FORMATION & AUDIT OF NGO’s 23rd October, 2009 East Delhi CA CPE Study Circle NIRC of ICAI New Delhi CA SUDHIR VARMA FCA; CIA (USA)

Formation of NGO’s

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

Trust 1. No separate Act 2. Trust Deeds can be registered 3. Settler 4. Corpus 5. 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 objects 3. Strength of Board of Trustees 4. Powers of the Trustees / remuneration / benefits 5. Broad guidelines for management of trust 6. 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 Registration 2. 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 account 2. Deposit membership fee 3. 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 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

Audit of NGO’s

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

Engagement 1. Appointment by appropriate authority 2. Engagement letter 3. Scope of audit 4. Reporting requirements 5. Fee

Audit approach 1. “Knowledge of business” objects ; activities 2. Audit objectives 3. Audit plan 4. Audit process 5. Resources

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

Project based audit 1. Understand activity under the project 2. Budget for the project 3. Separate bank account / books of accounts 4. Direct revenues from the project -grants -donations -revenue incomes 5. Direct project expenses – nature 6. Allocation of expenses to projects 7. Projects utilization certificates

Donor based audit 1. Donor sanction letter 2. Terms & Conditions 3. Budget 4. Reporting requirements

1. Corpus / Endowment fund 2. Unutilized Grants 3. Separate books of accounts for -foreign grants -local grants -revenue 4. Accrual vs cash system of accounts 5. Receipts and payments accounts

Efficiency audit 1. Donors / Governing body / Trustees 2. Verification of expenses beyond accounting 3. External help of specialists 4. Common sense / matured judgment 5. Team leaders

Computerized Environment 1. Size of NGO / No. of transactions 2. Familiarity with software in use 3. Asses software controls 4. Use auditing softwares 5. Remain abreast with technology

Statutory Compliances 1. Income Tax Act 2. FCRA / FEMA / RBI 3. Registration laws 4. Labour laws 5. VAT / Service Tax 6. Commercial laws 7. Protection laws 8.General laws

Auditing and assurance standards AAS1Basic Principles Governing an Audit AAS2Objectives and scope of the Audit of Financial Statements AAS3Documentation AAS4The Auditor’s Responsibility to consider Fraud and Error is an Audit of Financial Statements AAS5Audit Evidence AAS6Risk Assessments and Internal Control AAS7Relying Upon the work of an Internal Auditor AAS8Audit Planning AAS9Using the Work of another Auditor

Auditing and assurance standards AAS10Using the Work of an Expert AAS11Representations by Management AAS12Responsibility of Joint Auditors AAS13Audit Materiality AAS14Analytical Procedures AAS15Audit Sampling AAS16Going Concern AAS17Quality Control for Audit Work AAS18Auditing of Accounting Estimates AAS19Subsequent Events AAS20Knowledge of the Business

Auditing and assurance standards AAS21Consideration of Laws and Regulations in an Audit of Financial Statements AAS22Initial Engagements – Opening Balances AAS23Related Parties AAS24Audit Considerations Relating to Entities Using Service Organizations AAS25Comparatives AAS26Terms of Audit Engagements AAS27Communication of Audit Matters with Those Charged with Governance AAS28The Auditor’s report on Financial Statements

Auditing and assurance standards AAS29Audit in a Computer information Systems Environment AAS30External Confirmations AAS31Engagements to Compile Financial Information AAS32Engagements to Perform Agreed – Upon Procedures Regarding Financial Statements AAS33Engagements to Review Financial Statements AAS34Audit Evidence – Additional Consideration for Specific Items AAS35The Examination of Prospective Financial Information

Q & A Thank you SUDHIR VARMA FCA; CIA (USA)