Daksh Publications, 806 Jagat Trade Center, Frazer Road, Patna 800001 Bihar Email: managingnonprofit@yahoo.

com Mobile: 9334100035

Managing Financial Operations

Guideline for NGOs

How this guideline can help you? Page 2 - 3: It revises what do you need to start the NGO and whether you have covered the basic legal & organizational set up concerns. Checklist in this section will help you to measure the strength & weakness of your NGO and to what extent you are prepared for fulfillment of your mission. It helps you to assess to what extent your NGO is exposed to risk. Use of the checklist in this section can help you to manage risk and to reduce harmful effect of unnecessary risk exposure. This section highlights the need for effective bookkeeping system. It enlightens the common mistake by NGO and considerations for setting up your bookkeeping system. Your NGO has the responsibility for effective execution of social welfare programs, to safeguard assets, to ensure adherence of policy determined by founding members and to fulfill government regulations & donors conditions. This section can help you to achieve this purpose. It will help you to develop internal accounting control system in those areas where abuses or errors are likely to occur e.g. cash disbursements, petty cash and payroll. This is about Chart of Accounts. Every NGO should define its Chart of Accounts as early as possible. You can be very good at fulfillment of your mission but try to depict it properly. Any funding agency will see your final account first. It they see haphazard & fictitious disclosure in your final accounts the sanction of your grant can be questionable. Your yearend financial statements should reflect each monetary transaction in suitable category. Chart of Accounts contains sample proforma of Balance Sheet and Income & Expenditure Account. After proforma I have described commonly used account for NGO. It can help you to create functional categories i.e. arrangement of accounts with functional grouping and with adherence to accounting standard. I have also tried for code number to each account. Please understand the rationale for how I am trying to code the different accounts. Accounts of assets start with code A, Liabilities with code L, Expenditures with code E and Income with code I. Each functional group is assigned with different sub-code number. It will also help you to allot different code number to your each file. Separate file for each account is essential to bind all related supporting evidence, which can be asked during audit. This section explains what is audit, what auditor does and finally what to do for audit preparation. Please take audit report seriously. Audit report is for your NGO that, in few words, tell the outsiders what you have accomplished. Along with audit report you should have all supporting evidence & documents so that you can go back a year and reconstruct all your financial statements. Any funding agency or donor prefer to support such NGO who adopt perfect bookkeeping system and do not allow any type of messy figures in their audited final account. While implementing my suggestions you are free to ask me further explanation. I would feel glad to support you in this area.

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The Things You Need to Do to Start a Nonprofit Organization Many people, who think about starting a nonprofit, are unaware that they will be starting a small business with all the needs that a successful business entails. While the primary purpose to be accomplished by a nonprofit is its mission - whether it is serving the disabled or putting on theater performances - anyone who forms a nonprofit will soon realize that they are also running a business and in order to achieve their mission they must run their business well. These needs range from the concrete - setting up financial systems, payroll and opening a bank account; hiring staff and preparing a personnel manual; buying the right kinds of equipments - to the conceptual organizational structure, mission statements, long-range planning, evaluation, etc. Some believe that most of what is entailed is legal - getting separate legal status, obtaining a tax exemption and the like. There is, however, much more than just the legal aspects, and in fact a good deal of the legal requirements are fairly simple when compared some of the other things that need to be done. This information can be useful to those wishing to start a new NGO (I am using two terms - NGO & nonprofit however their implications are same), it may also be useful to existing groups who want to make sure that all the bases are being covered. The Checklist provides a list of all the things that need to be done to set up the office part of a nonprofit and could also serve as a reality check. To complete this introduction, I am telling you very brief overview of some of the essentials in starting a nonprofit office. Obviously a bank account needs to be established and choosing the right kind of account requires some research. Financial systems needs to be instituted with someone designated to serve the function of the organization's financial officer. Setting up a financial system includes establishing a chart of accounts, a general ledger and a bookkeeping system to account for cash receipts and payments. Part of this would include selecting the appropriate financial software (e.g. Tally), which in turn assumes you have developed an adequate computer system or opting for manual bookkeeping system. Next you might focus on your staff needs. This will entail developing job descriptions; getting an ESI/PF Registration Number; establishing a payroll system and complying with the legal requirements, with the periodic payment requirements and with the various payroll reporting requirements. In addition, you will need to initiate a mandatory system for maintaining records for each employee which would include her name and social security number, and much else. Finally, today virtually every office should be able to take advantage of information technology. This means installing a telephone/fax, and the necessary computer and internet facility to enable you execute electronic transfers of taxes, deposits, fund transfers, payroll, etc.; maintain and coordinate data bases; engage in e-mail communications; and have access to the Internet. While it is my belief that the checklist is fairly complete, it is possible that there are some issues that might be forgotten. I would appreciate being informed about these omissions. A final note on The Checklist. While the following items do not have to be done successively (and you may in fact find that some of these items are already done) there are some things that are dependant on others being accomplished.

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The Checklist 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Reserve a name with appropriate office of Registrar or Inspector General of Registration in your area. Select individuals to serve on its board of directors. Designate officers to serve on the board. Develop a mission statement. Develop a nonprofit operating plan, which is like a business plan for nonprofit organizations, and includes a description of the organizations location, staffing, activities, funding, fundraising plan and budget. Establish board committees (e.g., executive committee; finance committee; fundraising committee; volunteer committee; etc.). Create by-laws and get it recognized by appropriate authority. Retain a bookkeeper to create accounting records and financial reports. Choose an auditor for annual audit and mandatory government filings. Form a Trust/Society under appropriate Act to protect its founders and principals from personal liability. To open an office and employ people, the Nonprofit should get registered under the Shop and Establishment Act. Hold its first business meeting, elect business directors & officers and adopt business by-laws. Apply for Permanent Account Number (PAN) with Income Tax authorities. Establish a bank account and establish check signing procedures. Designate which officer(s) have the power to sign checks. Apply for Tax Exempt Status for NGOs and Deduction for Donors under Income Tax Act 1961 Obtain Registration under appropriate Act of ESI and/or PF Establish financial management, auditing and internal control systems. Set up a chart of accounts to record financial transactions. Establish a general ledger and bookkeeping system (either manual or computerized) to account for cash receipts and cash disbursements, income and expenditure, assets and liabilities. Compose job descriptions for staffing needs. Hire staff and sets compensation levels. Prepare a personnel manual. Establish a payroll system and adhere to requirements of ESI/PF and establish a mandatory system for maintaining records for each employee. Procure necessary insurance coverage - general & property both. Rent or purchase office space. Lease or buy computer equipment that is capable of email and accessing the Internet. Lease or buy office equipment: copy machine, telefax machine, desks, chairs, file cabinets, conference room tables and chairs, electric appliances, etc.

