A Non-Governmental Organization (NGO) is an entity established by a group of individuals with the primary goal of serving society rather than generating profit. NGOs rely on donations, government grants, and member contributions to support causes such as education, healthcare, disaster relief, and social welfare.

Introduction

NGOs play a crucial role in social development. Their primary source of funding comes from donations, subsidies, and grants from the government or private donors. It is essential for NGOs to maintain transparent financial records to ensure credibility with donors and legal authorities.

To validate financial integrity, NGOs may undergo an independent audit, ensuring accountability and compliance with regulations. NGOs are also required to file Income Tax (IT) returns as they hold a legal status under the law.

As per a 2015 CBI report, India has over 31 lakh registered NGOs.

Forms of NGO

NGOs can register under different legal structures, including:

1. Trust - Established for philanthropic or religious purposes and governed by the Charitable Endowment Act, 1890 and Charitable and Religious Act, 1920.
2. Society - Formed by a group of individuals for mutual objectives under the Societies Registration Act, 1860.
3. Section 8 Company - Registered under the Companies Act, 2013 with the purpose of promoting commerce, arts, science, research, sports, education, charity, and social welfare.

Audit Procedure for NGOs

Since NGOs operate with public donations, they must prepare financial statements to demonstrate transparency. Independent audits further reinforce credibility. The audit process includes:

1. Verification of financial records against previous data.
2. Checking of receipt & payment accounts to ensure all funds are accounted for.
3. Ensuring expenses are justified and categorized correctly as revenue or capital.
4. Compilation of an audit report detailing financial statements and social accounting.

Steps an Auditor Takes for NGO Audit

1. Understanding the NGO’s mission and the scope of its activities.
2. Ensuring legal compliance under various acts like Income Tax Act, Labour Law, and ESIC.
3. Verifying sources of income, including donations, grants, and subsidies, ensuring they are legitimate.
4. Checking separate accounts for government grants to ensure proper utilization.
5. Reviewing expenditure and fund allocations to maintain transparency.
6. Ensuring NGOs keep a record of every rupee spent for legal and financial clarity.
7. Confirming the applicability of Sections 12AA and 80G, ensuring donors receive tax exemptions.
8. Background checks on NGO executives and key personnel for compliance and credibility.

Types of Financial Audits for NGOs

NGOs undergo various types of audits to assess their financial activities:

1. External Audit - Conducted by independent auditors to verify the fairness of financial statements.
2. Internal Audit - Performed by NGO staff or hired professionals to review policies and legal compliance.
3. Donor Audit - Conducted by external auditors or donors to ensure donations are used appropriately.
4. Investigative Audit - Conducted when fraud or financial mismanagement is suspected.

Purposes of Different Audits

• External Audit - Ensures financial transparency and accuracy.
• Internal Audit - Evaluates compliance with policies and procedures.
• Donor Audit - Assesses whether funds are utilized as per donor agreements.
• Investigative Audit - Uncovers fraud or financial discrepancies.

Benefits of NGO Audit

1. Proof of Authenticity - Strengthens trust among donors and stakeholders.
2. Auditor’s Expert Advice - Provides guidance on financial management and compliance with legal amendments.
3. Increased Funding Opportunities - A clean audit report enhances the credibility of the NGO, making it eligible for more grants and donations.

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