Introduction
Exposure Draft for the issuance of a ‘Guidance Note on Audit of Public Charitable Institutions under section 12A of the Income-Tax Act, 1961.’ The primary objective of this Guidance Note would be to provide direction and clarity for the audit of public charitable institutions, which are registered under section 12A of the Income-Tax Act, 1961. The Income Tax Act, 1961 requires public charitable institutions to obtain particular registration under Section 12A of the Act if they wish to avail certain tax exemptions. Further, the accounts of such a charitable institution must also be audited by a Chartered Accountant. As such, the Institute of Chartered Accountants of India (ICAI) has recently issued an Exposure Draft on ‘Guidance Note on Audit of Public Charitable Institutions under section 12A of the Income-Tax Act, 1961’.
Overview
The Guidance Note provides an overview of various aspects related to the registration and audit of public charitable institutions. Accordingly, the note provides clarity regarding eligibility criteria, necessary documents and compliances that such charitable organizations need to adhere to while obtaining their registration as a public charitable institutions under Section 12A of the Income Tax Act, 1961. Moreover, it also mentions the roles and responsibilities of Chartered Accountants in auditing the accounts of such public charitable institutions. It tries to lay down a framework for conducting a proper audit of the same.
Key Provisions
The Exposure Draft, released by the Institute of Chartered Accountants of India, in partnership with NITI Aayog, is designed to help public charities meet the requirements of filing. It will evaluate financial performance and present an audit report about the organisation.
The key aims of the Exposure Draft are to:
- Provide a comprehensive guide to auditing practices;
- Specify reporting obligations;
- Define the audit procedures to be followed by public charities;
- Enable the identification of errors and omissions in financial statements;
- Generate reliable financial statements;
- Ensure accurate and timely filing of returns; and
- Enforce corporate governance practices.
The draft document would require that all charitable organisations, registered under section 12A of the Income-Tax Act, 1961, must lay down organisational structure, relevant policies and procedures for the purpose of internal financial controls. In order to ensure effectiveness and efficiency of operations, it should also provide for mechanisms for mitigating risks associated with the financial operations of the organisation.
The guidance by the Exposure Draft would lay down the standards of conduct in financial transactions and identify the responsible authorities for monitoring such transactions. It will also specify certain mandatory rules for proper accounting and disclosure of transactions.
The disclosure requirements set forth in the noted document comprise the following aspects:
- Revenue: The organisation should disclose the total revenue generated through donations and other sources.
- Expenditure details: The maximum amount that can be spent on administrative costs should be made clear, while an itemized account of daily expenditure should also be provided.
- Verification of financial documents: Financial documents must be verified and approved by an independent auditor.
- Formation of audit committee: An internal committee must be formed to examine the financial documents submitted in accordance with the rules and regulations set forth in the document.
The first part of the Guidance Note lays down the key provisions related to the registration of public charitable institutions under Section 12A of the Income Tax Act, 1961. It provides clarity regarding the impact of Section 12A on such organizations, topics like definitions, eligibility criteria and other relevant rules related to the registration are discussed in great detail.
Further, Chapter 2 discusses the roles and responsibilities of Chartered Accountants while conducting the audit of the accounts of such public charitable organizations. It talks about the various audit procedures that Chartered Accountants need to adhere to while conducting the audit of such organizations, including the various forms and schedules of accounts that need to be prepared and maintained by them. Moreover, the Guidance Note also issues guidelines for fraud cases and other discrepancies that may occur in the process of auditing.
Furthermore, Chapter 3 of the Guidance Note provides clarity regarding penalties imposed on public charitable institutions that are non-compliant to the regulations laid down by the Income Tax Act. It also suggests suggestions regarding the formulation of a proper audit committee and the importance of such a committee to the overall functioning of such charitable organizations.
Conclusion
The Guidance Note provides clarification on various aspects related to the registration and audit of public charitable institutions under Section 12A of the Income Tax Act, 1961. It provides a thorough understanding of all the necessary compliance requirements and procedures that such organizations must strictly adhere to. The Guidance Note attempts to streamline the auditing process and suggests necessary measures and steps to further enhance transparency and accuracy in the process of auditing public charitable organizations. The Exposure Draft provides a framework to ensure the efficiency and effectiveness of operations of public charitable institutions in India. It also enables organizations to maintain financial transparency and accountability through the provision of detailed guidance in the areas of financial reporting and auditing.
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Disclaimer: “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “
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