When is NGO Audit Required?
- Year-end financial reporting
- Bank funding or loan requirements
- Internal control and management review
- Periodic verification for large inventory-based businesses
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WHAT IS AN NGO AUDIT?
An NGO audit is an independent examination of the financial records, transactions, and compliance framework of a Non-Governmental Organization (NGO) to ensure transparency, accountability, and proper utilization of funds. It verifies that the NGO’s accounts are maintained correctly and that funds received from donors, grants, or government bodies are used in accordance with applicable laws, donor conditions, and the NGO’s objectives.
In the Indian context, an NGO audit also ensures compliance with Income Tax Act, 1961, Societies Registration Act / Trust Act / Section 8 of the Companies Act, 2013, and other applicable regulatory requirements, thereby enhancing credibility and stakeholder confidence.
SCOPE OF AN NGO AUDIT SERVICES
The scope of an NGO audit covers a comprehensive review of financial records, compliance requirements, and governance practices to ensure transparency, accountability, and proper utilization of funds. Key areas include:
1. Financial Statement Audit: Verification of books of accounts and financial statements to ensure accuracy and a true and fair view.
2. Utilization of Funds: Review of receipts and application of funds to confirm they are used strictly for the NGO’s stated objectives and donor conditions.
3. Compliance with Laws and Regulations: Assessment of compliance with the Income Tax Act, 1961, Societies Registration Act / Trust Act / Section 8 of the Companies Act, 2013, and other applicable laws.
4. Donor & Grant Compliance: Verification of compliance with donor agreements, grant conditions, and reporting requirements.
5. Internal Controls Review: Evaluation of internal control systems over receipts, payments, and asset management.
6. Verification of Statutory Records: Review of statutory registers, minutes, approvals, and governance documentation.
7. Asset & Inventory Verification: Verification of fixed assets, inventory, and proper record maintenance.
8. Income Tax & Exemption Review: Review of compliance related to Sections 11, 12, 12AB, 80G, and other applicable tax provisions.
9. Reporting & Disclosures: Ensuring proper financial disclosures and timely submission of audit reports to authorities and donors.
10. Fraud & Misuse Detection: Identification of irregularities, misappropriation, or weaknesses in financial management.
REGULATORY FRAMEWORK AND STANDARDS
• NGOs are governed by Societies Registration Act, 1860, Indian Trusts Act / State Trust Acts, or Companies Act, 2013 (Section 8).
• Statutory audit is mandatory as per the applicable registration law. • Under Income Tax Act, 1961, NGOs must register under Section 12AB and file Form 10B audit report to claim exemption under Sections 11 & 12. • NGOs receiving foreign funds must comply with FCRA, 2010, maintain separate books, and file Form FC-4 with audited accounts. • Accounting is generally as per ICAI Accounting Standards; audits follow Standards on Auditing (SAs). • Other compliances may include GST, labour laws, and CSR rules.
PURPOSE AND GOALS OF AN NGO AUDIT
An NGO (Non-Governmental Organization) audit is primarily conducted to:
Ensure Financial Accuracy
Regulatory Compliance
Safeguard Donor and Public Funds
Detect Fraud and Mismanagement
Enhance Transparency
Improve Internal Controls
Verify Fund Utilization
Provide Accountability to Stakeholders
Facilitate Regulatory Oversight
Facilitate Future Funding
Encourage Financial Discipline
Assess Operational Efficiency
IMPORTANCE OF NGO AUDIT
- Ensures accuracy of accounts as per Indian Accounting Standards and prescribed formats
- Ensures compliance with the Income Tax Act, 1961 (Sections 12AB, 80G, Forms 10B/10BB)
- Safeguards donor funds, government grants, and public money
- Helps detect fraud, errors, and financial mismanagement
- Ensures proper utilization of funds strictly for charitable objects
- Enhances transparency and credibility before donors and authorities
- Strengthens internal control systems and financial governance
- Ensures compliance with FCRA, 2010 for foreign contributions (where applicable)
- Improves chances of receiving government grants and CSR funding
- Supports legal and tax compliance and avoids penalties
- Assesses operational efficiency and effective use of resources
KEY BENEFITS OF NGO AUDIT
1. Regulatory Compliance: Ensures compliance with applicable laws including Income Tax Act, FCRA, and other governing statutes.
