
- Auditor also has to verify the investment or expenditure of funds by the NGO. NGO is supposed to maintain complete transparency for funds utilized in various fields.
- NGO needs to keep an updated record for every single rupee it spends because it plays an important role in the process of inspection and it ensures the legal utilization of funds only for the fulfillment of sole motto of the NGO.
- Auditors have to confirm the applicability of Sec 12AA and 80G on NGOs and that the exemptions are provided to all donors who have made donations and for the same, the counterfoils of receipts given to donors must be authenticated with the donation register.
- Background check of all the NGO executives, officials, people actively connected with the NGO is also carried out by the auditors.
Types of financial audit for NGO
There are four types of financial audit carried out for NGO to independently examine the activities of NGO and to verify that the NGO is working in adherence to law and order. The types of audits are as follows:
- External audit
An external audit is executed by independent auditors to give a professional opinion on the credibility and fairness of the financial statements on the basis of careful examination of an array of samples of the records. The opinion of the auditor plays an important role as it provides a set of proofs that financial reports are true and can be trusted by stakeholders, trustees and donors.
- Internal audit
An internal audit can be executed by the staff of the NGO or by competent professionals exclusively hired for audit. It includes verification of the NGO's policies and procedures and their consonance with law. This offers authenticated and updated information about the methods being followed to the trustees.
- Donor audit
A donor audit can be performed by the NGO’s external auditors or by donors themselves. This entrusts confidence among the donors that their donations have been duly utilized under the legal conditions. A successful audit often bolsters additional funding’s.
- Investigative audit
An investigative audit can be performed when an NGO suspects a particular issue (which is usually related to fraud) and auditor needs to uncover all the primary as well as secondary facts. The auditors may put forth the proofs for the next steps that the NGO may opt to take.
Different Purposes of Different Audits
- An external audit examines the authenticity, accuracy and fairness of the financial statements of the NGO.
- An internal audit examines the policies and procedures followed by the NGO.
- A donor audit examines the terms and conditions followed by the NGO.
- An investigative audit scouts for the evidence connected to particular suspected ill action.
Benefits of Audit for NGO
Plenty of benefits are consequences when an NGO is audited. The two main advantages of Audit for NGO are as follows:
- Proof of authenticity
Audits help an NGO to provide proof of its authenticity and honesty in its financial statements and the practices carried out by them.
- Auditor’s Advice
Auditors are updated with the latest amendments made by the government and they are competent enough to provide valuable advice on financial methods and controls to the NGOs. An audit allows an NGO to take and apply the tact’s & knowledge given by auditors, besides taking the help of the auditor in the investigation of particular issues.
