# Audit of Societies

## Key Audit Considerations

### 1. Governing Legislation

Auditor shall ascertain the governing legislation under which the society is registered (e.g., Societies Registration Act, 1860, or state-specific legislation).

### 2. Objects of the Society

Ascertained from the Memorandum of Association / Bye-laws of the society.

### 3. Foreign Contribution Compliance

Ascertain whether the society has obtained registration under the Foreign Contribution (Regulation) Act (FCRA), particularly if it receives foreign donations.

### 4. Income Tax Registration

Check whether registered under relevant provisions of the Income Tax Act (e.g., Section 12A/12AA for exemption, Section 80G for donor benefits).

### 5. Internal Controls Over Donations

Obtain understanding of internal controls to design audit procedures with reference to donations - since donations are typically cash-based and prone to misappropriation.

### 6. Accounting Policies

Evaluate appropriateness of accounting policies with reference to donations and grants (e.g., basis of recognition, treatment of restricted vs unrestricted donations).

### 7. Reimbursement of Expenses

Where some expenses incurred by the society are reimbursed by donors, ascertain how these are recognized in the financial statements (netting vs gross presentation).

Worked example

### Example 1

Example - FCRA compliance: A society 'Helping Hands' receives a donation of $50,000 from a US-based NGO. The auditor must verify whether the society is registered under FCRA and whether the donation has been received in a designated FCRA bank account. Receiving foreign contribution without FCRA registration is a serious violation.

### Example 2

Example - Donor reimbursement: Society X organizes a literacy campaign costing Rs. 10 lakhs. Donor Y reimburses Rs. 8 lakhs of these costs. The auditor must check whether the society recognizes Rs. 8 lakhs as income separately and Rs. 10 lakhs as expense (gross basis), or nets the reimbursement against expense - and whether the chosen policy is consistent.

⚠️ Common exam mistakes

Not verifying FCRA registration when foreign donations are involved
Failing to obtain understanding of internal controls over cash donations - a high-risk area
Not checking Income Tax registrations (12A, 80G) which affect tax exemption status
Inconsistent treatment of restricted vs unrestricted donations in financial statements

Reference:

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