AUDIT CHECKLIST FOR AN NGO

For Non-Governmental Organisations (NGOs) around the world to be accountable, transparent, and efficient, auditing is essential. Organisations that work in a variety of fields and frequently have a big impact on society, such as NGOs, are entrusted with the management of financial and human resources in order to address urgent social, economic, and environmental issues. As a result, stakeholders count on NGOs to maintain the greatest standards of governance, management, and moral behaviour. These stakeholders include donors, beneficiaries, regulatory bodies, and the general public.

This audit checklist is intended to offer a thorough framework for assessing NGOs' performance, compliance, and operations from a variety of angles. Through a methodical evaluation of several aspects like programme efficacy, risk management, legal compliance, governance, financial management, and transparency, auditors can pinpoint the advantages, disadvantages, and opportunities for development in non-governmental organisations.

Because of their distinct purposes, financing sources, operational settings, and stakeholder expectations, non-governmental organisations (NGOs) require a customised approach to auditing. While some NGO operations, like financial management and internal controls, may be similar to those of typical enterprises, other aspects, like stakeholder engagement and programme effect assessment, call for specific approaches and concerns.

Furthermore, the audit process must to be seen as a chance for organisational learning, capacity building, and ongoing improvement rather than just a compliance activity. NGOs may increase accountability, trust, and openness by involving stakeholders at every stage of the audit cycle—from planning to reporting—which will increase their credibility and effect.

In an era characterised by heightened expectations from donors, more scrutiny of NGO operations, and changing regulatory environments, audits are an essential instrument for encouraging accountability and fostering constructive change in the industry. NGOs may carry out their missions more successfully and make a significant contribution to social progress and sustainable development by upholding strict audit standards, adopting best practices, and promoting a culture of openness and learning.

DETAILED AUDIT CHECKLIST

Organizational Documentation

1. Registration Certificates

Verify the NGO’s registration under the appropriate Act:

• Societies Registration Act, 1860: Ensure the NGO is registered as a society if applicable. Obtain and review the Society Registration Certificate.
• Indian Trusts Act, 1882: If the NGO is a trust, verify the registration under the Trusts Act. Obtain and review the Trust Deed and the Trust Registration Certificate.
• Section 8 of the Companies Act, 2013: For Section 8 companies, confirm registration under the Companies Act. Obtain and review the Certificate of Incorporation issued by the Registrar of Companies.

Check the validity and renewal status of the registration:

• Ensure that the registration certificates are up to date and check if there are any renewal requirements.
• Verify that any required renewals have been completed on time and proper documentation is available.
• Confirm that the NGO is compliant with all statutory requirements related to its registration status.

2. Governing Documents

• Review the Memorandum of Association (MoA) and Articles of Association (AoA), or Trust Deed:
• For societies and Section 8 companies, obtain and review the MoA and AoA to understand the NGO’s objectives, governance structure, and operational guidelines.
• For trusts, review the Trust Deed to ensure it clearly outlines the trust’s purpose, governance, and operational guidelines.
• Confirm that these documents align with the NGO’s current operations and activities.

Ensure all amendments are documented and approved:

• Check for any amendments made to the MoA, AoA, or Trust Deed.
• Verify that all amendments have been duly approved by the governing body (Board of Trustees, Board of Directors, or General Body, as applicable).
• Ensure that any changes have been filed with the appropriate regulatory authorities (Registrar of Societies, Registrar of Companies, etc.) and that approval/acknowledgment of these changes is on record.

Governance and Compliance

Board Meetings:

Verify minutes of Board meetings:

• Obtain copies of minutes for all board meetings held during the reporting period.
• Ensure minutes are complete, accurately reflect discussions and decisions, and are signed by the chairperson.

Check for compliance with quorum requirements and frequency of meetings:

• Review the organization's bylaws or governing documents to determine quorum requirements.
• Confirm that quorum was met for each board meeting.
• Ensure board meetings were held at least as frequently as required by law or organizational policies.

Statutory Compliance:

• Ensure compliance with the Foreign Contribution (Regulation) Act (FCRA), if applicable:
• Verify FCRA registration status and validity.
• Review FCRA utilization and reporting to ensure compliance with regulations.
• Verify compliance with labor laws, including EPF, ESI, and minimum wage regulations:
• Review employee records to ensure compliance with EPF and ESI contributions.
• Confirm that the organization is paying employees at least the minimum wage required by law.

Legal and Tax Compliance:

• Confirm registration under the Income Tax Act (Section 12A, 80G):
• Verify registration under Section 12A for tax exemption on income generated from charitable activities.
• Ensure registration under Section 80G for tax benefits to donors.