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Evaluating Your Legal Liability The Checklist consists of lists of questions about nonprofit organization policies, programs or procedures that could carry legal liability risks. The Checklist can be used by a nonprofit organization as an organization management self-evaluation document to help understand and evaluate the potential risks they might face. You Can't Pass or Fail It must be emphasized that the Checklist is not an objective criterion document, but instead a subjective evaluation document. The Checklist is not a test that a nonprofit organization can "pass" or "fail." Although the questions are designed to be answered either "yes" or "no," there are no right or wrong answers for all nonprofit organizations in all circumstances. In most cases the answer "yes" suggests a low risk for the nonprofit organization and the answer "no" suggests that consideration should be given to whether a risk exists and whether it is acceptable to the nonprofit organization. But a nonprofit organization's answers will not necessarily identify the nonprofit organization as one that is, or is not, "liable" or one that is, or is not, "insurable." Legal liability for a nonprofit organization can only be assessed with respect to its specific factual situation under applicable legal authority. Ultimately, only a court can determine if a nonprofit organization is "liable" when the nonprofit organization is challenged. You Can Reduce Your Risk The exercise of attempting to answer the Checklist can be valuable, however, because the questions do relate closely to liability and insurability. Use of the Checklist may lead a nonprofit organization to more knowledgeable planning to eliminate or reduce unnecessary liability risks. Insurability Checklist Contracts 1. Does the nonprofit organization use a written contract signed by all parties whenever it becomes committed to a significant legal, financial or other obligation? 2. Are contracts reviewed by staff before they are signed to assure that they contain all of the intended and acceptable terms such as for price or fee, date of delivery or performance, interest or penalties and termination or cancellation? 3. Are contracts reviewed by legal counsel before they are signed to assure that they contain minimum requirements, are legally enforceable, do not violate the law or present unanticipated tax or tax exemption problems, other problems? 4. Does the nonprofit organization insist that every contract it enters into, no matter who drafts the contract, must be written in "plain English" - with simple and understandable statements of terms and conditions? 5. Are any changes in the arrangements contained in a written contract made only by insertions that are initialed by all parties or by use of a separate written agreement signed by all parties? 6. Does the nonprofit organization assure itself that the individual negotiating on behalf of the other party actually has the authority to bind that other party? 7. Is there an established policy as to who among the volunteers and staff is specifically authorized to bind the nonprofit organization to legal, financial, or other obligations? 8. Are volunteers and staff periodically advised regarding authority to bind the nonprofit organization? 9. When several aspects of a function or arrangement must depend on one another for success, are related contracts for each aspect specified as contingent upon one another - for example, committing through different contracts with several hotels and a convention center to be used simultaneously for a large meeting, or committing through different contracts with separate suppliers of computer hardware and computer software?

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10. When a contract incorporates another document into its terms by reference to that document, is the other document obtained, reviewed, approved and attached to the contract? 11. Does the nonprofit organization specifically assign someone to monitor performance under the terms of the contract by all parties involved? 12. When a nonprofit organization provides that it is automatically renewed unless terminated by a specified date, is that date carefully logged on a permanent calendar to assure against unintended automatic renewal? 13. Are original, signed copies of contracts maintained in secure and permanent files? Publications 1. Do the nonprofit organization's publications carry a copyright notice - the word "Copyright", the abbreviation the "c" in a circle symbol, followed by the date of first publication and the name of the copyright owner? 2. Are important nonprofit organization publications registered with the Copyright Office? 3. Does the nonprofit organization assure that it owns the copyright for its publications? 4. Does the nonprofit organization avoid copying or re-publication of copyrighted works of others except for excerpts, samples or other portions under the "fair use" doctrine? 5. When an infringement of the nonprofit organization's copyright is discovered, is the infringer pursued legally? 6. Does the nonprofit organization avoid defamation by assuring that all statements in its publications which criticize individuals, firms, products or services can be supported as fair and accurate from clear evidence? 7. Does the nonprofit organization invite individuals or firms whose products or services are criticized in the nonprofit organization's publications to respond to the criticism in advance of publication? 8. Is the response published? 9. Does legal counsel review publications in advance that contain potentially defamatory statements? 10. Does the nonprofit organization endorse or recommend particular products or services in its publications? Personnel 1. Does the nonprofit organization avoid discrimination in hiring, firing and other employment-related decisions? 2. Does the nonprofit organization check all references provided by candidates for employment? 3. Does the nonprofit organization generate and check additional references? 4. Does the nonprofit organization distribute a personnel manual to all employees? 5. Are all of the provisions of the manual uniformly applied? 6. Does the manual include job descriptions for all employees, list all employee benefits and provide for periodic evaluation against specific criteria? 7. Is the manual specific as to vacation benefits and the availability of "carry-forward" of unused vacation? 8. Are the job evaluation criteria objective, reasonable, and consistently applied? 9. Does the manual include criteria for determining when an employee is disabled and what the consequences and benefits are, if any? 10. Does the manual specify whether such conditions as AIDS are considered disabilities? 11. Does the manual make clear that staffs are "employees-at-will" subject to termination at the discretion of the nonprofit organization? 12. Does the manual specify termination procedures and severance benefits, if any? 13. Is the manual reviewed on a regular basis by legal counsel to assure compliance with applicable laws? 14. When an employee's performance is inadequate, are procedures consistently applied for notification to the employee, establishment of goals and deadlines for improvement, and recording of the situation in personnel files?

