Advanced Auditing, Assurance and Professional Ethics · Specialised Areas

Audit of Not-for-Profit Organisations and Co-operative Societies

Updated 5 October 2026 · Fact-checked

A not-for-profit organisation (NPO) audit checks that a trust, society or co-operative has applied its funds as its governing document and the law require. To solve a question, identify the entity type, read its constitution and statute, then test receipts, applications of funds, restricted funds and compliance, and report in provision-facts-conclusion form.

Understand Audit of Not-for-Profit Organisations and Co-operative Societies

An NPO exists for a purpose such as charity, education, health or mutual benefit, not to distribute profit to owners. In India it usually takes one of three forms: a public charitable trust, a society registered under a Societies Registration law, or a co-operative society registered under a Co-operative Societies law. Companies set up for charitable purposes under the Companies Act are also NPOs, but your exam focus here is trusts, societies and co-operatives.

The audit starts with the governing document: the trust deed, the memorandum and rules of a society, or the bye-laws of a co-operative. These documents state the objects, who can be a member or trustee, how funds may be used and how accounts are kept. The auditor tests every major transaction against them. An expense outside the objects is a finding even if the amount is small.

The law that applies depends on the entity. Trusts follow the state public trust law and the trust deed. Societies follow their registration law and rules. Co-operatives follow the Co-operative Societies Act applicable to them (state Acts, or the Multi-State Co-operative Societies Act for multi-state ones), and their audit is often by an auditor from a prescribed panel or appointed by the general body, with a statutory audit report and sometimes an audit classification. Where you are not given the exact section, state the rule in words and do not quote a section number.

The accounts of most NPOs are prepared on the receipts and payments basis, or on an income and expenditure basis with a balance sheet. Many NPOs also hold restricted funds: corpus donations, earmarked grants and specific-purpose funds. The key risk is not profit overstatement. It is misapplication of funds, incomplete recording of cash donations, weak control over cash, and loss of tax exemption or registration through non-compliance.

Income-tax exemption is an important compliance area. The exemption conditions, registration, application of income and audit report requirements for trusts and institutions sit in the Income-tax Act, 2025, and are covered in Direct Tax. In this paper, treat them as compliance matters the auditor checks and reports on, and refer to the relevant provisions only as the question supplies them.

Key rules to remember

Audit anchor rule: Governing document + applicable statute = criteria for every audit test; Always test a transaction against the objects clause, the powers of trustees or managing committee, and the law before testing its arithmetic.
Funds flow check: For each fund: Opening balance + Additions (donations, grants, transfers) − Utilisation = Closing balance; Apply it fund by fund, never to all funds pooled together. Corpus is normally retained and not utilised for revenue expenses, so its utilisation should be nil. Restricted funds are utilised only for their stated purpose. The general fund is the one that carries income and expenditure.
Receipts and payments to income and expenditure: Surplus or deficit = Income of the year − Expenditure of the year (accrual basis); Adjust receipts and payments for opening and closing outstanding items and prepaid or advance items. Capital receipts and capital payments do not enter income and expenditure.
Capital versus revenue donation: Corpus or specific capital donation → credited to fund or balance sheet; general donation → income; Treatment follows the donor's direction and the entity's policy. Check the donor letter.
Reporting structure: Provision → Facts → Conclusion; Use this form in written answers: state the rule, apply it to the case facts, then conclude on the opinion or action.

How to solve Audit of Not-for-Profit Organisations and Co-operative Societies questions

Use this sequence for any question on trusts, societies or co-operatives. It keeps your answer in provision-facts-conclusion form.

1Identify the entity type: trust, society or co-operative. This decides the governing document and statute.
2Read the objects clause and the powers of the managing body. Note any limit on investments, borrowing, property dealing and remuneration.
3Pick out the risk areas in the case: cash donations, corpus funds, grants, membership fees, loans to members, related-party dealings, fixed assets, and tax exemption conditions.
4For each risk, name the audit procedure: vouching, confirmation, inspection of minutes and registers, and reconciliation of fund balances.
5Check compliance: registration, filing of returns and accounts, audit by the right person, and application of income for the objects.
6Quantify the effect where figures are given, and consider whether a modification of opinion or a report on non-compliance is needed.
7Conclude. State your opinion or action in one clear sentence, linked to the facts.

Quickest way: Four-question scan for NPO cases

When to use it: Use it for case-scenario MCQs and short written answers when you have only a few minutes.

Who is the entity and what is its governing document?
Was the money received and recorded completely, especially cash donations and grants?
Was it spent only within the objects and on the right fund?
Is there a compliance breach that changes the opinion or needs reporting?

Common mistakes in Audit of Not-for-Profit Organisations and Co-operative Societies

Auditing an NPO like a company and looking only for profit misstatement.
Most audit practice is on companies, so students apply the same mindset.
Fix: Start with the objects and application of funds. The main risk is misuse and incomplete recording, not profit.
Treating all donations as income.
Students ignore the donor's direction or the corpus nature of the gift.
Fix: Read the donor's terms. Corpus and specific-purpose gifts are credited to the relevant fund, not income.
Quoting section numbers of Acts from memory.
Students try to look precise.
Fix: State the rule in words unless the question gives the section. A wrong number loses marks.
Ignoring the bye-laws and trust deed when a transaction looks normal.
Students judge the transaction only by business logic.
Fix: Test every major item against the governing document. Something normal in business may be outside the objects.
Not separating restricted funds in the balance sheet reconciliation.
Funds are pooled for ease of banking.
Fix: Track each fund with its own opening, additions, utilisation and closing balance.
Treating capital receipts and payments as income and expenditure items when converting from receipts and payments.
The converting step is rushed.
Fix: Separate capital items first, then adjust outstanding and prepaid items for the revenue side.