Verify timely filing of Income Tax Returns (ITR), FCRA returns, and other statutory reports:

• Review records to confirm that annual ITRs have been filed with the Income Tax Department.
• Ensure timely submission of FCRA returns and other statutory reports.

Review GST registration and compliance, if applicable:

• Confirm GST registration status and validity.
• Verify compliance with GST regulations, including filing of returns and payment of taxes.

Financial Management

Budgeting and Financial Planning:

• Review the annual budget and financial plan
• Obtain a copy of the organization's annual budget and financial plan.
• Assess the comprehensiveness and realism of revenue and expense projections.

Ensure alignment of expenditures with the approved budget:

• Compare actual expenditures with the budget to identify any significant variances.
• Investigate and document reasons for any deviations from the budget.

Accounting Records:

• Verify maintenance of books of accounts (cash book, ledger, receipts, and payments):
• Review the organization's accounting records to ensure completeness and accuracy.
• Check that all financial transactions are properly recorded and classified.

Check reconciliation of bank statements:

• Verify that bank statements are reconciled regularly with the organization's accounting records.
• Investigate and resolve any discrepancies between bank balances and book balances.

Internal Controls:

• Assess internal control mechanisms for cash handling, procurement, and inventory:
• Review internal control policies and procedures related to cash handling to prevent fraud and misappropriation.
• Evaluate controls over procurement processes to ensure transparency and compliance with procurement policies.
• Assess inventory management controls to prevent loss, theft, or misuse of inventory items.

Review the authorization and approval process for expenditures:

• Evaluate the process for approving and authorizing expenditures to ensure compliance with internal policies and procedures.
• Verify that expenditures are supported by appropriate documentation and approvals.

Audit Reports:

• Examine the previous year's audit report and management response to audit findings
• Obtain a copy of the previous year's audit report and management letter.
• Review the auditor's findings and recommendations and management's responses to address any identified deficiencies.
• Verify the appointment of an auditor and the auditor’s independence.
• Confirm the appointment of a qualified and independent auditor in accordance with regulatory requirements.
• Assess the auditor's independence and objectivity to ensure the integrity of the audit process.

Financial Statements

Balance Sheet:

• Verify the accuracy of assets and liabilities
• Confirm that all assets and liabilities are accurately recorded.
• Check for any discrepancies between recorded amounts and supporting documentation.

Check for proper classification and valuation of fixed assets:

• Ensure that fixed assets are properly classified (e.g., land, buildings, equipment).
• Verify that fixed assets are valued correctly and in accordance with applicable accounting standards.
• Confirm that depreciation is calculated and recorded accurately.

Income and Expenditure Statement:

• Confirm the accuracy and completeness of income and expenditure entries
• Review all income entries to ensure they are complete and accurately recorded.
• Check all expenditure entries for accuracy and completeness.

Verify that expenses are incurred for charitable purposes:

• Ensure that all expenses are related to the NGO’s charitable objectives.
• Confirm that expenditures are supported by appropriate documentation and approvals.

Cash Flow Statement:

• Review cash flow from operating, investing, and financing activities:
• Verify that the cash flow statement accurately reflects cash inflows and outflows.
• Ensure that cash flows are properly classified into operating, investing, and financing activities.
• Check for consistency with other financial statements.

Notes to Accounts:

• Ensure adequate disclosure of accounting policies and contingent liabilities
• Review notes to accounts to confirm that all significant accounting policies are disclosed.
• Check for disclosure of any contingent liabilities or commitments.
• Ensure that notes provide adequate explanations and details for understanding the financial statements.

Grants and Donations

Grant Management:

• Verify the receipt and utilization of grants as per donor agreements:
• Obtain copies of donor agreements and grant letters.
• Verify that grant funds received match the amounts stated in the agreements.
• Check that the utilization of grant funds is in line with the purposes and conditions specified by the donors.
• Review project reports and financial records to confirm that funds were used appropriately.

Check compliance with donor reporting requirements:

• Review donor reporting schedules and ensure timely submission of required reports.
• Verify that financial and narrative reports to donors are accurate and comprehensive.
• Ensure that any required audits or evaluations specified by donors have been conducted and reported.

Donation Records:

• Ensure proper documentation of donations received:
• Verify that all donations are recorded in the accounting system.
• Check for supporting documentation for each donation, such as donation receipts, bank statements, and acknowledgment letters.
• Ensure that records include details of the donor, amount donated, date of donation, and any specific conditions or restrictions.

Verify issuance of 80G certificates to donors, if applicable:

• Confirm that the NGO is registered under Section 80G of the Income Tax Act.
• Verify that 80G certificates are issued to eligible donors promptly.
• Check that 80G certificates include all necessary details, such as the donor's name, amount donated, date of donation, and the NGO's 80G registration details.