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15. Does the nonprofit organization have a plan for quickly confronting and resolving instances of workplace abuse of alcohol or drugs or sexual or racial discrimination? Finances 1. Does the nonprofit organization obtain an audited financial statement annually? 2. Are periodic interim financial reports issued to the governing board of the nonprofit organization? 3. Is a budget prepared each year, approved by the governing board, used to measure financial performance of the nonprofit organization, and adjusted when necessary? 4. Is the nonprofit organization's bookkeeper competent? 5. Are internal financial and bookkeeping procedures in place, approved by the governing board, and reviewed periodically with weaknesses noted? 6. Is a segregation of duties maintained among those with financial and bookkeeping responsibilities? 7. Is access to nonprofit organization funds limited to specified individuals and in specified amounts, with the nonprofit organization's bank notified of the amounts beyond which counter-signatures are required? 8. When cash is received at the nonprofit organization's office or at gatherings, are special procedures in place to assure control? 9. Are short-term and long-term plans or protocols for investment of association funds in place, reviewed periodically by the governing board, and revised when necessary? 10. Are all benefit programs reviewed periodically for compliance with applicable laws? Meetings 1. Is each nonprofit organization meeting held according to a notice and agenda distributed in advance to attendees? 2. Are attendees at nonprofit organization meetings warned about against discussion of subjects with potentially adverse legal ramifications? 3. Are minutes taken of nonprofit organization meeting proceedings? 4. Do the minutes record all or most comments, views, criticisms, considerations or discussions of each subject rather than merely reports, communications and resolutions? 5. Are minutes prepared by staff rather than by volunteers? 6. Are draft versions of minutes removed from the nonprofit organization's records once the final version is approved? 7. Are minutes reviewed by legal counsel before distribution? General 1. Is the leadership of the nonprofit organization routinely advised, through oral or written communications, regarding avoidance of potential legal liability? 2. Is the nonprofit organization managed by one or more experienced and knowledgeable professional nonprofit organization executives? 3. Has the executive attended educational programming on legal liability of nonprofit organizations? 4. Does the executive receive and review books, periodicals or other literature covering nonprofit organization law? 5. Is qualified legal counsel available either "inside" (on staff) or "outside" (on a retained basis) to consult regarding potential legal liability situations? 6. Is legal counsel specially knowledgeable and experienced in nonprofit organization law because of professional memberships, educational seminars, legal publications, or representation of other nonprofit organizations? 7. Does consultation with legal counsel typically occur when potential liability situations are first identified rather than later when a claim or challenge is received? 8. Does legal counsel attend meetings of the governing board of the nonprofit organization?

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9. Does legal counsel regularly receive and review minutes, communications and publications of the nonprofit organization? 10. Does the nonprofit organization have governing documents - a corporate charter, bylaws, and a compilation of policies and procedures - that clearly specify the rights and obligations of members, directors, officers and staff? 11. Are the governing documents periodically reviewed to make them current and consistent with present interpretation of nonprofit organization law? 12. Is the purpose of the nonprofit organization stated clearly in its governing documents with no implication of illegality? 13. Are volunteers or staff indemnified through the governing documents or otherwise? 14. Is there an established policy as to who among the volunteers and staff is specifically authorized to communicate outside the nonprofit organization its views, comments and positions? 15. Are volunteers and staff periodically advised regarding authority to communicate on behalf of the nonprofit organization? 16. Are volunteers prohibited from using nonprofit organization letterhead except when authorized for a specific task, project or purpose?

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Bookkeeping Basics Despite the importance of bookkeeping, NGOs often neglect it because of the time and effort it takes to set up and then keep an eye on to a bookkeeping system. Most NGOs would rather be out soliciting donations than sitting in the office entering debits & credits in their general ledgers. But bookkeeping is one thing you can't afford to ignore. To understand why, it helps to understand what bookkeeping is and how it affects your NGO. Bookkeeping is the recording of a NGO's financial transactions. It's the first step of the accounting process, which also includes classifying, reporting and analyzing financial data. Bookkeepers are responsible for organizing receipts, vouchers, bills, canceled checks & other records generated by financial transactions. Bookkeepers chronologically record all transactions - cash disbursements, cash receipts, sales & purchases, and others - in a journal and post the journal entries to a general ledger of accounts, which accountants use to prepare monthly financial statements. Although bookkeeping doesn't contribute directly to your cash inflow, there are several good reasons to maintain balanced books: Granters and donors want to see accurate and complete books for a NGO before granting or donating cash. If you rely on outside financing, this is the most important reason to invest time and money in bookkeeping. Bookkeeping generates the information you need to manage your NGO. For example, up-to-date general ledger information shows which customers are past due on their accounts or have outstanding balances on lines of credit. Financial reports help you assess whether or not income and expense are in line with your budget. In other words, these reports help you to anticipate and avoid cash-flow problems. In order to know how much you have utilized grant money you need to have proper bookkeeping system to record associated monetary transactions. Without good record keeping, you leave yourself exposed to fines and penalties if you get audited. Incomplete records can make an audit a nightmare. Also, if your records do not support your claims, they could be disallowed.

Top Bookkeeping Mistakes by NGOs Bookkeeping is a significant part of any endeavor for-profit or not-for-profit. While it is typically not one of the more glamorous jobs, bookkeeping is at the heart of a NGO's success, and errors can cost the NGO significantly. Below are the most common errors that you want to avoid. 1. Doing it yourself. No matter how much they hate it, many CEO insist upon handling the books themselves. Having a competent bookkeeper coming in to handle the books can be extremely beneficial in that they have the skills to do the job quickly and efficiently and will provide a second pair of eyes to find errors and make suggestions. 2. Forgetting to track reimbursable expenses. NGO members often pay for expenses out of their own pocket then make the mistakes of failing to track these expenses. They then fail to submit the expenses to the NGO for reimbursement. 3. Lack of communication. Having someone handling bookkeeping is only effective if they are filled in and kept up to date on all financial transactions. A frequent mistake is paying someone a salary and not reporting it or buying supplies and not providing the bookkeeper with the information or receipts.

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4. Not reconciling the cash book with the bank statement each month. One of the fundamental aspects of bookkeeping is reconciling the cash book and bank statements every month. Nonetheless, there are NGOs that do not do this and others where errors are made by not doing it properly. Again, this is a good reason for hiring an experienced bookkeeper. 5. No backup. The paperless office does not exist in the real world, where audits do still exist. A paper trail, documentation or verification in the form of backup documents should be available, especially if all files are on the computer system, which could be prone to technical problems. 6. Petty cash dispassion. A system should be set up whereby a set amount of money is in petty cash and each time money is taken out for any purpose, a petty cash slip is filled out. When the fund is exhausted, the slips will total the original amount and a check can be written to cash to set up the full amount again. Many NGOs are dispassionate about using the petty cash fund without keeping accurate records. 7. Miscategorization or overcategorization. There are fairly standard categories for expenses, incomes, liabilities and assets. However, often monetary transactions are entered into the wrong categories or too many categories are created. Use general bookkeeping guidelines for standard categorization and create as few new categories as possible. Try to follow generally accepted accounting practices. Look at Chart of Accounts as described in next section. It can help you to create different categories of monetary transactions, group them functionally & according to accounting standards. Chart of Accounts will also help you to allot different code number to each accounts and hence to each files. As you set up your bookkeeping system, keep these ideas in mind: Make a commitment to set up an accurate bookkeeping system. No NGO can possibly survive without one. Contact your accountant and ask for advice on setting up a system. Learn your bookkeeping system; otherwise you are asking to be the victim of theft and fraud. To make your bookkeeping easier, open a separate bank account for your NGO. Maintain daily records. This is one of the most basic rules: If you don't keep accurate daily records, you don't have an accurate way to track the financial condition of your business. Different people use different record-keeping systems; what matters is that you have one and use it every day. Once you have a good system set up, accurate record keeping will take just a few minutes a day. Handle and review checks carefully. It's easy to be on autopilot when you're writing checks and tossing canceled ones into a filing cabinet without reviewing them. Remember: Those checks are as good as cash. And if something goes wrong, you - not the bank - will be on the hook. Get a bank statement with a month-end cutoff. This is another basic tip that can reap big rewards. Synchronizing your bank statement with other monthly records will make it much easier to reconcile your statement and track expenses. Leave an audit trail. Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company's financial activities. This means keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping separate bank accounts for your NGO and personal funds. If you can't go back a year and reconstruct your company's finances, you probably aren't leaving an effective audit trail.

