NGO Audit

Introduction

NGOs (Non-Governmental Organizations) play a critical role in serving the public and contributing to society through social welfare activities, funded primarily by donations, subsidies, and grants from governments or other donors. It is essential for NGOs to maintain transparent financial records of their incoming and outgoing funds to ensure trust and credibility. To further guarantee the accuracy of these records, NGOs are encouraged to have their accounts audited by an independent external auditor. Additionally, NGOs are legally required to file income tax returns as per the law.

Forms of NGO

NGOs can choose from several legal structures, including:

1. Trust: A trust is formed for charitable and religious purposes, and it is established through a Trust deed under the Charitable Endowment Act 1890 and the Charitable and Religious Act 1920.
2. Society: A society is an association of individuals who join together for mutual purposes. It is established under the Societies Registration Act of 1860.
3. Section 8 Company: A non-profit company formed under the Companies Act 2013, with objectives to promote social welfare, education, arts, science, sports, etc.

Audit Procedure for NGOs

The audit procedure for NGOs ensures that their financial accounts reflect the true status of their operations. The process is fairly similar to audits of other businesses:

1. Verification of Accounts: Auditors check all books, trial balances, receipts, payments, and income & expenditure accounts.
2. Fund Source Verification: The auditor examines the sources of funds, ensuring they are from legitimate and transparent sources.
3. Expense Analysis: The auditor ensures that the expenses incurred are appropriately categorized (e.g., revenue vs. capital) and aligns with the NGO’s mission.
4. Audit Report: After thorough verification, an auditor prepares a detailed report, highlighting the accuracy and fairness of the financial statements.

Types of Financial Audits for NGOs

1. External Audit: Conducted by independent auditors to provide a professional opinion on the fairness and accuracy of the NGO’s financial statements.
2. Internal Audit: Performed by the NGO’s own staff or hired professionals to review internal processes, policies, and adherence to legal regulations.
3. Donor Audit: Can be conducted by the NGO’s external auditors or donors themselves to ensure funds are utilized as per the terms set by the donors.
4. Investigative Audit: Carried out when there is a suspicion of fraud or misconduct. It aims to uncover facts that could inform further actions.

Benefits of Audits for NGOs

1. Proof of Authenticity: Audits help NGOs demonstrate transparency, enhancing their credibility and trustworthiness with donors, stakeholders, and the public.
2. Valuable Insights: Auditors provide advice on best practices for managing funds, improving financial controls, and complying with legal requirements.
3. Increased Donor Confidence: A successful audit assures donors that their funds are being used appropriately, leading to increased confidence and possibly more donations.
4. Legal and Financial Compliance: Audits ensure that NGOs comply with the relevant financial and tax regulations, helping them avoid penalties.

Documents Required for NGO Audit

1. Financial Statements: Balance sheet, profit and loss statement, and cash flow statement.
2. Receipts and Payment Accounts: Documentation showing the sources of income and how funds have been spent.
3. Income & Expenditure Accounts: Detailed breakdown of income and expenses.
4. Donation Register: A record of all donations received, along with the corresponding receipts.