Project Management

Project Implementation:

• Review project proposals, budgets, and timelines:
• Obtain copies of project proposals to understand the objectives, scope, and expected outcomes.
• Review project budgets to ensure they are realistic and align with project goals.
• Check project timelines to ensure they are feasible and include key milestones.

Verify adherence to project plans and achievement of objectives:

• Compare actual project progress with the project plan and timeline.
• Review project expenditures to ensure they are in line with the approved budget.
• Assess the achievement of project objectives by comparing planned outputs and outcomes with actual results.
• Examine project reports and documentation for evidence of completed activities and achieved milestones.

Monitoring and Evaluation:

• Assess the effectiveness of monitoring and evaluation mechanisms:
• Review the NGO’s monitoring and evaluation (M&E) framework and methodologies.
• Check for regular monitoring reports and documentation of project activities.
• Verify that M&E activities are conducted in a timely manner and involve relevant stakeholders.

Review impact assessment reports and feedback:

• Obtain and review impact assessment reports to evaluate the effectiveness and sustainability of the project.
• Assess feedback from beneficiaries, stakeholders, and project staff to identify areas of success and opportunities for improvement.
• Ensure that lessons learned and best practices are documented and used to inform future projects.

Human Resources

Staff Records:

• Verify the maintenance of employee records (contracts, attendance, leave records):
• Ensure that each employee has a personal file containing their employment contract, job description, and any amendments.
• Check attendance records to ensure accurate tracking of employee presence.
• Review leave records to verify proper documentation and approval of leave taken.

Check for compliance with employment laws:

• Ensure that employment contracts comply with local labor laws and include all necessary terms and conditions.
• Verify that working hours, overtime, and leave policies comply with legal requirements.
• Confirm that the NGO follows anti-discrimination, harassment, and health and safety regulations.

Salary and Benefits:

• Review payroll records and ensure timely payment of salaries and statutory dues:
• Examine payroll records to confirm that salaries are calculated correctly and paid on time.
• Check those statutory dues (e.g., Provident Fund, Employee State Insurance) are deducted and remitted correctly.
• Verify that pay slips are issued to employees and include all necessary details.

Verify the calculation and remittance of taxes and contributions:

• Ensure accurate calculation and timely remittance of income tax deducted at source (TDS) from employee salaries.
• Confirm the calculation and payment of employer contributions to statutory benefits (e.g., EPF, ESI).
• Review records of tax filings and payments to ensure compliance with tax regulations.

Information Technology

Data Security:

• Assess the adequacy of data security measures and backup systems
• Data Security Measures
• Review the organization's data security policies and procedures.
• Verify the implementation of access controls to ensure only authorized personnel have access to sensitive data.
• Check for the use of encryption for data storage and transmission.
• Assess the use of firewalls, antivirus software, and other security tools to protect against unauthorized access and malware.

Backup Systems:

• Ensure that regular data backups are performed as per the organization's backup policy.
• Verify that backups are stored securely, both on-site and off-site, to prevent data loss.
• Test the restoration process to ensure that backups can be successfully restored if needed.
• Check for documentation of backup schedules and backup integrity tests.

Software Compliance:

• Ensure the use of licensed software and compliance with IT policies:
• Licensed Software:
• Review the inventory of software installed on the organization's computers and servers.
• Verify that all software is properly licensed and that the organization holds valid licenses for all software in use.
• Check for documentation of software purchases, licenses, and renewals.

Compliance with IT Policies:

• Review the organization's IT policies, including those related to software usage, internet usage, and data protection.
• Ensure that employees are aware of and comply with IT policies.
• Check for regular updates to IT policies to keep them in line with current best practices and legal requirements.
• Assess the organization's procedures for monitoring compliance with IT policies, including periodic audits and employee training.

Risk Management

Risk Assessment:

• Identify potential risks (financial, operational, reputational)
• Financial Risks
• Review potential financial risks such as budget shortfalls, funding uncertainties, and economic instability.
• Assess the impact of financial risks on the organization's ability to achieve its objectives.

Operational Risks:

• Identify operational risks related to internal processes, systems, and procedures.
• Review potential risks such as staffing shortages, technology failures, and supply chain disruptions.
• Assess the impact of operational risks on the organization's ability to deliver programs and services.

Reputational Risks:

• Identify risks that could damage the organization's reputation or public trust.
• Review potential risks such as negative publicity, ethical lapses, or controversies.
• Assess the impact of reputational risks on the organization's credibility and ability to attract funding and support.

Review the NGO’s risk management policy and mitigation strategies:

• Review the NGO’s risk management policy:
• Obtain a copy of the organization's risk management policy and procedures.
• Assess the comprehensiveness and effectiveness of the policy in addressing potential risks.
• Verify that the policy is regularly reviewed and updated to reflect changes in the organization's operating environment.