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Developing an internal accounting control system Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Effective internal accounting control procedures will significantly increase the likelihood that: a. Financial information is reliable, so that managers and the board can depend on accurate information to make programmatic and other decisions b. Assets and records of the organization are not stolen, misused, or accidentally destroyed c. The organizations policies are followed d. Government regulations and/or donors conditions are fulfilled Developing an Internal Accounting Control System: Developing an effective internal accounting control system involves identifying those areas where abuses or errors are likely to occur for example: Cash receipts: To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security. Cash disbursements: To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. Petty cash: To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded. Payroll: To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as TDS, ESI/PF Contributions) are complied with. Grants and donations: To ensure that all grants and donations are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored. Fixed assets: To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded. Internal control needed for cash disbursements: The objective of internal controls for cash disbursements are to ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. While it is impossible to guarantee that these objectives will be met at all times for all transactions; the following practices provide reasonable assurance that they will usually be accomplished. a. Segregation of Duties: Segregation of duties means that no financial transaction is handled by only one person from beginning to end. For cash disbursements, this might mean that different people authorize payments, sign checks, record payments in the books, and reconcile the bank statements. If your organization is a small nonprofit, managed by volunteers and possibly one staff person, this principle can be hard to put into practice. You might consider having one person, such as the paid staff member, sign checks and assign a different person, such as the board treasurer, to review disbursements, bank statements, and canceled checks on a monthly basis. b. Authorization and Processing of Disbursements: You will want to develop policies regarding who in your organization can authorize payments. Some organizations designate this function solely to the CEO to ensure that a single person is paying attention to monies going out of the organization. All disbursements should be accompanied by adequate documentation, in the form of receipts or an invoice. c. Managing Restricted Funds: Restricted grants are a form of revenue unique to the nonprofit sector. Money, which has been restricted by the donor for a specific use (such as buying a new building, starting a new program, etc.) should only be used for the purpose for which it has been given. However, most nonprofits find themselves tempted to borrow against restricted monies when facing cash shortage. In

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cases where the funder clearly prohibits such borrowing, such action clearly violates the funders trust and instructions and may lead to revocation of the grant. In other cases, donors allow temporary borrowing as long as the money is replaced within a certain period of time, usually within the grant period. d. Check Signing: There is some debate regarding the number of signatures required on a check. In many cases, it is useful to require two signatures on checks. However, the number of authorized signers should be kept to a minimum, while ensuring that daily business is not unnecessarily hampered. The purpose of this internal control is to make sure that there are deliberate decisions made about who to pay, how much to pay, and when to pay bills. Internal Accounting Controls for Cash Disbursements Checklist: The following questions reflect common internal accounting controls related to cash disbursements. You may wish to use this list to review your own internal accounting controls and determine which areas require further action. a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t. u. v. Are all disbursements, except those from petty cash, made by pre-numbered checks? Are voided checks preserved and filed after appropriate mutilation? Is there a written prohibition against drawing checks payable to Cash? Is there a written prohibition against signing checks in advance? Is a cash disbursement voucher prepared for each invoice or request for reimbursement that details the date of check, check number, payee, amount of check, description of expense account (and restricted fund) to be charged, authorization signature, and accompanying receipts? Are all expenditures approved in advance by authorized persons? Are signed checks mailed promptly? Does the check signer review the cash disbursement voucher for the proper approved authorization and supporting documentation of expenses? Are invoices marked Paid with the date, number and amount of the check? Are requests for reimbursement and other invoices checked for mathematical accuracy and reasonableness before approval? Is a cash disbursement journal prepared monthly that details the date of check, check number, payee, amount of check, and columnar description of expense account (and restricted fund) to be charged? Is check-signing authority vested in persons at appropriately high levels in the organization? Is the number of authorized signatures limited to the minimum practical number? Do larger checks require two signatures? Are bank statements and canceled checks received and reconciled by a person independent of the authorization and check signing function? Are unpaid invoices maintained in an unpaid invoice file? Is a list of unpaid invoices regularly prepared and periodically reviewed? Are invoices from unfamiliar or unusual vendors reviewed and approved for payment by authorized personnel who are independent of the invoice processing function? If the organization keeps accounts payable register, are payments promptly recorded in the register to avoid double payment? If purchase orders are used, are all purchase transactions used with pre-numbered purchase orders? Are advance payments to vendors and/or employees recorded as receivables and controlled in a manner which assures that they will be offset against invoices or expense vouchers? Are employees required to submit expense reports for all travel related expenses on a timely basis?

Controlling Petty Cash: Petty cash allows you to make small purchases or reimbursements, in cash, for items such as stamps, office supplies, parking, etc. The board or senior management should develop a policy of how much money should be available in cash, and a maximum expenditure which can be paid with petty cash. For example, you may establish a petty cash fund of Rs. 5000, and have a policy, which says that

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payments for items costing over Rs. 250 must be made by check rather than reimbursed through petty cash. The fund should be enough to cover petty cash expenditures for about a month. If it is too small you will have to constantly replenish the funds, and if it is too large it means you have cash on hand which could be more safely kept in your bank account. The petty cash fund should be kept in a locked box or drawer. Auditors recommend that only one person, called the custodian, have access to this cash, and that person be responsible for all petty cash activity. While disbursing petty cash each transaction is documented through petty cash voucher. A sample of petty cash voucher is as:

XYZ Helping Center ABC City of India Petty Cash Voucher Date: ________________ Voucher No. ___________ Amount: _______________________________________ Rs. _________ For: ________________________________________________________ Account No: _________________________________________________ Paid to: ________________________ Signed: ______________________ Approved by: _________________________________________________

Petty Cash Internal Controls Checklist: The following questions reflect common internal accounting controls related to petty cash. You may wish to use this list to review your own internal accounting controls and determine which areas require further action. a. b. c. d. Is an imprest petty cash fund maintained for payment of small, incidental expenses? Is there a limit to the amount that can be reimbursed by the petty cash fund? Is supporting documentation required for all petty cash disbursements? Is a petty cash voucher filled out with supporting documentation, name of person being reimbursed, and proper authorization? e. Is access to petty cash limited to one person who is the fund custodian? Internal control for payroll: The objective of internal controls for payroll are to ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as TDS, contribution towards ESI and/or PF) are complied with. Each employee should have a payroll/personnel file, containing updated salary, benefits, employment status, and withholding information, as well as beginning date of employment and termination date, when applicable. A personnel manual should describe the organizations policies, established by the board, regarding vacations, holidays and sick leave. The time sheet is the most common tool used to document employee hours (including overtime) and authorize payments to employees. Time sheets can be designed to incorporate information regarding vacation, sick leave, and holidays. Funding agencies often require time sheets to document employee effort for their grants or contracts and all other duties they perform.

