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

CA Meera is auditing Gram Seva Hospital, a not-for-profit entity, whose funds include a restricted endowment fund received for a specific purpose. During the audit she notes that part of the endowment fund was spent on general administrative expenses. What is the correct audit response?

The auditor should examine the endowment terms, treat the use for administration as a misapplication of restricted funds, and consider disclosure and the effect on the audit report. Funds received for a specific purpose cannot be freely spent, so ignoring the donor's conditions would be wrong.

  1. ATreat it as acceptable because funds are fungible within one entity
  2. BExamine the terms of the endowment, assess the diversion as a misapplication of funds, and consider its effect on the report and disclosureCorrect
  3. CReclassify the amount as income of the year without referring to the donor's terms
  4. DIgnore it because only the total expenditure matters for a not-for-profit entity

Explanation

Restricted funds must be applied as per donor terms. The auditor reviews the terms, evaluates the misapplication and considers disclosure and the effect on the opinion. Treating funds as fungible or ignoring donor conditions disregards the restriction.

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