Microlesson · 5-min read

Audit of NGOs — Planning, Audit Areas, and Income Verification

## Audit of NGOs

### What is an NGO?

NGOs are non-profit organisations that raise funds from members, donors or contributors (and receive donated time/skills) to achieve social objectives — education, medical facilities, economic assistance, disaster management, etc.

They may include: religious organisations, voluntary health/welfare agencies, charitable organisations, hospitals, old age homes, research foundations.

Legal forms of incorporation:

Form	Governing Law
Society	Societies Registration Act, 1860
Trust	Indian Trust Act, 1882
Company (non-profit)	Section 8, Companies Act, 2013

> Note: Registration is not always mandatory, except when an NGO is created as a trust relating to immovable property worth more than ₹100 — then registration under Section 17(1) of the Registration Act, 1908 read with Section 123 of the Transfer of Property Act, 1882 is mandatory.

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### Audit Planning for NGOs

The auditor should focus on:

1. Knowledge of the NGO: mission, vision, areas of operation, operating environment.

2. Relevant statutes: Foreign Contribution (Regulation) Act 2010, Societies Registration Act 1860, Income Tax Act 1961, and related rules/circulars/judicial decisions.

3. Legal form review: Memorandum of Association, Articles of Association, Rules and Regulations.

4. Governance documents: Organisation chart, Financial and Administrative Manuals, Project Guidelines, Funding Agency requirements, budgetary policies.

5. Minutes examination: Board/Managing Committee/Governing Body minutes — identify decisions impacting financial records.

6. Accounting system review: Procedures, internal controls, internal checks — verify applicability.

7. Materiality levels: Set for audit purposes.

8. Reporting plan: Nature, timing of reports and communications.

9. Experts: Identify involvement of experts and review their reports.

10. Prior year audit report: Review for outstanding matters.

The audit programme should cover all assets, liabilities, income and expenditure in sequential order ensuring no material item is omitted.

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### Key Balance Sheet Items — Audit Procedures

#### Corpus Fund

Vouch contributions/grants to corpus against donor letters.
Check interest income against Investment Register and physical investments.

#### Reserves

Vouch transfers from projects/programmes against donor letters and board resolutions.
Check transfer of gross value of assets sold from capital reserve to general reserve.

#### Earmarked Funds

Check donor institution requirements, board resolutions, and scheme rules.
Ensure funds are used only for the designated purpose.

#### Project/Agency Balances

Vouch disbursements and expenditure per donor agreements for each balance.

#### Loans

Vouch against loan agreements and counterfoils of receipts.

#### Fixed Assets

Vouch all acquisitions, sales/disposals, and depreciation — verify authorisations.
Check donor letters/agreements for grant-funded assets.
For immovable property: verify title documents.

#### Investments

Verify Investment Register and physical inspection — ensure investments are in the name of the NGO.
Verify further investments and dis-investments for proper approvals.
Check bank accounts for principal and interest receipts.

#### Cash in Hand

Physically verify cash and imprest balances at year end; agree to books.

#### Bank Balance

Check bank reconciliation statements; investigate old outstanding and unadjusted items.

#### Inventory

Physically verify; obtain management certificate for quantities and valuation.

#### Programme and Project Expenses

Verify donor/contributor agreements for conditions on the programme/project.
For projects involving contracts: verify TDS deducted, deposited, and returns filed.
Verify contract terms compliance.

#### Establishment Expenses

Verify PF, LIC, ESIC contributions deducted, contributed and deposited within prescribed time.
Check office expenses: postage, stationery, travelling, etc.

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### Income Verification

#### Contributions & Grants (Projects/Programmes)

Check donor agreements and grant letters — all funds received must be accounted for.
All foreign contributions must be deposited in the designated FCRA bank account as per the Foreign Contribution (Regulation) Act, 2010.

#### Fund Raising Programmes

Verify internal controls — who collects, mode of receipt.
Ensure collections are counted and deposited daily.

#### Membership Fees

Check against Membership Register.
Distinguish between entrance fees, annual fees, and life membership fees.
Reconcile fees received with fees expected.

#### Subscriptions

Check with subscription register and receipts issued.
Reconcile subscriptions received with printing/dispatch of magazines/circulars.
Verify against subscription rate schedule.

#### Interest and Dividends

Check against investments held during the year — interest and dividends received and receivable.

Worked example

### Example 1

Corpus Fund Vouching:

An NGO receives ₹10 lakh as a corpus donation from donor XYZ. The auditor must obtain XYZ's letter specifically designating this as a corpus contribution (not a project grant). Only funds explicitly designated as corpus can be treated as such — if the letter merely says 'donation for the NGO,' it may be treated as general income.

### Example 2

FCRA Compliance:

An NGO receives $5,000 from a US-based foundation. The auditor verifies that (a) the NGO holds a valid FCRA registration, (b) the amount was credited to the designated FCRA bank account (not the regular operations account), and (c) the utilisation is within permitted activities. Failure on any count is a serious audit finding.

### Example 3

Earmarked Fund Verification:

A government agency grants ₹20 lakh earmarked for building a school library. The auditor checks: (a) the grant letter specifies the purpose, (b) board resolution acknowledging the earmarking, (c) all expenditure from the fund is on library construction/books only, (d) unexpended balance is properly carried forward, not diverted.

⚠️ Common exam mistakes

Not distinguishing between corpus, earmarked, and general funds — each has different audit procedures and disclosure requirements.
Forgetting the FCRA requirement: all foreign contributions must go into a specific designated bank account, not the general account.
Missing TDS obligations on project/programme expenses involving contracts.
Treating 'membership fees' as one category — entrance fees, annual fees, and life membership fees require separate reconciliation.
Not physically verifying investments or checking that investments are in the NGO's name (not a trustee's personal name).
Skipping management certificates for inventory and cash — both are required given the disbursed nature of NGO operations.

Bare-Act text Section 8 (Companies Act, 2013); Section 17(1) (Registration Act, 1908); Section 123 (Transfer of Property Act, 1882) · Societies Registration Act, 1860 / Indian Trust Act, 1882 / Companies Act, 2013 / Registration Act, 1908 / Transfer of Property Act, 1882 / Foreign Contribution (Regulation) Act, 2010 · click to expand

Non-Governmental Organisations are generally incorporated as societies under the Societies Registration Act, 1860 or as a trust under the India Trust Act, 1882. NGOs can also be incorporated as a company under section 8 of the Companies Act, 2013. If an NGO is created as a trust and trust relates to immovable property worth more than one hundred rupees, the provision of Section 17(1) of the Registration Act, 1908 read with Section 123 of the Transfer of Property Act, 1882 must be complied with and the registration of trust becomes mandatory.

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