NGO Audit in India:

What is an NGO Audit?

An NGO (Non-Governmental Organization) audit is a systematic and independent examination of the NGO’s financial statements, records, and accounts by a qualified Chartered Accountant (CA). The audit reviews the financial transactions, compliance with legal and regulatory requirements, and the organization’s adherence to its objectives. The purpose is to ensure transparency, accountability, and proper use of funds—especially since NGOs rely heavily on public donations and grants.

Why is NGO Audit Important?

  • Ensures Accountability: Audits provide assurance to donors, funding agencies, and regulators that funds are used as intended.

  • Legal Compliance: Compliance with various laws like the Income Tax Act, the Foreign Contribution Regulation Act (FCRA), and the Societies/Trust Acts often requires an audit.

  • Builds Donor Trust: Transparent financial reporting enhances credibility and helps attract more donors.

  • Operational Improvements: Identifies inefficiencies, helps improve financial management and control systems.

  • Prevents Misuse: Detects discrepancies, fraud, or financial mismanagement.

Who Needs to Get Their NGO Audited?

The audit requirement depends primarily on:

  • Type of Registration: NGOs registered as Trusts, Societies, or Section 8 Companies must adhere to their relevant laws and audit requirements.

  • Income Threshold: Under Section 12A(b) of the Income Tax Act, an NGO whose total income exceeds the maximum non-taxable limit (currently ₹2,50,000 or as updated) must get its accounts audited annually.

  • FCRA Compliance: NGOs receiving foreign contributions must maintain audited accounts and submit annual FCRA returns.

  • Funding Conditions: Many grants from government, corporates, or international agencies mandate submission of audited financials.

Regulatory Framework Governing NGO Audits

  • Income Tax Act, 1961: Section 12A(b) mandates audit and filing of audit report (Form 10B) if income exceeds prescribed limits.

  • Societies Registration Act, 1860: Requires annual audit report for registered societies.

  • Indian Trusts Act, 1882: Trusts must maintain proper accounts and are subject to audits.

  • Companies Act, 2013: Section 8 Companies (non-profit companies) are audited like any registered company.

  • Foreign Contribution (Regulation) Act, 2010 (FCRA): Requires strict audit and reporting for foreign funds.

Scope of NGO Audit

  • Verification of books of accounts, vouchers, donations received, expenditure, assets, and liabilities.

  • Checking compliance of fund utilization as per donor’s guidelines, government grants conditions, and NGO objectives.

  • Evaluation of financial statements, including receipt and payment account, income and expenditure account, and balance sheet.

  • Examination of tax filings, TDS compliance, and adherence to other statutory requirements.

  • Assessment of fund accounting and segregation of restricted and unrestricted funds.

  • Review of internal controls and governance practices.

  • Special audit if required under FCRA or specific donor conditions.

Step-by-Step NGO Audit Process

Step 1: Audit Planning

  • Understanding the NGO’s structure, activities, and sources of income.

  • Review prior audit reports and regulatory filings.

  • Prepare audit checklist and timelines.

Step 2: Review Financial and Legal Documents

  • Trust Deed, Memorandum of Association, bylaws.

  • Income tax registration certificates, 12A/80G approvals.

  • FCRA registration and compliance reports (if applicable).

Step 3: Fieldwork and Verification

  • Examine bank statements, cash books, donation registers.

  • Verify receipts and utilization of funds.

  • Cross check accounting entries with physical evidence.

  • Verify compliance with donor restrictions, grant conditions.

Step 4: Reporting

  • Draft audit report summarizing findings.

  • Recommendations for compliance improvements.

  • Reporting fund balances and utilization to management.

  • Final audit report preparation and submission.

Documents Required for NGO Audit

  • Registration Certificates (Trust, Society, Section 8 Company)

  • PAN and TAN details

  • Income tax exemption certificates (12A, 80G)

  • FCRA registration certificates (if applicable)

  • Financial statements (Balance Sheet, Income & Expenditure Account)

  • Bank statements and Passbooks

  • Donation receipts and ledger

  • Cashbook and journals

  • Grant agreements and utilization certificates

  • Minutes of Board/Trustee meetings

  • Previous audit reports

  • Tax filings and TDS returns

Benefits of Conducting Regular NGO Audits

  • Fulfills legal obligations and avoids penalties.

  • Builds confidence among donors and stakeholders.

  • Improves financial discipline and accountability.

  • Helps management in strategic decision-making.

  • Facilitates grant approvals and renewals.

  • Prevents misuse or misappropriation of funds.

Challenges and Best Practices in NGO Audits

Challenges:

  • Maintaining detailed and accurate financial records.

  • Segregating funds properly in cases of multiple projects/donors.

  • Meeting compliance for multiple laws simultaneously.

  • Understanding of latest regulatory changes.

Best Practices:

  • Maintain a robust accounting system tailored for non-profits.

  • Conduct periodic internal audits to prepare for statutory audits.

  • Train accounting staff on regulatory requirements and documentation.

  • Keep separate bank accounts for different projects/donors.

  • Hire experienced and independent Chartered Accountants familiar with NGO sector.

An NGO audit is essential for demonstrating responsible financial management, safeguarding the organization’s reputation, and ensuring compliance with legal and donor requirements. For NGOs to continue making a positive impact, maintaining transparency and accountability through timely and thorough audits is indispensable.