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November 10, 2020

Checklist for Audit of a Trust

by CA Shivam Jaiswal in Income Tax

Checklist for Audit of a Trust

Charitable organization is a kind of institution or a business that falls under the category of NPO or non-profit organization and can be based on providing educational, religious or public interest activities. There are different kinds of activities of the charitable organizations. Some of them offer relief to the needy people who are in distress, poverty or are underprivileged. There are also some who are related to educational, scientific or religious affiliations. Some of the activities of charitable organization also include the creation of public building and monuments and take care of them.

All these are done by the donations that a charitable organization gets. Due to their distinct organisation and objective entire income of such charitable or religious trusts are taxed as per the provisions of section 11-13 of the Income Tax Act, 1961, which provides for various tax benefits to them. Let us learn about this in detail below:

What do you mean by a trust?

A trust is an association/ union of members constituted for a charitable or religious purpose not intending to do any commercial activity. As per the Trust Act, a Trust is an arrangement where a person transfers some property to another person within his acceptance for the benefit of any third person or a group of persons or society. Trust in India can be registered in any of the two ways i.e. by forming a Public Trust or a Private Trust.

  • Private Trust: A trust formed with the fundamental goal of protecting the interest of its beneficiaries who are limited in number or limited to a specific group.
  • Public Trust: A trust formed to benefit a large group or the general public. It captures the interest and benefit of public groups and is generally formed for scientific, religious, educational or charitable purposes.

What benefit under income tax is provided to trusts?

Trust formed for charitable or religious purposes which are not intended to do commercial activities are allowed various benefits under the Income-Tax Act, inter-alia, exemption under section 11.

What do you mean by religious or charitable purpose?

The term religious purpose is not defined under the Income-Tax Act. Section 2(15)​ of the Income Tax Act defines “charitable purpose” to include relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

However, the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess, fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless:

  • such activity is undertaken in the course of ​​carrying out of such advancement of any other object of general public utility and
  • the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year

The main purpose of audit of a trust is for the auditor to satisfy himself about the genuineness of the claim for exemption under section 11 and also whether the institution has complied with all the requirements prescribed by the statute. Given below are some points that an auditor has look into while auditing a Trust.

General Audit Checklist

  • Check the object clause of the trust deed or byelaws of the society to understand the Constitution and working of the Trust
  • Check the previous year’s financial statements, audit observations and related files of the trust.
  • Check that cash/cheque donations are received by authorised persons only and examine the internal control system with respect to such donations.
  • Ensure that all the receipts are deposited into the bank after checking with the deposit slips.
  • Checked the donor’s letters/donation list with the bank statement for the period.
  • Check that all bank credits are tallied with the donations/other receipts accounted in the books of the trust
  • In the case of Legacies and grants, the auditor should examine the correspondence, minutes books and other available information.
  • While verifying the income from investment, the auditor may vouch all the receipts, and examine the schedule of investments to confirm that all income and the investments are duly accounted. While verifying interest, the rates and calculation of interest are to be checked.
  • The rent received account is to be vouched with the counterfoils of rent receipts and counter checked with the entries in the cash book. The auditor should also examine the tenancy agreement to find out the amount of rent to be collected and the due dates, on which the rents become due.
  • The trust may organize special events, and generate income for charitable purposes. The auditor should thoroughly vouch the receipts and payments relating to such events.
  • The auditor should ensure that all payments made by the institution are only for the purpose for which the institution is constituted and no person, who is administering the Trust. (i.e., the trustee, the managing trustee or a member of the managing committee) is personally benefited therefrom.
  • He should also verify the existence of the movable and immovable assets and confirm that all the assets are accurately valued on a regular basis.
  • Ensure that religious trusts have adequately insured the ‘movables of value’ such as ornaments, gold, silver, utensils, bullion and other valuable articles and that the same are properly valued.
  • Find out if there are any cases of irregular, illegal or improper expenditure, or failure to recover money or of loss or waste of money or other property thereof and state whether such expenditure, failure, omission, loss or waste was caused in consequence of breach of trust, or misapplication or any other misconduct on the part of the trustees, or any other person.
  • Care should be taken that in respect of specific programs or fund raising activities, only the surplus there from should be included in the income.
  • Ensure that the trust has complied with the registration compliances u/s 12A and 12AA of the Income Tax Act.
  • Check whether accounts are maintained regularly and in accordance with the provisions of Act and the rules
  • Check whether receipts and disbursements are properly and correctly shown in the accounts
  • Check whether the cash balance and vouchers in the custody of the manager or trustee on the date of audit were in agreement with the accounts
  • Check whether all books, deeds, accounts, vouchers or other documents or records required by the auditor were produced before him.
  • Ensure that a register of movable and immovable properties is properly maintained, the changes therein are communicated from time to time to the regional office, and the defects and inaccuracies mentioned in the previous audit report have been duly complied with
  • Find out if any property or funds of the Trust were applied for any object or purpose other than the object or purpose of the Trust
  • Find out whether any of the trustees has any interest in the investment of the trust
  • Find out whether any of the trustees is a debtor or creditor of the trust
  • Check whether the irregularities pointed out by the auditors in the accounts of the previous year have been duly complied with by the trustees during the period of audit