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Payroll Internal Controls Checklist: The following questions reflect common internal accounting controls related to payroll. You may wish to use this list to review your own internal accounting controls and determine which areas require further action. a. Are detailed time sheets required to document employee hours, including overtime? b. Are time sheets signed by the employees immediate supervisor authorizing payment for work? c. Are employment records maintained for each employee that detail wage rates, benefits, taxes withheld each pay period, and any changes in employment status? d. Are payroll-related taxes (TDS) and contributions towards ESI and/or PF withheld and paid on a timely basis? e. Do the executive director and board treasurer review all the payroll tax & ESI/PF returns? f. Do written policies and procedures exist for accounting for vacations, holidays, sick leave, and other benefits? g. Is a list of all payroll checks written, with appropriate withheld taxes, maintained either through the cash disbursement journal or a separate payroll register? h. Is a separate payroll bank account maintained?

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Chart of Accounts The Chart of Accounts is designed to have a uniform classification and interpretation of monetary transactions. It facilitates the recording & summarizing of transactions and the preparation of financial reports. Sample Chart of Accounts XYZ Helping Center ABC city of India Balance Sheet as on March 31, 20xx
Account Number L-000-000
L-010-010

Account Liabilities
Capital Add: Capital introduced Reserve & Surplus Add/Less: Surplus/Deficit during the year Less: Drawings Loan Fund Distinguish loan into short & long term where necessary Show separate loan account for secured and unsecured From Within the organization From Outsiders Interest payable i.e. total debited interest amount Current Liabilities Account payable - board members Account payable - staff Account payable - trade Income Accrued (that is amount received but services not rendered) Outstanding Expenditures Other current liabilities Provisions for Audit Fee Provisions for Doubtful Debt Other Provisions

Amount

Account Number A-000-000

A-010-000 A-010-010

Account Assets
Fixed Assets Land Building (Gross Block + Addition) Depreciation Building (Net Block) Furniture & Fittings (Gross Block + Addition) Depreciation Furniture & Fittings (Net Block)

Amount

L-020-010 L-020-020 L-030-000

A-010-020 E-050-010

A-010-030 E-050-010

L-030-010 L-030-020 E-040-010 L-040-000 L-040-010 L-040-020 L-040-030 L-040-040 L-040-050 L-040-060 L-040-070 L-040-080 L-040-090

A-010-040 E-050-010

Electrical Equipments (Gross Block + Addition) Depreciation Electrical Equipments (Net Block)

A-010-050 E-050-010

Transportation Equipments (Gross Block + Addition) Depreciation Transportation Equipments (Net Block) Teaching Equipments (Gross Block + Addition) Depreciation Teaching Equipment (Net Block) Office Equipments (Gross Block + Addition) Depreciation Office Equipments (Net Block)

A-010-060 E-050-010

A-010-070 E-050-010

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A-010-080 E-050-010

Medical Equipments (Gross Block + Addition) Depreciation Medical Equipments (Net Block) Cooking Appliances (Gross Block + Addition) Depreciation Cooking Appliances (Net Block) Power Generation Equipments (Gross Block + Addition) Depreciation Power Generation Equipments (Net Block) Investments Short Term Investments Gross Amount Interest Accrued i.e. total credited interest amount Net Amount Long Term Investments Gross Amount Interest Accrued i.e. total credited interest amount Net Amount Current Assets Inventory/Stock e.g. Medicine Stock Teaching Material Stock Food Stock Other Stock Receivables

A-010-090 E-050-010

A-010-100 E-050-010

A-020-000

A-020-010 I-030-010

A-020-020 I-030-010

A-030-000

A-030-010 A-030-020 A-030-030 A-030-040

A-030-050 A-030-060 A-030-070

Grants/Contribution Receivable Sundry Debtors Debtors less than 6 months Debtors more than 6 months Cash Cash in Hand Cash at Bank Other Current Assets (Amount recoverable in cash or in kind or for value to be received)

A-030-080 A-030-090

A-030-100 A-030-110 A-030-120 A-030-130

Advance to staffs Advance to others Prepayment Refundable Deposits

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A-040-010

Misc. Expenditure (Asset) (to the extent not written off)

Total Liabilities

Total Assets

XYZ Helping Center ABC city of India Income & Expenditure Account For the year ended March 31, 20xx
Account Number E-000-000
E-010-000 E-010-010 E-010-020 E-010-030 E-010-040 E-010-050 E-010-060 E-020-000 E-020-010 E-020-020 E-020-030 E-020-040 E-020-050 E-020-060 E-020-070 E-020-080 E-020-090 E-020-100 E-020-110 E-020-120 E-020-130 E-020-140 E-020-150 E-020-160 E-020-170 E-020-180 E-020-190 E-030-000 E-030-010 E-030-020 E-040-000

Account Expenditure
Program Expenditure Community Health Program Education Program Awareness Program Empowerment Program Development Program Care & Shelter Program Administrative Expenditure

Amount

Account Number I-000-000

I-010-000 I-010-010 I-010-020 I-010-030 I-010-040 I-010-050 I-020-000 I-020-010

Account Income
Support Grant (Overseas) Grant (Domestic) Donations from members/staffs Donations from others Membership Fee Income Income from business Other Income Interest from investments Misc. Income

Amount

Salaries ESI Contributions PF Contributions Honorarium Board Meeting Expenditure Light & Power Office Rent Office Communications Office Supplies Insurance Repair & Maintenance Fuel & Oil Professional Fee Legal Fee Bank Service Charge Tax & License Transportation & Travel Human Resource Development Miscellaneous Expenditure Fundraising Expenditure Fundraising Campaign Membership Drive Interest Expenditure

I-030-000 I-030-010 I-030-020

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E-040-010 E-040-020 E-050-010 E-060-010 E-070-000 E-070-010 E-070-020 E-070-030

Interest on Bank Loan Interest to other loan Depreciation Written-off Expenditure Provisions Provisions for Audit Fee Provisions for Doubtful Debt Other Provisions Sulplus/(Deficit)

Total

Total

Description of commonly used accounts of NGO Below are the descriptions of significant commonly used NGO accounts which can serve as guide and starting point in preparing more detailed Charts of Accounts. Each NGO should define its Chart of Account. ASSETS Fixed Assets: Fixed Assets are tangible assets with an estimated useful life beyond one year, used for the conduct of business and not intended for sale during normal operations of NGO. Fixed Assets include: Assets not normally subject to depreciation such as Land and Antiques. Assets subject to depreciation such as Building, Furniture & Fittings, Electrical Equipments, Transportation Equipments, Office Equipments, Teaching Equipments, Medical Equipments, Cooking Appliances, Power Generation Equipments, etc.

