npo audits

NPO Audits

1

2 Special Issues

5 Audit Management

6 Standards & Guides

4 Role & Responsibility

1 Types & Scope

3 Preparation

2

NGOS

DONOR AGENCIES

SCHOOLS & HOSPITALS

Focus

NPOs - Not for Profit Organisations

Include:

• Schools, colleges, hospitals

• Project-based NGOs

• Donor Agencies

3

Scope of Audit

4

Audit Types

Client?

NGO

Donor

Internal

Tax / FCRA

GPFS

Systems

Utilisation

Pre-funding

5

Audit Scope

• Derived mainly from

• Terms of engagement or

• Terms of Reference

• Whose side are you on?

6

GPFS Audit• Required under registration law or own

bylaws

• True and Fair view

• Assets and Liabilities, including fund balances

• Surplus or deficit

• Receipts and Payments

7

Tax Audit• Form 10B / 10BB

• Utilisation of funds

• for charitable purposes

• within India

• Personal gain?

• Form 3CD

8

CAG on Trust Taxation

• Excess accumulation of surplus

• Investment of capital gains

• Commercial activities

• Separate books

11

CAG on Trust…• Claims for

• Deficit of earlier years

• Depreciation claim

• Repayment of loans

• 80G - control over receipts issued

• Deficiencies in audit report format

12

FCRA Audit• Validation of receipts, utilisation and

balance

• Does not cover details in form FC-6 itself

• Correctness of FCRA BS, I&E, R&P

• Compliance with accounting and banking norms

13

14

Internal Audit• Checking

• Transactions

• Updating of records

• Legal Compliance

• Review of system design and lapses

• Risk-based internal auditing

15

16

Donor-initiated Audits

17

Pre-funding Audit• Objective

• Forecasting risk to donor funds

• Focus

• Legal status / compliance

• Assessing control systems

• Accounting and reporting capacity

• Funds absorption capacity

18

Grant Audit• Objective

• Proper use of funds

• Focus

• Verifying utilisation of funds

• Validating donor reports

• Compliance with grant conditions

• General assessment of systems and records

19

Risk-based Internal Audit

• 3rd Generation Audit Approach

• Primarily for business organisations

• Simplified for use in NGO audits

20

Source: AuditAble 5, www.AccountAid.net, (c) AccountAid India

FRAMS+• Financial Risk Assessment & Mitigation

System

• Assesses risk in six areas

• Suggests mitigation

• Plus?

• Verification of funds utilisation

• Validation of donor reports22

23

NGO Audit Aspects

24

Accountingcorpus,

earmarked funds, unspent grants,

depreciation

Diversiondouble booking,

overlap, salaries, fake supportsBook-keeping

multiple books, allocation (expenses/ income), recoveries

ComplianceFCRA, income tax, TDS, service tax, gratuity

Environmentsize, systems, locations, staff, donor directives

Issues: NGO Audits

25

Environment

26

Big is small…

27

Locations

• Remote - difficult to reach

• Most payments in cash

• Difficult getting reliable bills

• Distributed records

28

Staff and Systems

• Technical background / training of staff

• Understanding of systems - differences

• Systems - Donor driven

29

Accounting Issues

30

Corpus• Concept

• Corpus or endowment fund

• Nominal corpus vs. real corpus

• Using corpus funds

• Investing corpus funds

• Corpus donations - tax issues

31

Unspent Grants

• Donations and grants

• General grant or project grant

• Accounting and presentation

• Safeguarding unspent funds

32

33

Ear-marked Funds

• Different types of funds

• Discretionary or general

• Restricted or ear-marked

• Accounting and safeguarding

34

Depreciation

• Historical purpose

• Relevance to NGO operations

• Under Income Tax

• For donor reporting

• Matching of revenue and expenses

35

36

Book-keeping

37

Separate Books• Origins and purpose

• ‘Separate Accounts’ or ‘separate books of account’

• Legal requirements

• Income Tax

• FCRA

• Donor directive

• Alternative?38

Source: AuditAble 13, www.AccountAid.net, (c) AccountAid India39

Source: AuditAble 13, www.AccountAid.net, (c) AccountAid India40

Allocation Issues• Common expenses

• Allocating to multiple donors

• Basis?

