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NPO Audits 1

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NPO Audits. 2. 5. 6. 4. 1. 3. Special Issues. Preparation. Types & Scope. Role & Responsibility. Standards & Guides. Audit Management. Focus. NPOs - Not for Profit Organisations Include: Schools, colleges, hospitals Project-based NGOs Donor Agencies. Schools & Hospitals. NGOs. - PowerPoint PPT Presentation

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Page 1: NPO Audits

NPO Audits

1

Page 2: NPO Audits

2 Special Issues

5 Audit Management

6 Standards & Guides

4 Role & Responsibility

1 Types & Scope

3 Preparation

2

Page 3: NPO Audits

NGOS

DONOR AGENCIES

SCHOOLS & HOSPITALS

Focus

NPOs - Not for Profit Organisations

Include:

• Schools, colleges, hospitals

• Project-based NGOs

• Donor Agencies

3

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Scope of Audit

4

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Audit Types

Client?

NGO

Donor

Internal

Tax / FCRA

GPFS

Systems

Utilisation

Pre-funding

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Audit Scope

• Derived mainly from

• Terms of engagement or

• Terms of Reference

• Whose side are you on?

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GPFS Audit• Required under registration law or own

bylaws

• True and Fair view

• Assets and Liabilities, including fund balances

• Surplus or deficit

• Receipts and Payments

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Tax Audit• Form 10B / 10BB

• Utilisation of funds

• for charitable purposes

• within India

• Personal gain?

• Form 3CD

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CAG on Trust Taxation

• Excess accumulation of surplus

• Investment of capital gains

• Commercial activities

• Separate books

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CAG on Trust…• Claims for

• Deficit of earlier years

• Depreciation claim

• Repayment of loans

• 80G - control over receipts issued

• Deficiencies in audit report format

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FCRA Audit• Validation of receipts, utilisation and

balance

• Does not cover details in form FC-6 itself

• Correctness of FCRA BS, I&E, R&P

• Compliance with accounting and banking norms

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Internal Audit• Checking

• Transactions

• Updating of records

• Legal Compliance

• Review of system design and lapses

• Risk-based internal auditing

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Donor-initiated Audits

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Pre-funding Audit• Objective

• Forecasting risk to donor funds

• Focus

• Legal status / compliance

• Assessing control systems

• Accounting and reporting capacity

• Funds absorption capacity

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Grant Audit• Objective

• Proper use of funds

• Focus

• Verifying utilisation of funds

• Validating donor reports

• Compliance with grant conditions

• General assessment of systems and records

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Page 18: NPO Audits

Risk-based Internal Audit

• 3rd Generation Audit Approach

• Primarily for business organisations

• Simplified for use in NGO audits

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Source: AuditAble 5, www.AccountAid.net, (c) AccountAid India

Page 20: NPO Audits

FRAMS+• Financial Risk Assessment & Mitigation

System

• Assesses risk in six areas

• Suggests mitigation

• Plus?

• Verification of funds utilisation

• Validation of donor reports22

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NGO Audit Aspects

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Accountingcorpus,

earmarked funds, unspent grants,

depreciation

Diversiondouble booking,

overlap, salaries, fake supportsBook-keeping

multiple books, allocation (expenses/ income), recoveries

ComplianceFCRA, income tax, TDS, service tax, gratuity

Environmentsize, systems, locations, staff, donor directives

Issues: NGO Audits

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Environment

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Big is small…

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Locations

• Remote - difficult to reach

• Most payments in cash

• Difficult getting reliable bills

• Distributed records

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Staff and Systems

• Technical background / training of staff

• Understanding of systems - differences

• Systems - Donor driven

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Accounting Issues

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Corpus• Concept

• Corpus or endowment fund

• Nominal corpus vs. real corpus

• Using corpus funds

• Investing corpus funds

• Corpus donations - tax issues

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Unspent Grants

• Donations and grants

• General grant or project grant

• Accounting and presentation

• Safeguarding unspent funds

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Ear-marked Funds

• Different types of funds

• Discretionary or general

• Restricted or ear-marked

• Accounting and safeguarding

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Depreciation

• Historical purpose

• Relevance to NGO operations

• Under Income Tax

• For donor reporting

• Matching of revenue and expenses

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Book-keeping

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Separate Books• Origins and purpose

• ‘Separate Accounts’ or ‘separate books of account’

• Legal requirements

• Income Tax

• FCRA

• Donor directive

• Alternative?38

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Source: AuditAble 13, www.AccountAid.net, (c) AccountAid India39

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Source: AuditAble 13, www.AccountAid.net, (c) AccountAid India40

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Allocation Issues• Common expenses

• Allocating to multiple donors

• Basis?