Each class of asset is debited for additional acquisitions made and credited for disposal or depreciation. Fixed Assets may be acquired through purchase, construction, grant or donation. Assets acquired from a restricted grant will be recognized as an asset at its net book value, when ownership is passed on with a corresponding credit to Asset Fund. In case the ownership of asset remains with the donor, a disclosure in the financial statements of these possessed but not owned assets should be made in the financial statements. Depreciation: Depreciation is the cost of using up the future economic benefit or service potential of fixed assets. Except for non-exhaustible assets such as Land & Art Collections, all fixed assets are subject to depreciation. The method & rate of depreciation to be used should be applied consistently from year to year. It is advisable to adopt the depreciation rates as suggested in Schedule XIV of The Companies Act 1956 for example: Building - 5 percent per annum, Equipments - 13.91 percent per annum, Furniture & Fittings - 18.1 percent per annum, etc. Investments: Investments are assets not directly identified with operating activities of NGO. Investments are expected to provide the revenues needed for operations over the time period. Investments can be classified as short-term or long-term. Short-term investments imply that investments may be converted to cash within a year and that they are funds available for current operations. Long-term investments are acquired in accordance with financial policies looking to the accumulation of funds.

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Interest Accrued: Interest accrued over investments are received on maturity. It is customary to maintain bookkeeping system on Accrual Basis. Hence any interest accrued or added over investments has to be recognized in books while closing the account. Current Assets: Current Assets are those assets that one reasonably expects to convert into cash, sell or consume in operations within a singly operating cycle. Difference between short-term investments and current assets is that the current assets arise during normal operations of NGO. It consists of: Inventory: Inventory comprises materials or supplies to be consumed in the process of rendering services. These may be manufactured or donated goods for distribution to beneficiaries. Inventories will be recognized as asset if the future economic benefits associated with the inventory will flow to the organization and the cost can be reliably measured. Inventories held for distribution are to valued based on historical cost; while inventories held for production should be stated based on fair value. Receivables: Receivables are generally defined as claims held against others for future receipt of money, goods or services. Receivables arise when adopting the accrual method of accounting. This is significant to NGOs because the collection from these transactions provides funding for programs & services. There are two basic considerations in recognizing receivables of this nature. First, a receivable (and the related revenue) should be recognized when the NGO actually earns the revenue & the right to receive the money. Second, that the receivables are ultimately collectible i.e. enforceable on the part of NGO. Receivables are valued at the outstanding balance at which they are to be collected. The amount is reduced by an estimated provision for doubtful accounts determined based on net realizable value of the receivables. Cash: Cash comprises Cash in Hand, Petty Cash fund as well as local or foreign currency deposits in bank account(s) that are immediately available for use in the current operations. At the end of each month or week Cash at Bank balance as per Cash Book is reconciled with balance shown in bank statement or saving account passbooks. Other Current Assets: It is also termed as Amount recoverable in cash or in kind or for value to be received. This includes advance to individuals or organizations intended for normal operation of NGO. Advances that are not within purview of normal operation of NGO are shown under Investments e.g. 15-day fixed deposit with bank. Advances e.g. advance given to staff, advance given to outsiders, prepayment for future delivery of goods/services, security deposit for availing any services e.g. telephone connection and any other advance which falls within purview of normal operation of NGO is shown under the head Other Current Assets. Miscellaneous Expenditure (Asset): Pre-operative expenditure i.e. expenditure incurred to incorporate your NGO e.g. expenditure incurred for getting NGO registered with Societies Registration Act is shown under this head. Pre-operative expenditures are not written off fully during the forthcoming year. Rather it is shown as asset under the head Miscellaneous Expenditure (Asset) and written off during 10 year or more or less. LIABILITIES Capital: This is contribution of founding members of NGO. For example, say 10 dignified persons have joined to incorporate NGO for well being of vulnerable sections of the society. To begin social work all

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founding members have contributed their share of money in current or saving account of NGO. This can also be termed as Equity. After incorporation members can add Fresh Capital anytime for fulfillment of mission of NGO. Contributions from members are shown separate under the head Capital. Reserve & Surplus: Any surplus generated during the year as reflected in Income & Expenditure Account is added here and similarly any deficit incurred during the year is deducted. Loan Fund: Loans are liabilities not directly identified with operating activities of NGO. These liabilities arise outside the purview of normal operation of NGO. Loans can be classified as short-term or long-term. Short-term loans imply that loans are to be paid within a year. Long-term loans are payable over a time period more than a year. Time - within a year or more than a year - is calculated from date of Balance Sheet. Loans can further be classified into Secured Loan & Unsecured Loan. Secured loans are those loan where specified securities e.g. hypothecation and/or mortgage are kept with lender. Unsecured loans are taken without providing any security. Current Liabilities: These liabilities arise within the purview of normal operation of NGO. Account payable to board members & staffs are shown separately. Account payable - trade account represents total of unpaid bills due to suppliers for support or services or materials received. Income Accrued is unearned income of NGO. This account is credited when cash is received prior to either having earned the revenue or the right to keep the revenue. It is debited when earned and the corresponding credit to revenue or support is made. Outstanding Expenditure account represents amounts due for services and/or supplies already received but which remain unpaid at the time of preparing Balance Sheet. Other current liabilities include other liabilities incurred which amount are readily determined from available documents e.g. billings, amount withheld from employees, or other parties for taxation, for contribution towards ESI/PF, etc. It also includes other liabilities that cannot be properly classified under other specific current liabilities account heads in the chart of accounts. Current liabilities also includes provisions e.g. provision for audit fee, provision for doubtful debts, etc at the time of preparing balance sheet and adopting accrual method of accounting. EXPENDITURE Expenditures incurred by NGO are classified functionally as follows: Program Expenditure Administrative Expenditure Fundraising Expenditure

Program Expenditure: This refers to all program implementation costs or those expenses related to program/project service activities that result in services (or goods) being given to beneficiaries or members that fulfill the mission of NGO.