Worked examples

Example 1

A charitable trust receives ₹10,00,000 from a donor, with a letter stating that the amount is to be held as corpus. The trust credits the full amount to its income and expenditure account and spends ₹6,00,000 on running costs. As auditor, what is the issue and what do you do?

Show the solution

Provision: a donation given with a direction that it be held as corpus is a capital receipt for the trust. It is credited to the corpus fund, not to income. Corpus is normally retained and not used for revenue expenses.
Facts: the donor's letter states corpus. The trust credited ₹10,00,000 to income and used ₹6,00,000 for running costs, which it debited to expenditure.
Correcting entry: Dr Income and Expenditure (donation wrongly credited) ₹10,00,000; Cr Corpus Fund ₹10,00,000. The ₹6,00,000 of running costs is a genuine expense of the year and stays in expenditure.
Effect on the surplus (assuming no other items): as reported, income ₹10,00,000 less expenditure ₹6,00,000 gives a surplus of ₹4,00,000. After correction, income from the donation is nil and expenditure is ₹6,00,000, so there is a deficit of ₹6,00,000. The reported surplus is overstated by ₹10,00,000.
Effect of the breach: the ₹6,00,000 of running costs was met from corpus money, so the general fund has a deficit of ₹6,00,000 that corpus has funded. After correction, the corpus fund shows ₹10,00,000. It is represented by corpus investments or assets of ₹4,00,000 and a receivable of ₹6,00,000 from the general fund, which is a deficit to be restored. Count the ₹6,00,000 once only, as that receivable. Disclose the breach of the donor's condition.
Action: ask management to correct the classification and to disclose the breach. Whether and how to restore the ₹6,00,000 is management's decision under the deed and donor terms. You report the breach and the unrestored amount.
Compliance: consider the effect of the breach on the trust's compliance with the conditions for exemption and on its ability to restore the corpus fund. Refer to the exemption conditions only as the question supplies them.
Assess materiality and pervasiveness of the misstatement, considering its size against the trust's income, funds and surplus, and its effect on the users of the accounts.
Conclude on the opinion from those facts. If management corrects the accounts, the opinion need not be modified, but the breach is still disclosed and reported. If management does not correct the misstatement, modify the opinion. Give a qualified opinion if the effect is material but not pervasive, and an adverse opinion only if it is both material and pervasive.

Answer: The donation should be credited to the corpus fund at ₹10,00,000. Crediting it to income overstates the reported surplus by ₹10,00,000: the stated surplus of ₹4,00,000 should be a deficit of ₹6,00,000. The ₹6,00,000 of running costs is a proper expense of the year, but it was met from corpus money. This breaches the donor's condition. Show the corpus fund at ₹10,00,000, represented by ₹4,00,000 of corpus assets and ₹6,00,000 due from the general fund, and disclose the breach. Ask management to correct and disclose. Management decides on restoring corpus, and you report the breach and consider its effect on exemption compliance. If the misstatement is left uncorrected, the opinion depends on your assessment of materiality and pervasiveness: qualified if material but not pervasive, adverse only if both material and pervasive.

Example 2

You are auditing a co-operative credit society. You find that the managing committee has granted loans of ₹4,50,000 to two committee members without the approval required by the bye-laws, and the loans are not included in the register of loans. What should you do?

Show the solution

Provision: a co-operative society must follow its bye-laws and the Co-operative Societies law on lending, approvals and registers. Loans to office-bearers usually need prior approval and must be recorded in the register.
Facts: ₹4,50,000 was lent to two members of the committee without approval and outside the register.
Procedure: obtain the minutes, the loan applications, the bank statements showing disbursement, and confirmations from the borrowers. Check repayment and interest.
Assess: this is non-compliance and a control failure, and it creates a risk of misappropriation. Related-party loans must also be disclosed.
Report: describe the non-compliance in the audit report as the law and the audit format require, and consider whether the unrecorded loans make the balance sheet misstated and require a modified opinion.
Communicate the matter to those charged with governance, for example the general body or the board.

Answer: The loans breach the bye-laws and the lending controls. Confirm the facts through documents and borrower confirmations, require recording and disclosure, report the non-compliance in the audit report, and modify the opinion if the loans remain unrecorded.

Exam tips

Begin each answer by naming the entity type and its governing document. It shows the examiner you have the framework right.
Use provision-facts-conclusion form for every written answer. Keep the conclusion to one sentence.
In MCQ case scenarios, look for clues about corpus, restricted funds, bye-law breaches and unrecorded cash. These are the usual traps.
Do not quote section numbers unless the question gives them. Describe the rule in words.
When figures are given, show the correction in rupees and its effect on income, funds and the balance sheet.

Practice questions from Specialised Areas

Audit of Not-for-Profit Organisations and Co-operative Societies in other exams

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

Audit of Not-for-Profit Organisations and Co-operative Societies: frequently asked questions

Is the audit of a trust the same as a company audit?

The audit approach and standards are the same, but the criteria differ. You test compliance with the trust deed, the applicable trust law and application of funds for the objects. Profit is not the focus.

Who audits a co-operative society?

The audit is carried out by an auditor as the applicable Co-operative Societies law requires, often from a prescribed panel or appointed by the general body. Check the Act that applies to the society in the question and state the rule in words.

What basis of accounting do NPOs use?

Many small NPOs use the receipts and payments basis, while larger ones use income and expenditure with a balance sheet. When you convert from receipts and payments, separate capital items and adjust for outstanding and prepaid amounts.

What are the main risk areas in an NPO audit?

The main risks are incomplete recording of cash donations, misapplication of funds, wrong treatment of corpus and restricted funds, weak cash control and breach of registration or exemption conditions.