FORMATION

1
FORMATION AUDIT OF NGOs

• 23rd October, 2009
• East Delhi CA CPE Study Circle
• NIRC of ICAI
• New Delhi

CA SUDHIR VARMA
FCA CIA (USA)
2
Formation of NGOs
3
Constituents

1. Trust - Registered document
2. Society - Registrar of Societies
3. Company - Sec. 25 of the Companies Act, 1956

4
Trust

1. No separate Act
2. Trust Deeds can be registered
3. Settler
4. Corpus
5. Trustees
6. Trust Deed

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Trust Deed

1. On a stamp paper as per stamp duty payable on the
   corpus amount.
2. Must clearly and broadly define objects
3. Strength of Board of Trustees
4. Powers of the Trustees / remuneration / benefits
5. Broad guidelines for management of trust
6. On dissolution

6
Societies

• Status
• - Delhi / state
• - All India

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Societies

1. In state level at least 7 promoters (not blood
   related)
2. In all India level at least 8 promoters from 8
   different states of India

8
Societies

• Memorandum of Association
• - name
• - objects
• - profits/benefits to promoters/board members
• - dissolution clause
• - subscribers

9
Societies

• Rules Regulations
• - define rules of membership
• - define rules for elections
• - define powers, duties and responsibilities of
  
• the board and each office bearer
• - define broad parameters of governance

10
Societies

• Registration
• - covering letter in a file cover
• - power of attorney
• - affidavit from secretary / president
• - NOC for registered office
• - Memorandum of Association Rules and
• Regulations signed by each promoter on each
• page
• - proofs of addresses for all promoters

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Societies

• Certificate of Registration
• Certified copies from Registrar of
• - Memorandum of Association
• - Rules Regulations

12
Societies

• Registrations
• - PAN
• - TAN
• - u/s 12AA of Income Tax Act
• - u/s 80G of Income Tax Act
• - IEC code
• - VAT

13
Societies

1. Establish bank account
2. Deposit membership fee
3. Start members register

14
Companies

• Registration process as usual
• - apply for name of approval
• - apply for license to operate as a company
• registered u/s 25 of the Companies Act 1956
• - after obtaining license submit papers for
• incorporation
• - certificate of incorporation issued to mention
  that
• the company is registered u/s 25 of the
• Companies Act 1956

15
Audit of NGOs
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Types of Audit

• 1. Transaction based audit
• 2. System / Risk based audit
• 3. Project based audit
• 4. Donor based audit
• 5. Efficiency audit
• 6. Compliance / Statutory audit
• - Income Tax
• - FCRA
• - Registering authority

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Engagement

• Appointment by appropriate authority
• Engagement letter
• Scope of audit
• Reporting requirements
• Fee

18
Audit approach

• Knowledge of business objects activities
• Audit objectives
• Audit plan
• Audit process
• Resources

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• Transaction based audit
• System / Risk based audit
• Compliance / Statutory audit (as usual)

20
Project based audit

• Understand activity under the project
• Budget for the project
• Separate bank account / books of accounts
• Direct revenues from the project
• - grants
• - donations
• - revenue incomes
• Direct project expenses nature
• Allocation of expenses to projects
• Projects utilization certificates

21
Donor based audit

• Donor sanction letter
• Terms Conditions
• Budget
• Reporting requirements

22

• Corpus / Endowment fund
• Unutilized Grants
• Separate books of accounts for
• - foreign grants
• - local grants
• - revenue
• Accrual vs cash system of accounts
• Receipts and payments accounts

23
Efficiency audit

• Donors / Governing body / Trustees
• Verification of expenses beyond accounting
• External help of specialists
• Common sense / matured judgment
• Team leaders

24
Computerized Environment

• Size of NGO / No. of transactions
• Familiarity with software in use
• Asses software controls
• Use auditing softwares
• Remain abreast with technology

25
Statutory Compliances

• Income Tax Act
• FCRA / FEMA / RBI
• Registration laws
• Labour laws
• VAT / Service Tax
• Commercial laws
• Protection laws
• 8. General laws

26
Auditing and assurance standards

• AAS1 Basic Principles Governing an Audit
• AAS2 Objectives and scope of the Audit of
  Financial Statements
• AAS3 Documentation
• AAS4 The Auditors Responsibility to consider
  Fraud and Error is an Audit of Financial
  Statements
• AAS5 Audit Evidence
• AAS6 Risk Assessments and Internal Control
• AAS7 Relying Upon the work of an Internal
  Auditor
• AAS8 Audit Planning
• AAS9 Using the Work of another Auditor

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Auditing and assurance standards

• AAS10 Using the Work of an Expert
• AAS11 Representations by Management
• AAS12 Responsibility of Joint Auditors
• AAS13 Audit Materiality
• AAS14 Analytical Procedures
• AAS15 Audit Sampling
• AAS16 Going Concern
• AAS17 Quality Control for Audit Work
• AAS18 Auditing of Accounting Estimates
• AAS19 Subsequent Events
• AAS20 Knowledge of the Business

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Auditing and assurance standards

• AAS21 Consideration of Laws and Regulations in
  an Audit of Financial Statements
• AAS22 Initial Engagements Opening Balances
• AAS23 Related Parties
• AAS24 Audit Considerations Relating to Entities
  Using Service Organizations
• AAS25 Comparatives
• AAS26 Terms of Audit Engagements
• AAS27 Communication of Audit Matters with Those
  Charged with Governance
• AAS28 The Auditors report on Financial
  Statements

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Auditing and assurance standards

• AAS29 Audit in a Computer information Systems
  Environment
• AAS30 External Confirmations
• AAS31 Engagements to Compile Financial
  Information
• AAS32 Engagements to Perform Agreed Upon
  Procedures Regarding Financial Statements
• AAS33 Engagements to Review Financial Statements
• AAS34 Audit Evidence Additional Consideration
  for Specific Items
• AAS35 The Examination of Prospective Financial
  Information

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• Q A
• Thank you
• SUDHIR VARMA
• FCA CIA (USA)