Charitable Trust Audits in Bangalore

A certified chartered accountant must audit the organisation’s books if the total income of a charity trust or NGO exceeds the amount that makes it tax-exempt, according to Section 12A(1)(b) of the Income Tax Act of 1961. The income tax department must receive both the audit report and the trusts or NGO’s income tax return.

The primary goal of audit of charitable trust is to persuade the assessing officer of the legitimacy of the privilege/exemption claim under Section 11. It is even to ensure that the trust has met the standards set by law or regulation. The accountant must ensure that the ‘balance sheet’ and ‘profit and loss’ show an accurate and fair picture. He shall assess all aspects of the institution’s compliance with the Act, including the preservation of books of accounts, data, and returns from members, as well as other related documents.

Why is Audit of Charitable Trust or NGO Required?

Audit of Charitable Trust or NGO pertains to specific criteria outlined in the Income Tax Act. According to Section 12A(1)(b) of the Income Tax Act, these are the criteria given below:

1. Audit Threshold: An audit is mandated if the total income of the charitable organisation for the relevant year exceeds the maximum amount not subject to income tax.

2. Audit Exemption: If the organization's total income, before considering the provisions of the Act, does not surpass this maximum exempt amount, an audit is not required.

3. Inclusion of Corpus Contributions: For calculating the ceiling limit of the non-taxable amount under Section 12A(1)(b), contributions or grants directed towards the organization's corpus must be added.

4. Exclusion of Certain Income Exemptions: Income exemptions under Section 10, such as dividends, should not combine to exceed the non-taxable maximum amount.

5. Unforeseen Situations: In certain cases, even if the ‘total income’ crosses the maximum limit, due to specific incidents like unforeseen misapplications of investments under Section 11(2)(b), the audited reports can be submitted with corrected returns.

6. Deductions for Donations: Donations collected by organizations exempt under sections 11, 12, Clause (23), Clause (23AA), or Clause (23C) of Section 10 qualify for deduction under Section 80G. This deduction needs approval by the Commissioner of Income tax or Director-general (exemptions) under Section 80G(5)(vi).

7. Accountant’s Role in Audit of Charitable Trust or NGO: The primary duty of the accountant is to conduct the audit of a Charitable Trust as per Section 12A. However, no obligation exists for the accountant to validate compliance under other laws.

8. Additional Requirements: Apart from the conditions in Section 12A(1)(b), there are other essential requirements. Section 12A(1)(a) deals with registration requirements, necessitating trust registration applications in Form No.10A, as per Rule 17A.

Meaning of Audit Report Under Form 10B and 10BB

When conducting an audit of charitable trust or NGO, the auditor is required to review and consider specific documents that address essential particulars as outlined in the specified annexure forms, such as Form 10B and 10BB. These documents provide critical information relevant to the assessment of a trust’s financial activities and compliance with relevant regulations.

Form 10B Audit Report

Form 10B

 pertains to the audit report that is required to be submitted by charitable or religious trusts, ensuring that they meet the conditions and criteria for tax exemptions under Section 11 of the Income Tax Act. The auditor needs to consider the following information and documents for this report during the audit of charitable trust or NGO:

1. Income and Expenditure Statements: Review the statements of income and all accounts of expenditure to assess financial activities.

2. Balance Sheet: Examine the balance sheet of the trust to understand its financial position.

3. Payment and Receipt Reports: Analyse all reports related to payments and receipts to verify financial transactions.

4. Minutes of Trust Governing Committee Meetings: Scrutinise the minutes of meetings held by the trust’s governing committee to understand decisions and actions taken.

5. Proof of Paid Income Tax: Verify documents indicating the payment of income tax.

6. Income Tax Statements: Examine calculations and statements of income tax for each year.

7. Business Reports and Profits/Loss Proof: Review business reports and assess proofs of profits and losses.

8. Trust Deed/Byelaws/Memorandum of Articles: Examine multiple copies of legal documents defining the trust’s structure.

Form 10BB Audit Report

Form 10BB 

is relevant to approval of the trustee’s remuneration in case of charitable or religious trusts. The auditor needs to consider these specifics for this form when doing the audit of charitable trust or NGO:

1. Particulars of Remuneration: Assess details of remuneration paid to the trustees.

2. Charitable or Religious Purpose: Verify if the remuneration is consistent with the trust’s objectives for charitable or religious activities.

In both cases, the audit reports help ensure compliance with legal requirements and tax exemptions, contributing to transparent financial practices within the trust. 

Verifications in the Audit of Charitable Trusts or NGO

In the audit of charitable trust or NGO, verification is a crucial process where auditors confirm the existence, ownership, valuation, and details of assets and liabilities reported in the financial statements. It ensures the accuracy and reliability of the financial position presented. Here are the key verifications conducted during the audit of a charitable trust:

1. Verification of Income:

• Income under Sections 11 and 12:
  
   Verify the income earned by the trust and classify it into different categories:
  

• Income with Specific Direction:
  
   Voluntary contributions intended to become part of the trust’s corpus with a specific direction.
  

• Income without Specific Direction:
  
   Voluntary contributions not specifically directed to become part of the corpus.
  

• Profits from Incidental Business Activities:
  
   Gains and profits from business activities conducted to fulfill the trust’s objectives.
  

• Receipts and Capital Gains:
  
   Regular receipts and capital gains generated.
  

2. Expenditure Verification: Confirm the amount utilised during the year by analysing figures from the income and expense account, balance sheet, receipts, and returns account.

3. Donations to Other Trusts: Examine donations made to other trusts as per the provisions of section 11(3)(d) of the Income tax Act.

4. Services Provided: Verify the services provided to the specified class of individuals or beneficiaries, as required by section 12(2).

5. Anonymous Donations: Examine anonymous donations in accordance with the prescribed particulars set by the Government. Ensure proper documentation and management representation.

Created & Posted by Navneet Kumar

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