Audit and Assurance · Not-for-profit organisations

Audit Evidence Procedures for NFP Income and Expenditure

Updated 11 October 2026 · Fact-checked

NFP audit procedures test whether income is complete and whether funds were used for their stated purpose. Cash donations carry a completeness risk because no one controls them at source. You test controls over collection, trace grants and legacies to documents, and check restricted funds were spent as the donor required.

Understand Audit Evidence Procedures for NFP Income and Expenditure

A not-for-profit (NFP) organisation, such as a charity, exists to meet a purpose, not to make profit. Its money comes from donations, grants, legacies and fundraising. It spends that money on its cause. The auditor must gather sufficient appropriate evidence that the income and expenditure in the financial statements are right.

The main income risk is completeness. Donors give cash with no invoice and no customer record. If a collector keeps some cash, or a donation is never recorded, nothing in the accounts shows it is missing. Auditors cannot simply test for overstated income as they would in a profit-seeking company. They ask: is all the income that was given actually recorded?

Different income types give different evidence. Grants are supported by a grant agreement or award letter, so you can inspect terms and confirm with the grantor. Legacies come from a will, so you inspect correspondence from the executor and check the timing of recognition. Fundraising events and street collections have weak documents, so you rely on controls and on analytical review.

Expenditure has its own risks. Many funds are restricted: the donor or grantor says they may be used only for a set purpose. Spending them elsewhere breaches the terms. It may need disclosure, repayment or a modified report. The auditor also looks for fraud, misuse of funds, and costs that are not charitable activity, for example excessive administration or related party payments.

The auditor also considers laws and regulations, such as rules set by a charity regulator. The auditor may have reporting duties to the regulator. Checking that funds are used as intended supports the audit opinion and the trustees' accountability to donors.

Key rules to remember

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.

How to solve Audit Evidence Procedures for NFP Income and Expenditure questions

Use this method for any question asking for audit procedures on NFP income or spending.

1Identify the income or expenditure type: cash donation, grant, legacy, fundraising event or restricted spending.
2Name the key assertion at risk. For income it is usually completeness; for restricted funds it is classification and compliance.
3Link the procedure to the risk. Do not list generic procedures.
4For each type give specific evidence: agreements, executor letters, collection records, bank statements, confirmations.
5Include tests of controls where controls exist, for example two people counting cash and sealed collection tins.
6Add analytical procedures, such as comparing to prior years, budgets and event attendance.
7For spending, trace to invoices and approvals and compare to the donor's restrictions.
8State the purpose of each procedure in a few words, because marks go for the link to the assertion.

Quickest way: Type, risk, evidence

When to use it: Use when a Section C or OT case scenario names a type of NFP income and asks for procedures with little time.

Write the income type.
Write the risk in one word (completeness, cut-off, restriction).
Give three procedures: one control or document, one external confirmation or bank trace, one analytical.
Add a restricted fund check if spending is mentioned.
Finish with the purpose of each in a short phrase.

Common mistakes in Audit Evidence Procedures for NFP Income and Expenditure

Testing for overstatement of income only
Students copy the standard company approach to revenue.
Fix: For donations and collections, focus on completeness: ask whether all income given has been recorded.
Listing generic procedures such as inspect invoices
Students recall a standard list without linking to the scenario.
Fix: Tie each procedure to a named income type and its assertion, such as agreeing a legacy to executor correspondence.
Ignoring restrictions on funds
Students treat all funds as one pool.
Fix: Check grant and donation terms, confirm spending is in line with them, and confirm correct fund classification and disclosure.
Recognising grant income on receipt of cash
Students confuse cash timing with income recognition.
Fix: Read the grant agreement for conditions and recognise income under the applicable framework when conditions are met.
Forgetting controls over cash collection
Students jump to substantive tests.
Fix: Include controls such as two unrelated people opening and counting collections, sealed tins, and recording and banking promptly, and test them.

Worked examples

Example 1

A children's charity collects cash from street collectors and charity shops. Describe audit procedures to gain assurance that all cash income is recorded. (6 marks)

Show the solution

Risk: completeness, because cash has no external record and could be taken before it is recorded.
Control test: observe or inspect evidence that collection tins are sealed and numbered, and are opened by two unconnected people who sign the count sheet.
Agree a sample of count sheets to the cash book and to the bank paying-in slips and bank statements, checking amounts and dates.
Cut-off: check collections made close to the year end were banked and recorded in the correct period.
Analytical review: compare income per shop and per collector with prior year, number of tins issued and opening hours, and investigate unusual falls.
Check the number of tins issued agrees with the number returned and counted, and follow up any missing tins.

Answer: Test controls over sealing, counting and banking of collections. Trace count sheets to the cash book and bank. Test cut-off. Use analytical review and tin reconciliation to detect unrecorded cash. Each procedure addresses completeness.

Example 2

A charity received a grant of ₹40,00,000 that must be spent only on a vaccination programme. Describe procedures on the grant income and its use. (6 marks)

Show the solution

Inspect the grant agreement to understand the amount, purpose, conditions and any repayment terms.
Agree the receipt to the bank statement and to the cash book.
Consider whether conditions have been met and whether the income recognised in the year is appropriate under the applicable framework.
Confirm the grant terms directly with the grantor if the amount is material or the terms are unclear.
Select a sample of programme expenditure and agree to invoices, approvals and payment records, checking it relates to vaccination.
Review the restricted fund account to see that spending is charged to it, that any unspent balance is carried forward as restricted, and that disclosure is adequate.

Answer: Inspect the agreement, trace receipt to the bank, check conditions for recognition, obtain grantor confirmation, test spending is on vaccination, and check restricted fund classification and disclosure.

Exam tips

When the scenario mentions cash, write completeness first and build every procedure around it.
Always use the scenario's facts, such as the charity shops or the named grant, rather than generic lists.
Show the purpose of each procedure briefly. Marks are for relevant, specific procedures.
If restricted funds appear, mention both compliance with terms and disclosure; a breach may affect the audit opinion.
In objective questions, read for the type of income. Completeness answers are usually correct for donations and collections.

Audit Evidence Procedures for NFP Income and Expenditure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit Evidence Procedures for NFP Income and Expenditure: frequently asked questions

What are the main audit procedures for donations?

Test controls over collection and banking, agree counts to the bank, check cut-off and use analytical review. Completeness is the main concern because donations have no external record.

How do you audit legacies?

Inspect correspondence from the executor or solicitor and the will where available. Check the legacy is recognised when entitlement and amount are reasonably certain under the applicable framework, and agree receipts to the bank.

How do you audit grant income in a charity?

Read the grant agreement, confirm the amount and conditions, trace receipts to the bank and consider confirmation with the grantor. Check recognition is consistent with the conditions and that restrictions are respected.

Why is completeness the main risk for NFP income?

Donors give money without an invoice or customer ledger. The charity cannot easily show what it should have received, so unrecorded or stolen cash is hard to spot.