• Interest on bank account

• Allocating to donors

• Average monthly balances

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Recoveries• Use of NGO resources

• Costing and setting a price

• Accounting and control issues

• Suggested approach

• Direct cost or market, whichever is lower

42

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Double Booking

• Problem of double booking

• Expenses

• Salaries

• Common Methods

• Suggested solution

43

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UNDP Funds

BM Funds

SDTT Funds

Page 43: NPO Audits

Overlap

• Program overlap

• Segment overlap

• project staff used for fee-based activities

• Identifying and dealing with overlap

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Bills and Supports• Importance of proving expenses

• Field realities

• Blank bills / signed vouchers

• Alteration of bills

• Paper bills / rubber stamped bills

• Printing of bills

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FIRM NGO

? Movement

Multiple Entities

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Compliance

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FCRA

• Separate set of accounts and records

• Columnar presentation for FCRA and non-FC

• Filing nil FC-6, FC-7, FC-8

• India-based foreign sources?

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Income Tax

• Expenditure outside India

• Transactions with key persons

• Including managers

• Minimum spending norms

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Service Tax• Applicability similar to other service

providers

• Narrow exemption window

• Applicable to

• Grants given as consultancy contracts

• CSR contracts - advertisement?

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TDS

• General compliance issues

• Employees as consultants

• 192 or 194J

• Documentation

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Gratuity

• Applicable since Oct’98

• Implications

• Non-provision

• Remedy for employee

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Provident Fund

• Exempted repeatedly since 1986

• Current notification valid till 31-Mar-15

• Conditions for exemption

• 12A

• No funds provided for PF

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Role & Responsibility

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Role

• Guidance, hand-holding, advisory, compliance, audit

• Book-keeping and audit - conflict?

• Internal audit and statutory audit - conflict?

• Donor mandate vs. NPO mandate

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Responsibility

• Professional liability

• Diversity of views

• Audit tenure

• Communicating with previous auditor

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Audit Reports

60

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Structure

• Driven by scope of audit

• Form based

• ToR based

• Devised by Auditor

• Relevance of Audit Standards

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Style• Who will use the report

• General circulation

• Only client

• Client + others

• Language

• User needs

62

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On-site Training

Com

plia

nce

67

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FRAMS - Summary

68

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Risk Hea

t Map

69

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Observation

70

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Three-band Classification

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Audit Management

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Client Interaction

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Attitude?

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Properly dressed?

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Sector Knowledge

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Audit Planning• Travel

• Facilities / infrastructure

• Coordination

• Communicating

• Team selection

• Team Orientation

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Building the Practice

• Practice models

• NGO based

• Donor based

• CSR based

• Mixed NPO and Corporate

• Fees and other unmentionables…

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Standards

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Authority LevelsStandards on… Authority… Auditing (SA) Mandatory

… Review Engagements (SREs)

Mandatory

… Assurance Engagements (SAEs)

Mandatory

… Related Services (SRSs) Mandatory… Quality Controls (SQCs) Mandatory

Guidance NotesRecommendat

ory81

Page 75: NPO Audits

Standards on Auditing

Audit Type Relevant

General Purpose Financial Statement

Audit

SA 200 to SA 720

Special Purpose Financial Statement

Audit

SA 800 to SA 810

Tax / FCRA AuditSA 200 to SA

720

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Standards on Related Services

Audit Type Relevant

Prefunding Audit SRS 4400

Grant Audit SRS 4400

FRAMS+ SRS 4400

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Standard on Internal Audit (SIA)

Audit Type Applicability

Internal Audit SIA 1 to SIA 18

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Reference Material

85

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ICAI• Accounting of special Authorities under Central or

state Act (CCONPO, ICAI - 2013)

• Technical Guide on Internal Audit of Not -for- Profit organisation (IASB, ICAI-2013)

• Guidance Note on Accounting by Schools (Tec. Dir., ICAI-2005)

• Management Control Systems in Non-Profit Organisations with Special Reference to Hospitals (Tec. Dir. ICAI-1996)

• Technical guide on accounting for Not-for-Profit organisation (NPO’s) (Tec. Dir., ICAI - 2009)

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Other Sources• Not-for-Profit GAAP (Wiley, 2012)

• Taxation of Charitable Trusts (BCAS, 2007)

• http://www.bcasonline.org

• www.AccountAid.net

• http://fmsfindia.org.in

• http://www.charitycommission.gov.uk 88