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This also includes expenditures incurred for activities necessary to support or assist program implementation e.g. capability building, information management, policy advocacy, networking of project supporters, partnership building, investment promotion, project development, assessment, approval, monitoring and evaluation and provision for technical assistance to other NGOs. Administrative Expenditure: These expenditure relate to activities such as administration & management, general record keeping, office maintenance and similar expenses. Human resource development pertains to expenditure incurred for the purpose of developing & strengthening NGOs board members, management & staff e.g. those expenditures incurred for staff training & development. Fundraising Expenditure: These are expenditures incurred in encouraging donors to support or encouraging members to become a member of your NGO. Depreciation & other expenditures: Already explained in Fixed Assets section. I am repeating, it is advisable to adopt the depreciation rates as suggested in Schedule XIV of The Companies Act 1956. Please consult your Auditor. Depreciation is chargeable over Fixed Assets only. However there can be other expenditures that have potential to render services for more than a year at the time of preparing Final Accounts. Such expenditures are capitalized, say for 2 to 3 years or more. Amount that has been utilized till preparation of Final Accounts are shown as writing off such assets at predetermined rates. Provisions arise when NGO adopt accrual method of accounting. Under accrual method of accounting you need to provide for those expenditures that NGO has utilized but not paid. For example Audit Fee, which is for the current year but to be paid during next year. While closing account NGO has to recognize all expenditures i.e. all services that NGO has utilized and accordingly make a provision for it even if audit fee is to be paid during next year. Joint Costs: These are expenses incurred by NGO for activities involving two or more different programs or support services. Cost allocation is proper if the purpose, audience and content criteria are met that indicate that the joint activity included two or more programs or support services. Allocation of cost may include any of the following methods but should be applied consistently for the same type of transaction: a. Physical unit method, which allocates joint costs based on physical materials that make up the joint cost. b. Relative direct method, which allocates joint costs in relation to the direct costs of each of the activities. c. Stand alone cost method, which allocates joint costs to each component of the joint activity on a ratio that estimates the cost that would have been incurred had each activity been performed separately. INCOME Income represents actual or expected cash inflows (or the equivalent) that have occurred or will materialize as a result of entitys ongoing operations during the period. As done with expenditures, various income accounts are grouped under following heads: Support: Support income can be of following types:

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a. Grants: This refers to funds (or equivalent) given by donors for a specific program/project with certain conditions relating to the operating activities of NGO. Grants, including non-monetary grants, valued at fair value, should not be recognized until there is reasonable assurance that NGO will comply with the conditions attaching to them and the grants will be received. Mere receipt of the grant is not conclusive evidence that the conditions attached to the grant have been or will be fulfilled. Grants should be recognized as support income over the period necessary to match them with the related expenditure incurred for the purpose for which they are intended. b. Donations: This refers to the unrestricted contributions in cash or in kind or services from donors to be used in accomplishing the purposes for which the NGO has been created or organized and over which the Board has discretionary control. Donation from members & donations from others should be shown separately. c. Membership Fee: It is also the major source of fund to keep the NGO operating. In return members are given services e.g. low cost accommodation, free access to seminar/conference, discount in admission for certain professional courses, etc. You can create further subtype e.g. Annual Membership Fee A/c, Life Membership Fee A/c, etc. Income from business: If NGO manufacture & sell certain goods e.g. handicrafts, food, stationary, etc then income generated by means of producing & selling such goods are shown under this head. Other Income: This represents income earned from sources other than from operations. Examples include interest from savings account & investments, gain on sale of fixed assets and foreign exchange gain or losses and other miscellaneous items.

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Audit What is an audit? An audit is a process for testing the accuracy and completeness of information presented in an organizations financial statements. This testing process enables an independent Chartered Accountant (CA) to issue what is referred to as an opinion on how fairly the nonprofits financial statements represent its financial position and whether they comply with accounting principles. The audit report is addressed to the board of governors as the trustees of the organization. The report usually includes the following: a. A cover letter signed by the auditor, stating the opinion, as described above. b. The financial statements, including the statement of financial position (balance sheet), statement of financial activity (income & expenditure account), and statement of cash flows (receipt & payment account). c. Notes to the financial statements, as required by Accounting Principles, which might include information about functional expenses, method for allocating joint costs, a depreciation schedule, further information about grants/donations, volunteer services, and other significant information not obvious in the financial statements. In addition to the materials included in the audit report, the auditor often prepares what is called a management letter or report to the board of governors. This report cites areas in the organizations internal accounting control system, which the auditor evaluates as weak. What an Auditor Does? The auditor will request information from individuals and institutions to confirm bank balances, grants/donations amounts, conditions and restrictions, contractual obligations, and monies owed to and by your organization. The auditor will review physical assets, journals and ledgers, and board minutes to ensure that all activity with significant financial implications is adequately disclosed in the financial statements. In addition, the auditor will select a sample of financial transactions to determine whether there is proper documentation and whether the transaction was posted correctly into the books. In addition, the auditor will interview key personnel and read the procedures manual, if one exists, to determine whether the organizations internal accounting control system is adequate. The auditor usually spends several days at the organizations office looking over records and checking for completeness. Auditors are not expected to guarantee that 100 percent of the transactions are recorded correctly. They are only required to express an opinion as to whether the financial statements, taken as a whole, give a fair representation of the organizations financial picture. In addition, audits are not intended to discover embezzlements or other illegal acts. Therefore, a clean or unqualified opinion should not be interpreted as an assurance that such problems do not exist. An unqualified opinion includes wording such as, In our opinion, the accompanying financial statements, read together with the Notes, present fairly the financial position of XYZ Helping Center at the fiscal year ending March, 31 200x in conformity with accounting principles. A qualified opinion is issued when the CA believes the financial statements are, in a limited way, not in accordance with accounting principles. A qualified opinion might include wording such as, In our opinion, except for the omission of... the accompanying financial statements present fairly... Many auditors provide nonprofits with year-end financial management services also, which are not part of the audit. These include preparing final account statements, accrual and other adjustments, timely preparation of trial balance, stock valuation, etc. Smaller nonprofits with limited accounting expertise may choose to pay

