8 Essential To-Dos for NPOs to Prepare for Statutory Audit

Introduction:

Not for Profit Organisations (NPOs) are subject to a number of financial audits. Some key ones being statutory audit, tax audit, internal audit and various donor audits. This article provides insights into different types of audits, their timelines, points to consider when selecting an auditor, year-round practices for seamless audits, and a comprehensive checklist for year-end statutory audit.

Audits and their timelines

While some audits, such as Statutory Audit and Tax Audit, are mandatory, others like Internal Audit are optional. In this article, we will discuss the two mandatory audits in detail. We will cover Internal Audit in a future article.

Statutory Audit:

Statutory audit is required by the law under which an NPO is registered such as Companies Act, Trust acts, Society Act etc. The purpose of a statutory audit is to provide an independent opinion on the fairness and accuracy of the financial statements prepared in accordance with the applicable accounting standards and to ensure that the organization complies with the relevant laws, rules and regulations.

Timeline: Statutory Audit of a Section 8 company is required to be done before the AGM. The audit report must be attached to Form AOC-4 (financial statement) and filed with the ROC within 30 days of the AGM. The due date for holding AGM is 6 months from close of the financial year. Hence interpreting the same the due date of audit is before 30th September. If you are registered under a different law for trusts or societies, please check the relevant provisions.

Tax Audit:

Mandated by the Income Tax Act, it is required for an NPO to have its books of accounts audited to avail the exemption under Section 11 and Section 12.

Timelines: The due date for tax audit is one month prior to the due date for furnishing the return of income under sub-section (1) of section 139, which is currently 31th October and hence the due date of tax audit is 30th September. Further, Form No. 9A (deemed application) and Form No. 10 (secondary accumulation for five years) should be furnished at least two months prior to the due date of furnishing return of income (i.e., by 31st August). However, it has been clarified by a circular that deemed application/secondary accumulation will be allowed as long as Form No. 9A and 10 are furnished on or before the due date of filing return of income (i.e. 31st October 2023).

Additional Timeline: In case of organization who are registered on Social Stock Exchange, the requirement is to make disclosures on financial statements, auditors reports and auditor details within 60 days from the end of the financial year (i.e., by 31st May). The relevant circular for the same is attached here for your reference. For the Financial Year 2023-24 the timelines have been extended till 31st October, 2024 via a circular by SEBI.

Given these specific timelines and requirements, it is essential to have an auditor who can ensure timely and accurate compliance with all regulatory obligations. An effective auditor will help your organization stay on track with these deadlines and maintain transparency and accountability.

When selecting a statutory auditor for an NPO or evaluating the current professional, it might be worthwhile to consider the following points:

1. Relevant Experience: It is beneficial to appoint an auditor who has significant experience with NPOs and thoroughly understands the specific regulations, such as FCRA, CSR requirements, Income Tax laws, specific state trust acts, and accounting standards applicable to NPOs in India. Additionally, having experience with NPOs of similar size and budget can be an advantage.

2. Professional Certification and reference: Consider verifying that the auditor is a qualified Chartered Accountant (CA) and registered with the Institute of Chartered Accountants of India (ICAI). Researching the auditor’s reputation and seeking references from other NPO clients can also provide valuable insights.

3. Audit Methodology & availability: It may be useful to understand the auditor’s approach to audits and whether their methodology considers your NPO’s specific requirements, such as programs, geographical diversity, and materiality. Assessing their communication skills and ensuring they are accessible for addressing concerns could be beneficial.

4. Cost and Value: If you are unsure of the audit cost then a good way to arrive at conclusion can be to see if the auditor’s experience reflects and is appropriate for your organization’s size and complexity of operations. Comparing fees with other organizations of similar geography, size, and complexity can help determine the value.

5. Ethical Standards and Independence: Verifying the auditor’s independence, ethical standards, and potential for a long-term relationship could be crucial. It might be helpful to be aware that certain statutes, such as Section 226 of the Companies Act, contain independence clauses that prohibit the appointment of specific CAs as auditors. Trusts and Societies might consider adopting such clauses for better adherence. Additionally, ensuring that the auditors are not involved in maintaining the NPO’s books of accounts can safeguard against conflicts of interest.

Preparing for a Statutory Audit

While the audit occurs at year-end, continuous efforts and processes throughout the year ensure a smooth year-end audit and timely compliance. Here are 8 essential to-dos for NPOs audit suggested areas of preparedness include:

1. Monthly reconciliations and overall review of Books of Accounts (BOA):  Regular monthly reviews and monitoring of the BOA can contribute significantly to a seamless year-end audit process. Consider using a detailed monthly checklist to cover various crucial areas of review. (Link here)

2. Budget Monitoring: It might be helpful to regularly compare the budget against actual expenditures and investigate any significant discrepancies to understand their causes. The frequency of these reviews could depend on your organization’s size, complexity, and donor reporting requirements. Monthly reviews are ideal, but minimum quarterly reviews are recommended.

3. Grant Monitoring: Tracking approved grants versus actual utilization and communicating with donors about any necessary reallocations can ensure timely and accurate reporting in accordance with funding agreements. Being vigilant about upcoming fund requests and making them on time is also beneficial.

4. Internal Controls: Review the effectiveness of internal controls and determine if standard operating procedures (SOPs) need to be established for specific operational areas. Ensure that authorization and approval processes are followed.

5. Internal Audits: Conducting periodic internal audits can help ensure compliance with policies and procedures and identify areas for improvement. If internal audits are not feasible due to the size of operations, having internal teams perform these checks could be an alternative.

6. Compliance and Updates: Staying informed about changes in regulatory requirements affecting NPOs can help ensure that your organization remains compliant with relevant laws and regulations.

7. Continuous communication with the Auditors: Maintaining regular communication with your auditors throughout the year might be beneficial. Seeking their advice on complex transactions and accounting issues as they arise can also be helpful.

8. Year-End Preparation: Creating a checklist of all tasks and documents needed for the year-end audit can be useful. We have tried to create a comprehensive audit checklist here your reference.

   
   

Conclusion:

By adhering to these ongoing processes and engaging the right professionals, NPOs can achieve a seamless year end audit experience. Proactive management and preparation are key to a successful audit outcome.