2. Transparency & Accountability: Enhances transparency in financial reporting and accountability in fund utilization.
3. Proper Utilization of Funds: Confirms that funds are applied strictly towards the NGO’s charitable objectives. .
4. Donor Confidence: Builds trust and credibility among donors, grant agencies, and stakeholders.
5. Tax Exemption Safeguard: Helps protect tax exemptions under Sections 11, 12, 12AB, and 80G of the Income Tax Act.
6. Early Detection of Irregularities: Identifies errors, misutilization, or non-compliance at an early stage.
9. Enhanced Governance: Supports better governance and decision-making by trustees and management.
8. Smooth Regulatory: Reporting Facilitates timely and accurate filing of audit reports and statutory returns.
9. Enhanced Governance: Supports better governance and decision-making by trustees and management.
10. Organizational Credibility: Improves the NGO’s standing with regulators, donors, and funding agencies.
FREQUENTLY ASKED QUESTIONS (FAQs)
An NGO audit is an independent examination of the financial statements, records, and compliances of a Non-Governmental Organization to ensure accuracy, transparency, and compliance with applicable Indian laws.
Yes, audit is mandatory if:
- The NGO is registered under Societies Registration Act, Trust Act, or Section 8 of Companies Act, and
- Its income exceeds the basic exemption limit under the Income Tax Act, or
- It receives foreign contribution (FCRA), or
- Audit is required under its governing law or trust deed.
Only a practicing Chartered Accountant (CA) holding a valid Certificate of Practice can conduct a statutory audit of an NGO.
NGO audits are governed by:
- Income Tax Act, 1961
- Societies Registration Act
- Indian Trusts Act
- Companies Act, 2013 (Section 8 companies)
- FCRA, 2010 (if applicable)
- State-specific laws and NGO’s governing documents
Common types of audits include:
- Statutory Audit
- Income Tax Audit
- FCRA Audit
- Donor Audit
- Internal Audit (voluntary but recommended)
Income Tax Audit: Usually 30th September (subject to government extensions)
- FCRA Audit: On or before 31st December
- Society/Trust audit: As per state law or governing document
Key documents include:
- Books of accounts (Cash book, Ledger, Bank book)
- Receipts and payment vouchers
- Bank statements
- Registration certificates
- Trust deed / MOA / AOA
- 12A/12AB and 80G certificates
- FCRA registration (if applicable)
Donor agreements and utilization records
Form 10B is an audit report filed by the auditor for charitable or religious trusts claiming exemption under Section 11 & 12 of the Income Tax Act.
Penalties may include:
- Loss of income tax exemption
- Penalty under Income Tax Act
- Cancellation of FCRA registration (if applicable)
- Adverse donor action or funding suspension
FCRA audit is a mandatory audit for NGOs receiving foreign contributions, ensuring funds are used only for permitted purposes as per FCRA, 2010.
Yes, but:
- For FCRA, only one designated FCRA bank account (SBI New Delhi Branch) is allowed
- Other utilization accounts may be opened with prior approval
The auditor:
- Verifies financial records
- Ensures compliance with laws
- Checks proper utilization of funds
- Issues audit report and observations
NGOs should maintain records for at least 8 years, or longer if required by law or donor agreement.
Yes, organizations may outsource internal audit to independent professional firms to ensure objectivity and specialized expertise.
Yes, NGOs can change auditors by passing a resolution as per their governing rules and informing authorities if required.
The NGO should:
- Address audit remarks promptly
- Rectify compliance gaps
- Maintain proper documentation to avoid future issues
Audit helps in:
- Building donor trust
- Ensuring transparency
- Avoiding legal penalties
- Improving financial management
- Enhancing credibility with stakeholders
Yes. Donor audits focus on specific project funds, while statutory audits cover the overall financial position of the NGO.
Generally, NGOs should be audited annually.