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

CA Rohan is auditing Bharat Gramin Sewa Samiti, an NGO that receives grants from a state government for a specific rural sanitation project. During the audit he finds that Rs 8 lakh of the grant was spent on the general administrative expenses of another unrelated project, contrary to the grant conditions. What is the most appropriate response of the auditor?

The auditor should report the misuse of the specific grant as non-compliance with its conditions, ensure proper disclosure in the financial statements and consider the implication for the audit report. Specific purpose grants must be applied as the grantor stipulates, so diverting them to another project is a reportable matter.

  1. ATake no action since the money was used for the NGO's own activities
  2. BTreat the grant as income of the NGO for the year in which it was received, irrespective of conditions
  3. CReport the non-compliance with the grant conditions, ensure appropriate disclosure and consider its effect on the audit reportCorrect
  4. DAsk the NGO to transfer the amount to the trustees' personal account

Explanation

For grants received for a specified purpose, the auditor must check that the funds were utilised as per the conditions. Misapplication is a non-compliance with the terms, so it should be reported to those charged with governance, disclosed appropriately and its impact on the audit report considered. Ignoring it or transferring funds to trustees would be improper.

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