• Interest on bank account

• Allocating to donors

• Average monthly balances

41

Recoveries• Use of NGO resources

• Costing and setting a price

• Accounting and control issues

• Suggested approach

• Direct cost or market, whichever is lower

42

Double Booking

• Problem of double booking

• Expenses

• Salaries

• Common Methods

• Suggested solution

43

UNDP Funds

BM Funds

SDTT Funds

Overlap

• Program overlap

• Segment overlap

• project staff used for fee-based activities

• Identifying and dealing with overlap

45

Bills and Supports• Importance of proving expenses

• Field realities

• Blank bills / signed vouchers

• Alteration of bills

• Paper bills / rubber stamped bills

• Printing of bills

46

47

FIRM NGO

? Movement

Multiple Entities

49

Compliance

50

FCRA

• Separate set of accounts and records

• Columnar presentation for FCRA and non-FC

• Filing nil FC-6, FC-7, FC-8

• India-based foreign sources?

51

Income Tax

• Expenditure outside India

• Transactions with key persons

• Including managers

• Minimum spending norms

52

Service Tax• Applicability similar to other service

providers

• Narrow exemption window

• Applicable to

• Grants given as consultancy contracts

• CSR contracts - advertisement?

53

TDS

• General compliance issues

• Employees as consultants

• 192 or 194J

• Documentation

54

Gratuity

• Applicable since Oct’98

• Implications

• Non-provision

• Remedy for employee

55

Provident Fund

• Exempted repeatedly since 1986

• Current notification valid till 31-Mar-15

• Conditions for exemption

• 12A

• No funds provided for PF

56

Role & Responsibility

57

Role

• Guidance, hand-holding, advisory, compliance, audit

• Book-keeping and audit - conflict?

• Internal audit and statutory audit - conflict?

• Donor mandate vs. NPO mandate

58

Responsibility

• Professional liability

• Diversity of views

• Audit tenure

• Communicating with previous auditor

59

Audit Reports

60

Structure

• Driven by scope of audit

• Form based

• ToR based

• Devised by Auditor

• Relevance of Audit Standards

61

Style• Who will use the report

• General circulation

• Only client

• Client + others

• Language

• User needs

62

On-site Training

Com

plia

nce

67

FRAMS - Summary

68

Risk Hea

t Map

69

Observation

70

Three-band Classification

71

Audit Management

72

Client Interaction

73

Attitude?

74

Properly dressed?

75

Sector Knowledge

76

Audit Planning• Travel

• Facilities / infrastructure

• Coordination

• Communicating

• Team selection

• Team Orientation

77

Building the Practice

• Practice models

• NGO based

• Donor based

• CSR based

• Mixed NPO and Corporate

• Fees and other unmentionables…

78

Standards

79

Authority LevelsStandards on… Authority… Auditing (SA) Mandatory

… Review Engagements (SREs)

Mandatory

… Assurance Engagements (SAEs)

Mandatory

… Related Services (SRSs) Mandatory… Quality Controls (SQCs) Mandatory

Guidance NotesRecommendat

ory81

Standards on Auditing

Audit Type Relevant

General Purpose Financial Statement

Audit

SA 200 to SA 720

Special Purpose Financial Statement

Audit

SA 800 to SA 810

Tax / FCRA AuditSA 200 to SA

720

82

Standards on Related Services

Audit Type Relevant

Prefunding Audit SRS 4400

Grant Audit SRS 4400

FRAMS+ SRS 4400

83

Standard on Internal Audit (SIA)

Audit Type Applicability

Internal Audit SIA 1 to SIA 18

84

Reference Material

85

86

ICAI• Accounting of special Authorities under Central or

state Act (CCONPO, ICAI - 2013)

• Technical Guide on Internal Audit of Not -for- Profit organisation (IASB, ICAI-2013)

• Guidance Note on Accounting by Schools (Tec. Dir., ICAI-2005)

• Management Control Systems in Non-Profit Organisations with Special Reference to Hospitals (Tec. Dir. ICAI-1996)

• Technical guide on accounting for Not-for-Profit organisation (NPO’s) (Tec. Dir., ICAI - 2009)

87

Other Sources• Not-for-Profit GAAP (Wiley, 2012)

• Taxation of Charitable Trusts (BCAS, 2007)

• http://www.bcasonline.org

• www.AccountAid.net

• http://fmsfindia.org.in

• http://www.charitycommission.gov.uk 88