Auditing and Ethics · Special Features of Audit of Different Type of Entities

Audit of Not-for-Profit Organisations for CA Inter Auditing

Updated 4 October 2026 · Fact-checked

A not-for-profit organisation (NPO) runs for a charitable, social or similar purpose, not to share profit. Its auditor first reads the governing document, then checks that income is applied for the stated objects, then tests donations, grants, funds and statutory compliance, and reports under the law that governs that entity.

Understand Audit of Not-for-Profit Organisations

An NPO is set up for charity, education, health, religion, sports or social welfare. It may not distribute surplus to members. Any surplus must be used for its objects. The common forms are trusts, societies and section 8 companies.

A trust is governed by its trust deed and the trust law that applies to it. A society is governed by its memorandum and rules and by the society registration law that applies. A section 8 company is a company under the Companies Act, 2013, formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, environment protection or similar objects. It applies its profits to those objects and does not pay dividends to members. It must follow the Companies Act, including Schedule III and the audit rules for companies.

The auditor's main starting point is the governing document: trust deed, rules and regulations, or memorandum and articles. It tells you the objects, who can spend, how funds are held, who the trustees or governing body are, and the year-end. Without it you cannot say if a payment is valid.

Many small NPOs keep a Receipts and Payments Account. It is a summary of cash and bank transactions for the period. It is on cash basis, shows opening and closing cash and bank balances, and includes capital and revenue items of both the current and other periods. It does not show outstanding or prepaid items or depreciation. An Income and Expenditure Account is the revenue account on accrual basis. It is like a profit and loss account. It shows only revenue items of the current period and its balance is a surplus or deficit. Larger NPOs and section 8 companies prepare an income and expenditure account and a balance sheet.

Donations and grants need special care. A donation may be general (revenue income) or for a specific purpose or corpus (added to a fund, not income). Grants may be for revenue or for assets. The auditor checks the donor's terms, receipts, bank credit, and the correct treatment. Since receipts are often in cash and not fully recorded at source, completeness is the main risk. Educational institutions and hospitals add checks on fee registers, student or patient records, and the control of cash collections.

Key rules to remember

Surplus or deficit: Surplus or deficit = Income of the period − Expenditure of the period; Both on accrual basis. A balance of income over expenditure is a surplus. It is not called profit.
Receipts and Payments Account basis: Opening cash and bank + Receipts − Payments = Closing cash and bank; Cash basis. It includes capital and revenue items and has no non-cash items like depreciation.
Subscription income for the year: Subscription received − Opening arrears received + Closing arrears (due) − Advance received at close + Opening advance; Use this to move from cash received to income of the year. Arrears of earlier years are not this year's income. Advance for next year is not this year's income.
Consumption of stock (stationery, medicines): Opening stock + Purchases − Closing stock = Consumption; Consumption is the expense in the Income and Expenditure Account.
Key difference test: Receipts and Payments = cash basis, all items; Income and Expenditure = accrual basis, revenue items only; Learn this one line for theory questions.
Section 8 company rule: Profits and income applied to objects; no dividend to members; State this in plain words. It is the main feature that separates it from other companies.

How to solve Audit of Not-for-Profit Organisations questions

Use this order for any NPO audit question. It works for trusts, societies, section 8 companies, schools and hospitals.

1Identify the entity type and the law that governs it. Say if it is a trust, society or section 8 company.
2Read the governing document and note the objects, powers of trustees or governing body, and restrictions on spending and investment.
3Check the accounting framework: which statements are prepared (Receipts and Payments, Income and Expenditure, Balance Sheet), the basis (cash or accrual), and whether the Companies Act and Schedule III apply.
4Test income: donations, grants, subscriptions, fees and entrance fees. Check the nature (revenue or corpus), donor terms, receipts, bank credit and completeness.
5Test expenditure and assets: check approvals, application to objects, vouching, fund-wise records, and the existence of fixed assets and investments.
6Check statutory and regulatory compliance that applies to the entity, such as registration, tax-exemption conditions and filings. Do not quote section numbers you are unsure of.
7Gather representations, evaluate misstatements and form the opinion. Report under the law that applies and in the form that fits the entity.
8Write the answer in the form: provision or rule, facts of the case, conclusion.

Quickest way: Entity, document, income, application

When to use it: Use it when a question is short or when MCQ options look alike.

MCQs: first spot the key words. 'Cash basis, capital and revenue items' means Receipts and Payments Account. 'Accrual, revenue only' means Income and Expenditure Account.
Eliminate options that say an NPO earns 'profit' or pays 'dividend'. Look for 'surplus' and 'applied to objects'.
For donation questions, ask one thing: is it for a specific purpose or corpus? If yes, it goes to a fund and not to income.
For written answers, use four short headings: Governing document, Income checks, Expenditure and asset checks, Compliance and reporting.
Write one audit procedure per mark. Name the document you would inspect each time, such as the trust deed, minutes, donor letter or bank statement.
If the question gives figures, set out the working in a small table-like list so that step marks are visible.

