NGO FORMATION, ACCOUNTS & AUDIT

21st December, 2009NIRC of ICAI

New Delhi

CA SUDHIR VARMAFCA; CIA (USA)

Formation of NGO’s

Constituents

1. Trust - Registered document2. Society - Registrar of Societies3. Company - Sec. 25 of the Companies Act,

1956

Trust

1. No separate Act2. Trust Deeds can be registered3. Settler 4. Corpus5. Trustees 6. Trust Deed

Trust Deed

1. On a stamp paper as per stamp duty payable on the corpus amount.

2. Must clearly and broadly define objects3. Strength of Board of Trustees4. Powers of the Trustees / remuneration /

benefits5. Broad guidelines for management of

trust6. On dissolution

Societies

Status- Delhi / state- All India

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

Societies

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

Societies

1. 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

Societies

1. 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

Societies

1. Certificate of Registration2. Certified copies from Registrar of

- Memorandum of Association- Rules & Regulations

Societies

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

Societies

1. Establish bank account2. Deposit membership fee3. Start members register

Companies

1. 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

SYSTEM OF ACCOUNTSACCRUAL SYSTEM OF ACCOUNTS

CASH SYSTEM OF ACCOUNTS

SYSTEM OF ACCOUNTSFOREIGN FUNDS

LOCAL FUNDS - SPECIAL PROJECTS - GENERAL

REVENUES

BALANCE SHEET

Accounting of Fixed AssetsFully donated Partly donated/subsidisedBought from specific grantsDepreciation

BALANCE SHEET

InvestmentsApproved ListCorpus Investments Special Fund Investments Interest Accrued

BALANCE SHEET

Current Assets Cash in handBank balancesInventoriesReceivablesReimbursablesAdvances

BALANCE SHEET

Current Liabilities

PayablesStatutory dues - Provident Fund - TDS - Others

BALANCE SHEET

Capital Fund

General Fund Corpus Fund - interest accrued on corpus

investments - transfer to corpusSpecific Funds - building fund - others

BALANCE SHEET

Project Funds(to the extent unutilised)

Project balances Carry Forward for specific projectsBoard Resolutions with Form-10

BALANCE SHEET

ReservesFacility fund

Staff benefit fund

Other specific funds

SUDHIR VARMA

FCA;CIA(USA)

INCOME & EXPENDITURE A/C

IncomesDonor wise accountingIncomes from revenue Surplus from projects closedR & D receipts

INCOME & EXPENDITURE A/C

ExpenditureProject by exp.Program exp.Administration/overhead exp.R & D exp.

Audit of NGO’s

Types of Audit1. Transaction based audit2. System / Risk based audit3. Project based audit4. Donor based audit5. Efficiency audit6. Compliance / Statutory audit

- Income Tax - FCRA- Registering authority

Engagement1. Appointment by appropriate authority2. Engagement letter3. Scope of audit4. Reporting requirements5. Fee

Audit approach1. “Knowledge of business” objects ; activities2. Audit objectives3. Audit plan 4. Audit process5. Resources

Transaction based auditSystem / Risk based auditCompliance / Statutory audit (as usual)

Project based audit1. Understand activity under the project2. Budget for the project3. Separate bank account / books of accounts4. Direct revenues from the project

- grants - donations- revenue incomes

5. Direct project expenses – nature6. Allocation of expenses to projects7. Projects utilization certificates

Donor based audit1. Donor sanction letter2. Terms & Conditions3. Budget4. Reporting requirements

1. Corpus / Endowment fund2. Unutilized Grants3. Separate books of accounts for

- foreign grants- local grants- revenue

4. Accrual vs cash system of accounts5. Receipts and payments accounts

Efficiency audit1. Donors / Governing body / Trustees2. Verification of expenses beyond accounting 3. External help of specialists4. Common sense / matured judgment5. Team leaders

Computerized Environment1. Size of NGO / No. of transactions2. Familiarity with software in use3. Asses software controls4. Use auditing softwares5. Remain abreast with technology

Statutory Compliances1. Income Tax Act2. FCRA / FEMA / RBI3. Registration laws4. Labour laws5. VAT / Service Tax6. Commercial laws7. Protection laws8. General laws

Auditing and assurance standardsAAS1 Basic Principles Governing an AuditAAS2 Objectives and scope of the Audit

of Financial StatementsAAS3 DocumentationAAS4 The Auditor’s Responsibility to consider

Fraud and Error is an Audit of Financial Statements

AAS5 Audit EvidenceAAS6 Risk Assessments and Internal ControlAAS7 Relying Upon the work of an Internal AuditorAAS8 Audit PlanningAAS9 Using the Work of another Auditor

Auditing and assurance standardsAAS10 Using the Work of an ExpertAAS11 Representations by ManagementAAS12 Responsibility of Joint AuditorsAAS13 Audit MaterialityAAS14 Analytical ProceduresAAS15 Audit SamplingAAS16 Going ConcernAAS17 Quality Control for Audit WorkAAS18 Auditing of Accounting EstimatesAAS19 Subsequent EventsAAS20 Knowledge of the Business

Auditing and assurance standardsAAS21 Consideration of Laws and Regulations in an

Audit of Financial StatementsAAS22 Initial Engagements – Opening BalancesAAS23 Related PartiesAAS24 Audit Considerations Relating to Entities

Using Service OrganizationsAAS25 ComparativesAAS26 Terms of Audit EngagementsAAS27 Communication of Audit Matters with Those

Charged with GovernanceAAS28 The Auditor’s report on Financial Statements

Auditing and assurance standards

AAS29 Audit in a Computer information Systems Environment

AAS30 External ConfirmationsAAS31 Engagements to Compile Financial

InformationAAS32 Engagements to Perform Agreed – Upon

Procedures Regarding Financial StatementsAAS33 Engagements to Review Financial

StatementsAAS34 Audit Evidence – Additional Consideration

for Specific ItemsAAS35 The Examination of Prospective Financial

Information

Q & AThank you