Mandatory Audit of NGOs and Charitable Foundations: When the Law, a Donor or the Charter Requires It

“Are we required to have an audit?” We hear this question from directors of civic organisations and charitable foundations almost every week. The answer depends on three sources of requirements: the law, the donor and the organisation’s own charter. For most small NGOs the law does not require an audit, but as soon as the organisation receives a large grant or exceeds certain financial thresholds, the picture changes.

In this article the MK Audit team explains when an audit is mandatory under Ukrainian legislation, when international donors require it, how charters and supervisory boards phrase the requirement, which types of audit exist and what the organisation gains beyond a formal report.

When the law requires an audit

Mandatory audit in Ukraine is governed by two laws: the Law “On the Audit of Financial Statements and Auditing Activities” No. 2258-VIII and the Law “On Accounting and Financial Reporting in Ukraine”. Both apply to all legal entities, including non-profit organisations.

A statutory audit of financial statements is required primarily for:

• public interest entities (issuers of securities, banks, insurers, private pension funds, large enterprises);
• large enterprises under the criteria of the Accounting Law;
• other categories defined by special laws (for example, natural monopolies and certain financial institutions).

The size of an enterprise is determined by three criteria at the annual reporting date: book value of assets, net revenue and average number of employees. An entity falls into a category if it meets at least two of the three criteria. For most NGOs these indicators stay within the micro or small enterprise range, so the statutory audit requirement does not apply to them.

At the same time, large charitable foundations that have accumulated significant humanitarian and international funding in recent years may well exceed the small enterprise thresholds. In that case the figures should be checked every year and an auditor consulted about the obligation to publish financial statements together with an audit report. These provisions have changed over time, so always rely on the current wording of the laws.

Special requirements for certain organisations

For some categories of non-profit organisations, sector-specific laws set additional audit or independent review requirements: for example, political parties, private pension funds, credit unions and organisations handling public funds. If your organisation belongs to one of these categories, the sector law takes precedence.

When a donor requires an audit

In practice, donors are the main source of audit requirements for Ukrainian NGOs. A grant agreement with the European Union, GIZ, UN agencies, embassies, international foundations or large foreign NGOs almost always includes a financial verification clause. The wording varies:

• Project audit. An independent audit of the financial report for a specific grant, performed under International Standards on Auditing ISA 800 or ISA 805, which cover special purpose financial statements and specific elements of a financial statement.
• Expenditure verification. Common in EU-funded projects. The auditor performs procedures agreed with the donor under ISRS 4400 and issues a report of factual findings without expressing an opinion.
• Organisational or institutional audit. An audit of the annual financial statements of the whole organisation, used when the donor provides core funding or wants to assess the financial management system as a whole.
• Capacity assessment or due diligence. Not formally an audit, but it often includes a review of the accounting system, internal controls and procurement before an agreement is signed.

Typical triggers for a donor audit requirement: the grant exceeds a certain threshold (often from several tens of thousands of euros or dollars), the project lasts more than a year, there are sub-grants or partners, or equipment is procured. The requirement is set out in the agreement, so the best moment to clarify the scope of the audit and who pays for it is at contract signing, not at project closure.

Read more about how we conduct grant and donor project audits on the service page.

When the charter or governing bodies require an audit

The third source of requirements is the organisation’s internal documents. The charter of a civic association or charitable foundation may provide for an annual independent audit. This clause is especially common among organisations with foreign founders, corporate foundations and organisations that want to position themselves as transparent partners for donors.

An audit may also be initiated by:

• the supervisory board or the executive board at year end;
• the general meeting of members, for example when the director or chief accountant changes;
• the founder of a foundation who wants independent confirmation that contributions were used as intended.

If the charter requires an audit, skipping it is a breach of internal rules, and a donor or partner may treat this as a risk. We therefore advise either complying with the clause or amending the charter in good time.

Types of audit for NGOs: what to choose

Type of engagement	Standard	Deliverable	When appropriate
Audit of annual financial statements	ISA	Auditor’s report with an opinion on the statements	Required by law, charter or an institutional donor
Audit of a grant financial report	ISA 800 / ISA 805	Independent auditor’s report on the project report	Required by the grant agreement
Agreed-upon procedures (expenditure verification)	ISRS 4400	Report of factual findings	EU and other donor projects that define a list of procedures
Review of financial statements	ISRE 2400	Limited assurance conclusion	When a full audit is not required but independent confirmation is needed

The choice depends on who will use the report. For a donor, the format is usually defined in the agreement or in the donor’s standard terms of reference for auditors. For the general meeting or supervisory board, the organisation decides for itself.

What the organisation gains from an audit

An audit is often seen as a formality for the donor’s benefit. In reality it brings the organisation several tangible results:

1. Reputation. An audit report from a firm listed in the Register of Auditors and Audit Firms and belonging to an international network is a clear signal to foreign partners.
2. Access to larger grants. Many donors require an audit report for the previous year as a condition of participation in calls for proposals.
3. Identification of weaknesses in accounting. The auditor sees typical problems: no allocation of costs between projects, incorrect recognition of restricted funding, gaps in procurement documentation. Fixing them before the donor’s review is far cheaper than refunding ineligible costs.
4. Lower tax risk. The audit checks whether expenses match the statutory purpose, which is the key criterion for keeping non-profit status.
5. Better organisation. The management letter with recommendations becomes an improvement plan for the finance team and management.

For organisations that do not yet have an in-house accountant experienced in grant accounting, an effective combination is ongoing accounting services for NGOs plus an independent audit at the end of the project by a different team. This separation of functions respects the independence principle and is viewed positively by donors.

How to choose an auditor for an NGO

• Check that the firm is listed in the Register of Auditors and Audit Firms maintained by the Audit Public Oversight Body of Ukraine.
• Ask about experience specifically with non-profit organisations and grants: NGO accounting has its own specifics.
• Ask whether the firm issues reports in English and is familiar with your donor’s requirements.
• Look for membership of an international network: it indicates external quality control.
• Agree on timing in advance: auditors are busiest at the end of the reporting period.

MK Audit has been operating since 2000, is listed in the Register of Auditors and Audit Firms under No. 4624 and is a member of DFK International. We audit NGOs and charitable foundations, perform grant audits under ISA 800/805 and expenditure verifications under ISRS 4400, and issue reports in Ukrainian and English. To find out whether your organisation needs an audit and in what format, send us a request: we will review the task, prepare a commercial proposal and reply within 1 day.