ACCA Applied Skills · Audit and Assurance

Not-for-profit organisations: formula sheet

Full chapter guide

Key formulas

Value for money (the three Es): Value for money = Economy + Efficiency + Effectiveness; Economy: minimise the cost of inputs for the right quality. Efficiency: get the most output from inputs. Effectiveness: outputs achieve the stated objectives.
Core contrast with commercial entities: Commercial: profit for owners | NFP: service or purpose, surplus reinvested; Use this as the opening point for any 'how is an NFP different' answer.
Answer structure for NFP characteristics: Objectives + Funding + Stakeholders + Measurement + Governance; A simple checklist to cover all main differences in a written answer.
Economy: Economy = spending the minimum cost for resources of appropriate quality; Focus on inputs and price. Never ignore quality. Cheapest is not always economical.
Efficiency: Efficiency = outputs ÷ inputs; Compare with a target, prior year or similar body. Higher output per unit of input, or lower input per unit of output, is better.
Effectiveness: Effectiveness = actual results achieved compared with stated objectives; Focus on outcomes. An organisation can be efficient yet ineffective if it does the wrong thing well.
Example efficiency measure: Cost per beneficiary = total cost ÷ number of beneficiaries served; Example only. Choose measures that fit the scenario, and compare them with a benchmark.
Risk answer structure: Risk → Why it is a risk in this NFP → Audit response; Use this chain for every point. A bare list of risks earns little.
Audit risk model: Audit risk = Inherent risk × Control risk × Detection risk; Weak volunteer controls raise control risk. The auditor then lowers detection risk with more substantive work.
Main NFP risk areas: Income completeness | Restricted funds | Going concern | Regulatory compliance | Weak controls and fraud; Use this as a checklist when a scenario describes a charity.
Main income assertion: Income risk = Completeness (all income recorded); Donations and collections have no external control, so completeness is usually the key assertion.
Main expenditure assertion: Restricted funds spent = Occurrence + Classification + Compliance with terms; Check spending matches the donor's purpose and is shown in the right fund.
Recognition test for grants: Recognise grant when conditions are met (performance-related) or entitlement is certain (unconditional); Apply the applicable framework; do not recognise income before the grant terms are satisfied.
Analytical review: Expected income = Prior year × Change in activity (members, events, donors); Compare expected with actual and investigate significant differences.

Quick revision

An NFP exists to deliver a service or cause, not to make profit for owners.
Funding often comes from donations, grants or public money, and may come with conditions.
Stakeholders include donors, beneficiaries, trustees or governing bodies, regulators and the public.
Success is judged by whether objectives are met, not by profit.
Economy means obtaining inputs of suitable quality at the lowest cost.
Efficiency means the relationship between inputs and outputs: more output for the same input.
Effectiveness means whether the organisation achieves its objectives.
Cash donations are a key risk because it is hard to prove that all income received has been recorded.
Restricted funds must be used only for their stated purpose, so check spending against the donor's conditions.
Controls may be weaker where volunteers do much of the work.
Test income with evidence such as donor records, bank and cash-handling controls and agreement of grants to grant terms.
Always link points to the scenario, not generic audit steps.

Common mistakes

Saying NFPs must not make a surplus or profit. Fix: Say NFPs may make a surplus, but it is reinvested in the purpose and not distributed to owners.
Saying NFPs have no financial objectives. Fix: Say objectives are mainly non-financial, but NFPs still need sound finances, budgets and funding to continue.
Treating economy as meaning cheapest. Fix: Always write 'lowest cost for the appropriate quality'. Use a cheap, poor-quality purchase as your example of failed economy.
Mixing up efficiency and effectiveness. Fix: Efficiency is about the ratio of outputs to inputs. Effectiveness is about meeting objectives. Ask: 'did it use resources well?' versus 'did it achieve the aim?'
Listing generic risks that apply to any company, such as inventory or receivables. Fix: Anchor each risk to an NFP feature in the scenario: donations, restricted funds, volunteers, grants.
Saying donation income is overstated. Fix: For donations the main risk is understatement through incompleteness or theft, because there is no external record.
Testing for overstatement of income only Fix: For donations and collections, focus on completeness: ask whether all income given has been recorded.
Listing generic procedures such as inspect invoices Fix: Tie each procedure to a named income type and its assertion, such as agreeing a legacy to executor correspondence.

Exam tips

Open any comparison answer with the objective: service or purpose versus profit for owners. It sets up every other point.
In stakeholder questions, use the scenario. Name the actual donors, funders or members given and say what each expects.
Link characteristics to audit risk when the paper is Audit and Assurance. Funding type, restricted funds and volunteers are the usual links.
In objective test questions, watch for absolute words like 'never' or 'only' in options about surplus or financial objectives. They are often wrong.
Remember value for money: economy, efficiency and effectiveness are the usual measures when profit cannot be used.
Define each E in one line before applying it. The marks come from the application to the scenario.
Use the scenario's own numbers where given, and compute simple comparisons such as percentage difference or cost per unit.
In OT questions, identify whether the fact concerns inputs, the input-output ratio or objectives before choosing an answer.