Common mistakes in Audit of Not-for-Profit Organisations

Calling the excess of income over expenditure 'profit'.
Students carry over the profit and loss account habit from commercial entities.
Fix: Use 'surplus' and 'deficit' for NPOs. Say that the surplus is applied to the objects.
Treating all donations as income of the year.
Students ignore the purpose and the donor's terms.
Fix: Read the terms first. Specific-purpose or corpus donations go to the relevant fund. General donations are revenue income.
Including outstanding and prepaid items in the Receipts and Payments Account.
Students mix cash and accrual bases.
Fix: Receipts and Payments shows only actual cash and bank flows. Adjustments for outstanding and prepaid items belong to the Income and Expenditure Account.
Not starting with the governing document.
Students jump to vouching and testing.
Fix: Always name the trust deed, rules or memorandum and say that you check powers, objects and restrictions against it.
Counting arrears or advance subscriptions in this year's income.
Students take cash received as income.
Fix: Use the subscription working: adjust for opening and closing arrears and advances so that only this year's subscription remains.
Writing general audit steps with no NPO flavour.
Students write a standard audit answer.
Fix: Link each step to NPO risks: unrecorded cash donations, restricted funds, misuse of funds outside the objects and regulatory conditions.

Worked examples

Example 1

A charitable society received subscriptions of ₹4,80,000 during the year. Its records show: arrears at the start ₹30,000 (all received in the year), arrears at the end ₹45,000, advance received at the start ₹20,000 (for this year), advance received at the end ₹15,000 (for next year). Find the subscription income for the Income and Expenditure Account.

Show the solution

Start with subscription received: ₹4,80,000.
Remove arrears of earlier years received in this year: ₹4,80,000 − ₹30,000 = ₹4,50,000.
Add closing arrears due for this year: ₹4,50,000 + ₹45,000 = ₹4,95,000.
Remove advance received at the end for next year: ₹4,95,000 − ₹15,000 = ₹4,80,000.
Add opening advance, which relates to this year: ₹4,80,000 + ₹20,000 = ₹5,00,000.

Answer: Subscription income for the year is ₹5,00,000.

Example 2

You audit a section 8 company that runs a school. It received ₹10,00,000 as a donation that the donor letter says must be used for a new library building. Management has credited the full amount to income. State the audit procedures and your conclusion.

Show the solution

Provision: a donation for a specific purpose is not general revenue income. It is a restricted amount that is shown as a fund until it is used for the stated purpose, in line with the donor's terms and the accounting policy.
Procedure: inspect the donor letter and the board minutes accepting the donation. Confirm the amount and the purpose.
Procedure: agree the receipt to the bank statement and the receipt book. Check the donor's identity and whether the donation is complete in the books.
Procedure: check how the amount was used. Examine spending on the library against approvals, bills and contracts, and check that it was not spent on other objects.
Facts: the full amount of ₹10,00,000 was credited to income, so income and surplus are overstated and the restriction is not shown.
Conclusion: ask management to transfer the amount to a specific-purpose fund and recognise it as per the policy that applies. If management does not correct it, the misstatement is material at this size, so consider a qualified opinion under SA 705 and report accordingly.

Answer: The donation is a restricted fund and not income. Request correction. If not corrected and material, issue a modified opinion.

Exam tips

For 'difference between' questions, give 5 or 6 points in two columns: basis, nature of items, period, non-cash items, result (closing balance or surplus), and statements prepared. Use short bullet lines.
For donations, always split into general donation, specific-purpose donation and corpus donation. Then state the treatment of each in one line.
In audit-procedure answers, name the document you inspect. 'Inspect the trust deed' earns more than 'check the objects'.
For section 8 companies, mention that the Companies Act applies, Schedule III format is followed, and profits are not distributed. Do not quote a section number unless you are certain.
For schools and hospitals, add entity-specific risks: fee collection controls, concessions, patient billing, drug stock and grants received.

Practice questions from Special Features of Audit of Different Type of Entities

Audit of Not-for-Profit Organisations 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: frequently asked questions

What is the main difference between a Receipts and Payments Account and an Income and Expenditure Account?

A Receipts and Payments Account is a summary of cash and bank flows. It includes capital and revenue items of any period. An Income and Expenditure Account is on accrual basis and includes only revenue items of the current period, ending in a surplus or deficit.

Is a section 8 company the same as a trust?

No. A section 8 company is a company and follows the Companies Act, 2013, including the company audit rules. A trust follows its trust deed and the trust law that applies. Both apply income to their objects and do not distribute profit.

How does an auditor test donations in an NPO?

The auditor reads the donor terms, agrees receipts to the receipt book and bank statement, and checks the treatment as income, fund or corpus. The auditor also tests completeness, since cash donations may be unrecorded, and checks that the money is used for the stated purpose.

What should I write first in an NPO audit answer?

Start with the entity type and the governing document. The trust deed, rules or memorandum set the objects and limits on spending. Everything else in the audit is checked against them.