Non-Compliance with Income Tax Provisions

Auditors often observe failure to comply with tax laws, especially regarding application of income, donor reporting, or Section 11 conditions. These may affect tax exemptions.

• Non-application of 85% of income during the financial year
  
• Failure to file Form 9A or Form 10 for accumulation
  
• Income earned from non-charitable activity without separate accounting
  
• Incomplete or delayed filing of Form 10B or ITR-7
  
• Non-disclosure of investment details as per Section 11(5)

Improper Fund Utilization and Documentation

Lack of clarity or errors in fund usage is a common concern. Donors and authorities expect clear fund flow and evidence-based reporting.

• Misclassification between restricted and unrestricted funds
  
• Poor documentation of expenses and supporting bills
  
• Fund diversion from one project to another without donor approval
  
• Use of project funds for admin expenses without documentation
  
• Non-submission of utilization certificates or donor reports

Cash Management and Internal Control Gaps

Weaknesses in cash handling, bank reconciliations, and approval systems are often highlighted. These can lead to fraud risk and non-compliance.

• Absence of proper approval for payments and withdrawals
  
• Missing or delayed bank reconciliations
  
• Cash disbursements without vouchers or exceeding policy limits
  
• Lack of segregation of duties in finance functions
  
• Inconsistent policies for petty cash and imprest system

HR and Payroll Irregularities

Payroll compliance issues are frequently raised by auditors, particularly related to statutory deductions, appointment letters, and employment records.

• Non-deduction or late deposit of TDS, EPF, or ESI
  
• Salary paid in cash without proper accounting
  
• Absence of employment contracts or attendance records
  
• No documentation of staff roles, responsibilities, or appraisals
  
• Discrepancy in board-approved salary structures versus actual payments

Statutory Filing and License Lapses

Auditors check for statutory compliance across tax, FCRA, labor, and CSR requirements. Delays or missing filings can lead to penalties and reputational harm.

• Expired or unrenewed 12AB, 80G, or FCRA certificates
  
• Delayed or non-filing of FC-4 returns and CSR-1 form
  
• Incomplete or inaccurate filing of Form 10BD and 10BE
  
• Failure to update details on NGO Darpan or MCA portals
  
• Non-compliance with local labor or shop establishment laws

Governance and Board Meeting Gaps

Auditors may flag weak board oversight, missing documentation, or inactive governance practices. Transparency in decision-making is critical for trust.

• Missing board meeting minutes or undocumented resolutions
  
• No approval for budgets, annual plans, or policy updates
  
• Failure to rotate board members as per by-laws
  
• No conflict of interest disclosures by trustees
  
• Lack of performance evaluation or attendance tracking of board members

Recommendations for Corrective Action

Auditors typically provide actionable steps to improve systems. NGOs must review and implement these to ensure future compliance and efficiency.

• Strengthen internal controls through documented policies and SOPs
  
• Train finance and program teams on compliance expectations
  
• Update donor reporting formats and automate accounting systems
  
• Establish periodic review mechanisms for governance and operations
  
• Respond to audit queries with clarity and follow-up documentation promptly