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An audit of a non-profit organisation’s annual financial statements answers one question: can the figures in the balance sheet and the statement of financial results be trusted? The answer matters to founders and the board, to donors assessing the organisation before a new grant, to banks, to consortium partners and sometimes to the tax authority. Below we explain what an auditor actually checks in the statements of a Ukrainian NGO, charitable foundation or association, which documents to prepare, how long the review takes and what opinion you will receive.<\/p>\n
When such an audit is required by law and when it is demanded by a donor or by the charter is covered separately in our article on the mandatory audit of NGOs and foundations<\/a>. This article is about the substance of the review itself.<\/p>\n Most Ukrainian civil society organisations, charitable foundations and associations qualify as non-entrepreneurial entities and prepare simplified financial statements under National Accounting Standard 25: a balance sheet (form 1-ms) and a statement of financial results (form 2-ms). Organisations that exceed the small-enterprise thresholds, or that have chosen the full format, file a full set under National Standard 1: balance sheet, statement of financial results, cash flow statement, statement of equity and notes.<\/p>\n Separately from the financial statements, a registered non-profit files a report on the use of income with the tax authority, which supports its status under clause 133.4 of the Tax Code. The auditor checks that the two reports agree with each other: if the income in the financial statements and in the non-profit report differs without an explanation, that is the first question both the auditor and the tax office will ask.<\/p>\n A financial statement audit is performed under International Standards on Auditing (ISA). The auditor does not check every transaction but plans the work around risk: identifying where material misstatement in an NGO’s statements is most likely and concentrating procedures there. For non-profits the typical risk areas are the following.<\/p>\n Grants, charitable contributions and membership fees are recorded in account 48 “Targeted financing and targeted receipts” and recognised as income in the period in which the related expenses are incurred. The auditor checks that a grant has not been recognised as income on receipt, that the unused balance of financing at year end is presented correctly and that the analytical breakdown by project matches the donor agreements.<\/p>\n The auditor reviews the split of costs between projects and general activities, tests source documents on a sample basis and looks for costs paid from two sources. For charitable organisations the share of administrative expenses is also monitored, because Ukrainian law caps it at 20 percent of annual income.<\/p>\n Equipment bought with grant funds or received as humanitarian aid must be capitalised, depreciated and shown in the balance sheet. A frequent finding: equipment purchased within a project is expensed and disappears from the balance sheet even though it stays with the organisation. The accounting treatment of aid is described in our article on humanitarian aid accounting for NGOs<\/a>.<\/p>\n Grants in euros or dollars are translated into hryvnia at the National Bank rate on the transaction date, and monetary items at the balance sheet date. The auditor checks exchange differences under National Standard 21 and whether part of a grant has been “lost” through an incorrect rate.<\/p>\n The auditor tests accruals under employment contracts and civil-law contracts, withholding of taxes and the unified social contribution, and the consistency between the ledger, the personal income tax and social contribution returns and the actual payments.<\/p>\n For an NGO that lives from grant to grant, the auditor assesses whether funding is secured for at least 12 months after the balance sheet date and whether the risks are disclosed in the notes.<\/p>\n If the books are kept in BAS or another accounting system, the auditor will ask for access to the database or an export of the registers: sampling is faster that way and the accountant receives fewer requests.<\/p>\n For an organisation with an annual turnover of up to several tens of millions of hryvnia and 3-10 projects, the audit usually takes two to four weeks after the complete document package is received. The work is done remotely: documents are shared through secure storage and meetings are held online.<\/p>\n The result of the audit is an auditor’s report under ISA 700 with one of four types of opinion:<\/p>\n In addition to the report, the organisation receives a management letter listing findings and recommendations. This is the most useful document for the accountant and the board: it describes what to fix in the accounting, policies and documentation before the next year. Most findings can be resolved during the audit itself, in which case they do not affect the auditor’s opinion.<\/p>\n Donors increasingly ask for audited financial statements for the last year as part of a capacity assessment before signing an agreement. An unqualified audit report shortens the donor’s due diligence, improves the odds in competitive calls and removes questions about transparency from the board and the community. For organisations running several grants at once, an annual audit also replaces part of the separate project reviews: an auditor who already knows the organisation’s accounting system performs the audit of an individual grant<\/a> faster and at lower cost.<\/p>\nWhat an NGO’s annual statements consist of<\/h2>\n
What exactly the auditor checks<\/h2>\n
Targeted financing and revenue recognition<\/h3>\n
Project costs and administrative costs<\/h3>\n
Fixed assets and property received free of charge<\/h3>\n
Foreign currency transactions<\/h3>\n
Payroll and settlements with the budget<\/h3>\n
Going concern and events after the reporting date<\/h3>\n
Documents to prepare<\/h2>\n
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Stages and timeline<\/h2>\n
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\n Stage<\/th>\n What happens<\/th>\n Duration<\/th>\n<\/tr>\n \n Planning<\/td>\n Understanding the organisation, risk assessment, document request<\/td>\n 2-3 days<\/td>\n<\/tr>\n \n Substantive procedures<\/td>\n Sample testing of transactions, confirmation of balances, analytical procedures<\/td>\n 1-2 weeks<\/td>\n<\/tr>\n \n Completion<\/td>\n Discussion of findings, adjustments to the statements, auditor’s report<\/td>\n 3-5 days<\/td>\n<\/tr>\n<\/table>\n What opinion the organisation receives<\/h2>\n
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Typical findings from NGO audits<\/h2>\n
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Why an annual audit makes sense even when it is not required<\/h2>\n