Audit of Non-Profit Organization: A Checklist to Follow

Dharna Rajpal

03 Mar, 2023

A non-profit organization is also under an obligation to conduct an audit of its financial statements on an annual basis. The donors have the right to know and check whether the funds are being utilized for the decided purpose or not. They provide additional aid by way of donations to the organizations. This might lead to the misuse of funds. Thus, to maintain transparency and fairness, an audit is required.

What is an NPO (Non-Profit Organization)?

NPO, also known as a non-profit organization, is a specific kind of organization which aims at solving social causes and serving people at large. The source of revenue in such type of organization is by way of donations, charity programmes, fund-raising events or fees charged to people for becoming members of such organization.

Such organizations are involved in activities like education, the healthcare sector, scientific and professional service, entertainment, religious acts, and social assistance.

The Purpose of Nonprofit Auditing

The main purpose audit of a non-profit organization is for verifying the accuracy and fairness of the financial data present in the financial statements. This analysis helps a Chartered Accountant to give an opinion based upon the observation made with proper implementation of a defined set of accounting and auditing compliances.

The audit process of an NPO is a bit different from the audit of other profit-making organizations due to the calculation of taxes. Thus, a manager of a non-profit organization needs to ensure each and every detail for the proper conduction of an audit of the organization. The manager can look into a checklist to ensure that everything is as per the set and prevailing rules and regulations.

The important checklist points for a smooth and effective audit of a non-profit organization are as follows:

• Review Accounting Practices
  Practices of accounting are very important in any business organization. The audit process involves a review of the prevailing accounting practices of the organization. It is the basic checkpoint of a non-profit organization to ensure that the practices being made are as per the defined practices and are ethical. There might be a possibility that the internal members of the organization commit fraud. Thus, the appointment of an audit firm helps in generating true and positive outcomes.
• Evaluate Financial Reports
  Evaluation of the accounting practices is the next checklist to follow for effective audit after the accounting practices of the organization have been reviewed. The person evaluating must ensure that there exists no error in the financial records. This activity is performed to make sure that the funds invested by various stakeholders^[1], such as donors, employees and the public being affected by the organization, are being used for the set purpose.
• Analyze Management of Contributions
  There is a responsibility on the members of such an organization to utilize the funds donated to the set and for an ethical purpose only. Thus, the need to manage the funds received from various contributors arises. The auditor needs to ensure that the funds which have been utilized are spent on the stated cause by the organization. It is also necessary to ensure that the procedure of utilization of funds has been made ethically after following a proper procedure.
• Test Internal Controls
  An essential part of an organization is to manage its internal control system. The auditor needs to ensure that the internal control system is an efficient system. It depicts transparency and fairness in the internal working system of the organization and makes sure that there is no mismanagement of funds. The auditor has the authority to state strengths and weaknesses, if any, to improve the internal control system.
• Check Cash Flow Projections
  The auditor must verify each and every inflow and outflow of cash in the organization. The cash flow is monitored and verified to ensure that there is no suspicious transaction made by the members of the organization.
• Review Policies and Procedures
  Some professionals try to find out loopholes in the system and add clauses in the organization’s document which help them to misuse the funds and use the funds for purposes other than the ones pre-defined.
  There are some basic points which need to be verified by the member of the organization before submitting the financial records to the auditor for audit purposes. These are as follows:
  • Bank accounts must be reconciled from time to time to ensure that there are no errors in recording transactions.
  • The organization should ensure that all the members have paid the membership fees and there lies no outstanding balance on the part of members.
  • The amount present in the bank account must match the amount stated in the financial record.
  • The expenses and revenue sources must be verified.

Conclusion

The auditor and the person managing a non-profit organization must follow certain checklist points so that the audit process gets successful. Getting an audit of the financial statements of such an organization not only increases the quality of operations of the organization but also enhances reliability and confidentiality among the people making donations. Positive audit reports depict that the organization is working towards the set goal for the welfare of the public at large.

Also Read:
Know All About NGO Audit
What Are The Basic Principles Of Auditing?