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their auditors for these tasks. However, you should know that these services are provided in addition to the audit and can be completed by staff or volunteers to lower the cost of the audit. Preparing for an audit: You need to assure who is going to audit your statements. Choosing an auditor involves many criteria, out of which important ones are: Experience in the nonprofit sector: Since there are some differences between for-profit and not-for-profit accounting and in how financial statements are interpreted, an auditor who has other clients in the nonprofit sector is likely to be more helpful and efficient. Experience with other nonprofits in your area of work: You may want to consider an auditor experienced with nonprofits similar to yours and who knows the specific reporting requirements of your primary funding sources. Fee: Chances are few that your auditor will render his/her services for free to your charity and nonprofits are cost sensitive to afford the luxury to hire outstanding auditors. There are some outstanding auditors who charge nonprofits a reduced fee. Chartered Accountant may produce a lower bid for the first year to get your business and then significantly raise the fee in subsequent years. Auditors who do not have necessary experience to work with nonprofits may also prepare a less complete report, which has less value to the board and the funding agencies. Also, they may require nonprofit staffs, who are typically overburdened, to do even more work in preparing for the audit. Your goal should be to get the reports and recommendations that you need and can understand for a reasonable fee. However, once you have appointed an auditor and you are getting the information you need from your audit and are satisfied that the reports are complete and usable, it is unwise to start over with a new auditor. To carry out the process of audit, auditors prepare a list of those records, which they will need to examine, forms, which you will need to complete, and questions you will need to answer. Complete, accurate, and accessible records and other information prepared well in advance of the audit will help ensure that the process goes smoothly and more quickly, reducing the financial and emotional cost of an audit. While the following is not a complete list, it is representative of the information an auditor is likely to require: Confirmations: A confirmation is an independent statement, which supports the financial information in your records. Auditors will ask you to prepare confirmation letters on your letterhead (they will provide the format) to your bank(s), funders, donors, attorney, people, and organizations you owe money to and who owe you money to confirm the amounts reflected in your books. Confirmations are mailed by and returned directly to your auditor to ensure their credibility. Evidence of Internal Controls: The auditor will either meet with staff members or request that they complete a questionnaire documenting the procedures related to spending and receiving money and other resources, complying with laws, donor restrictions and regulations, maintaining property and equipment, and recording financial information in the books. Documentation: The auditor will request a number of schedules (lists) of information related to the following: Assets: Property and Equipment (Fixed Assets): When acquired, how much you paid, how long they are expected to last, how much they are depreciated each year, and how much has been depreciated to date (cumulative depreciation)? Auditor can also ask boards resolution for purchase of assets. Investment: Whether there is any agreement or restriction to the right of ownership and/or disposal of investments? Inventories: Whether all recorded inventories exist, owned by your NGO and valued appropriately?

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Accounts Receivable: Who owes you money, how much, when it was due? Your auditor will categorize total accounts receivable amount into (a) less than 6 months & (b) equal to or more than 6 months. Cash and Bank balance: Auditor will review segregation of duties relating to authorization of transactions, handling of cash, cheque issuance, writing books of accounts, daily recording of cash transactions and periodic reconciliation of bank balances. Liabilities: Capital: How much your NGO owe to board members? Loan: Who you owe money to, how much you owe each individual/organization? Copies of loan agreements, security offered against loan and confirmation of outstanding balances. Trade Creditors: Money you owe each individual/organization and proper recording of payment made. Deferred Revenue: If you have deferred any grant or income due to donor restrictions or due to enhanced time span of services, provide the information about it under Grants section of Income & Expenditure A/c. Income Grants and Donations: Funder/donor names and addresses, grant period, grant amount, when received, restrictions, and copies of the grant letters and grant applications. In the case of individual contributions, your auditor will specify which donors to include on this list based on a minimum level of contributions they will establish for you based on your overall budget and total contributions. Donated services and materials: You may be required to place a rupee value on contributions of certain services and materials. Prepare a list of these donations to discuss with your auditor. Special events and benefits: Show income and expenses, and documentation for the value of goods or services which donors received. Documentation: Such as contracts and invoices, names and addresses, registrations, etc. for fees from memberships, tuition, performances, and other services. Sale & Inventory: If you sell candles, tee-shirts, books, or other products, keep a record of sales throughout the year so that beginning inventory can be reconciled with inventory at the end of the year. Auditor will check by reference of carbon copies or counterfoil of receipts issued of cash sale and cash receipt. Expenses Payroll records: All expense for concerned period incurred whether paid or not paid are taken into account and adherence to legal requirement e.g. TDS, contribution to ESI, Provident Fund, Gratuity, etc. Your auditor will also review loan taken by employee and installment deducted from salary. Purchase: Cash purchase will be examined by reference to cash memo or receipted invoice issued by seller/supplier. Credit purchase will be examined by reference to sellers invoice and related entries in Purchase Register & Creditors Ledger. Your auditor will seek verification and management representation about purchases, purchase returns and method of valuation of stock. Ensure that you have not made double payment for same invoice. Your auditor can obtain direct confirmation from the seller for high amount purchase. Other management expenses: Sufficient evidence regarding occurrence, completeness, measurement, presentation and disclosure about establishment, interest, repair and other management expenses. Remuneration to governor, Salary to CEO, program managers and other should be bifurcated. For other expenses auditor will verify its nature whether capital or revenue or deferred revenue with reference to corresponding vouchers. Certain expenses e.g. travelling calls for approval from appropriate authority and auditor will check this. Finally auditor will also check that expenses incurred are for organization and not for personal use. Smaller nonprofits rely on their auditors to prepare many of these schedules based on information they give to the accountant. You can save on the cost of your audit by preparing the majority of these schedules internally, using staff or board volunteers, rather than asking the auditor to prepare them.

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Additional Information In addition to the schedules noted above, be prepared for the auditor to review the following items: Board minutes Leases and other contracts Bank statements, bank reconciliation, cheque books, and canceled cheques Financial files for paid bills and deposits Components of the accounting system - chart of accounts, journals and ledgers, printouts if the system is computerized, trial balance, etc. Budget for the fiscal year being examined

Finally, you will want to consider the non-financial aspects of the audit. The staff should understand what is involved in an audit, that it is a routine examination of financial and other information, and that they may be asked a few questions in relationship to that examination. You should assign one person to be the audit coordinator. In a small nonprofit, that may be the bookkeeper or executive director. In a larger organization, it may be the finance director. The audit coordinator should have access to all information the auditors may need, and should plan to be available to the auditors while they are on-site. In addition, some thought should be given to setting aside a physical location for the auditors so they can work efficiently. When Does an Audit Begin? Most organizations select an auditor prior to the end of their fiscal year. About the time your fiscal year ends, you will want to meet with your auditor to determine what information will be required for the audit. If your financial management system is reasonably well organized, the audit can usually begin within two months of the end of your fiscal year.

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