Review mitigation strategies:

• Evaluate the NGO's strategies for mitigating identified risks.
• Assess the effectiveness of risk mitigation measures in reducing the likelihood and impact of risks.
• Verify that risk mitigation strategies are integrated into the organization's operations and decision-making processes.

Conclusion

Conducting an audit for an NGO can be quite intricate, as it entails assessing its adherence to legal requirements, financial practices, programme impact, and involvement with stakeholders. Having a comprehensive audit checklist is crucial to ensure that the NGO maintains a strong commitment to governance, transparency, and accountability. Through the process of conducting audits, NGOs are able to assess their strengths and areas for improvement. This not only helps them maintain donor confidence and regulatory compliance, but also enhances their overall effectiveness and impact.

TaxPartner is well-equipped to assist in this process, leveraging its expertise in financial audits and deep understanding of the unique challenges faced by NGOs. Our team of skilled auditors is equipped to perform comprehensive financial statement audits, evaluate the efficiency of internal controls, ensure adherence to applicable laws and regulations, and offer valuable insights on risk management.

TaxPartner provides training and support to NGO staff, enhancing their financial management capabilities and promoting a better understanding of audit processes. With TaxPartner's expertise, NGOs can ensure their financial practices meet the highest standards, build trust with stakeholders, and ultimately achieve greater financial sustainability, operational efficiency, and social impact.

FAQs

What is the purpose of an NGO audit?

The purpose of an NGO audit is to ensure financial transparency, compliance with legal and regulatory requirements, effective use of resources, and to build trust with stakeholders, including donors and beneficiaries.

What documents are required for an NGO audit?

Key documents include registration certificates, governing documents (MoA, AoA, Trust Deed), financial statements (balance sheet, income and expenditure statement, cash flow statement), donor agreements, grant utilization reports, payroll records, and compliance documents (FCRA, EPF, ESI, GST, tax filings).

What are the primary areas reviewed during an NGO audit?

Primary areas include organizational documentation, governance and compliance, financial management, project management, human resources, information technology, and risk management.

How often should an NGO conduct an audit?

An NGO should conduct an annual audit. Additionally, specific audits may be required for individual projects or as stipulated by donors.

Who can perform an audit for an NGO?

Audits should be performed by a qualified and independent Chartered Accountant (CA) who is not associated with the NGO’s operations to ensure impartiality.

What is FCRA compliance and why is it important for NGOs in India?

FCRA (Foreign Contribution (Regulation) Act) compliance is crucial for NGOs receiving foreign contributions. It ensures that foreign funds are used for the intended charitable purposes and that the NGO adheres to reporting and regulatory requirements.

What should be included in the minutes of board meetings?

Minutes should include the date, time, and place of the meeting, list of attendees, agenda items discussed, decisions made, resolutions passed, and action items. Minutes should be signed by the chairperson and properly documented.

What are the key aspects of financial management reviewed during an audit?

Key aspects include budgeting and financial planning, accuracy and completeness of accounting records, internal controls over cash handling and expenditures, and compliance with tax and statutory requirements.

How is the accuracy of the balance sheet verified during an audit?

Accuracy is verified by cross-checking recorded assets and liabilities with supporting documents, ensuring proper classification and valuation of fixed assets, and reconciling with bank statements and other financial records.

What are the common internal controls that should be in place for cash handling?

Common internal controls include segregation of duties, regular reconciliation of cash records, proper authorization of transactions, secure storage of cash, and regular internal audits.

What is the importance of maintaining proper donation records?

Proper donation records ensure transparency, help in tracking the source and use of funds, facilitate compliance with legal requirements, and build trust with donors by providing necessary documentation for tax benefits.

What steps should be taken to ensure compliance with labor laws?

Steps include maintaining accurate employee records, ensuring contracts comply with legal requirements, adhering to minimum wage laws, timely payment of salaries and statutory dues (EPF, ESI), and providing a safe working environment.

What are the critical elements of an effective risk management policy?

Critical elements include identification of potential risks, assessment of their impact and likelihood, development of mitigation strategies, regular monitoring and review, and clear documentation and communication of risk management procedures.

How can NGOs ensure the use of licensed software and IT compliance?

NGOs can ensure compliance by maintaining an inventory of all software, ensuring all software is properly licensed, regularly updating software to avoid security vulnerabilities, and adhering to IT policies regarding usage and data protection.

Why is it important to review impact assessment reports during an audit?

Reviewing impact assessment reports helps verify whether the NGO’s projects are achieving their intended outcomes, provides insights into the effectiveness and efficiency of project implementation, and informs future planning and decision-making processes.