Ensure that the trust has duly complied with the relevant accounting standards such as:

  • Disclosure of Accounting Policies (AS – 1)
  • Valuation of Inventories (AS – 2)
  • Contingencies and Events Occurring After the Balance Sheet Date (AS – 4)
  • Net Profit or Loss for the period, prior period items and changes in Accounting Policies (AS – 5)
  • Accounting for Construction Contracts (AS – 7)
  • Revenue Recognition (AS – 9)
  • Property, Plant and Equipment (AS –10)
  • The Effects of Changes in Foreign Exchange Rates (AS – 11)
  • Accounting for Government Grants (AS – 12)
  • Accounting for Investments (AS – 13)
  • Employee Benefits (AS – 15)
  • Borrowing Costs (AS – 16)
  • Related Party Disclosures (AS – 18)
  • Leases (AS – 19)
  • Intangible Assets (AS – 26)

Checklist for Application of Income for Charitable and Religious Purposes

  • Verify whether amount of income of the previous year applied to charitable or religious purposes in India during that year.
  • Check whether the Trust has exercised the option under clause (2) of the Explanation to section 11 (1). If yes, check the details of the amount of income deemed to have been applied to charitable or religious purposes in India during the previous year
  • Verify that amount of income accumulated or set apart for application to charitable or religious purposes, to the extent it does not exceed 15% of the income derived from property held under trust wholly for such purposes.
  • Check whether, during the previous year, any part of income accumulated or set apart for specified purposes under section 11(2) in any earlier year:
    1. has been applied for purposes other than charitable or religious purposes or has ceased to be accumulated or set apart for application thereto, or
    2. has ceased to remain invested in any security referred to in section 11(2)(b)(i) or deposited in any account referred to in section 11(2)(b)(ii) or section 11(2) (b) (iii) or
    3. has not been utilized for purposes for which It was accumulated or set apart during the period for which it was to be accumulated or set apart, or in the year immediately following the expiry thereof?

Checklist for Application or use of income or property for the benefit of persons referred to in section 13(3)

  • Check whether any part of the income or property of the Trust was lent, or continues to be lent to any person referred to in section 13(3). If yes, obtain details of the amount, rate of interest charged and the nature of security, if any
  • Check whether any land, building or other property of the Trust was made, or continued to be made, available for the use of any such person during the previous year. If yes, obtain details of the property and the amount of rent or compensation charged, if any.
  • Check whether any payment was made to any such person during the previous year by way of salary, allowance or otherwise. If yes, obtain the relevant details.
  • Check whether the services of the Trust were made available to any such person during the previous year. If yes, obtain details thereof together with remuneration or compensation received, if any.
  • Check whether any share, security or other property was purchased by or on behalf of the Trust during the previous year from any such person. If yes, obtain details thereof together with the consideration paid
  • Check whether any share, security or other property was sold by or on behalf of the Trust during the previous year to any such person. If yes, obtain details thereof together with the consideration received.
  • Check whether any income or property of the Trust was diverted during the previous year in favour of any such person. If yes, obtain details thereof together with the amount of income or value of property so diverted.
  • Check whether the income or property of the Trust was used or applied during the previous year for the benefit of any such person in any other manner. If so, obtain relevant details.

Auditor should also proactively keep on advising the trustees about their obligations. Merely because the income of a charitable trust is exempt, auditors should not take matters lightly. Proper audit is crucial to ensure that the trust is not misapplying the exemption provisions and evading the payment of tax.

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