Auditing a non-profit or implementing agency running CSR-funded or donor-funded projects means testing whether each grant received has been tracked against its own specific restricted purpose and sanctioned budget rather than pooled into the organisation's general funds, whether expenditure actually matches the sanctioned budget line by line — not just in total — and whether the utilisation certificate eventually filed with the CSR contributor or donor genuinely reconciles to the organisation's own books rather than being prepared as a separate, standalone document that nobody ties back to the ledger.
Why pooled accounting for grants is the wrong starting point
A grant given for a specific project — a school building, a health camp, a livelihood programme — carries a donor- or contributor-specified purpose and usually a sanctioned budget broken into line items (construction, materials, staff salaries attributable to the project, administrative overhead capped at a stated percentage). Recording the receipt simply as 'donation income' and the spend simply as 'programme expense,' without a project-wise and line-item-wise ledger, makes it impossible to demonstrate the restricted-fund compliance a grant actually requires.
- 01Obtain the grant sanction letter or MOU for each significant grant and extract its actual conditionsPurpose, sanctioned budget by line item, permitted overhead percentage, project timeline, and any specific deliverable or milestone the fund release depends on — read the actual document, not a summary.
- 02Confirm the organisation maintains a project-wise ledger, not just a consolidated set of booksEach grant should be traceable from receipt through spend to balance remaining, separately from every other grant and from the organisation's unrestricted funds.
- 03Test actual spend against the sanctioned budget line by lineA project that spent within its total sanctioned amount but materially over one line item and under another (e.g., overspending on administrative cost beyond the capped percentage) is a compliance issue even though the bottom line looks fine.
- 04Reconcile the utilisation certificate to the books directlyRecompute the UC's figures from the project ledger rather than accepting a UC that was drafted separately — a common finding is a UC that doesn't actually tie to any specific ledger account.
Regulatory requirement
CSR spending obligations and the specific rules for unspent CSR amounts (including the requirement, for certain categories, to transfer unspent amounts to a specified fund or a separate unspent CSR account within a prescribed timeline) are set out in the Companies Act and CSR rules, and these provisions have been amended. Where the auditee is itself a company subject to CSR obligations, or an implementing agency receiving funds from one, confirm the current rules before concluding on compliance.
Overhead and administrative cost caps
Most grants, whether CSR or institutional donor funding, cap the share of the grant that can be used for administrative overhead rather than direct programme activity. Testing this requires a defensible basis for allocating shared costs (a programme manager working across several projects, a shared office) to each project — an organisation that allocates overhead arbitrarily, or back-solves the allocation to stay just under the cap, has a real compliance exposure.
Unspent funds and timeline compliance
- Identify grants where the project timeline has lapsed, or is close to lapsing, with funds still unspent, and confirm the organisation's position with the grantor on extension or return of the balance.
- Check whether unspent funds are carried as a liability (amount payable back to the grantor, or restricted fund pending use) rather than being absorbed into general reserves.
- Test for funds from one grant being used to cover a shortfall on a different, unrelated project — a form of informal cross-subsidy that breaches the restriction even if both projects are run by the same organisation for a broadly similar cause.
- Review correspondence with the grantor for any amendment to the sanctioned budget or timeline, and confirm the organisation's accounting reflects the amended terms, not the original ones.
Using one donor's restricted grant to bridge a cash shortfall on another project, even temporarily and even with the full intention of repaying it from the next tranche, is a breach of the restriction and needs to be reported as such — intent to repay does not change what happened.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit documentationTrust and society audit: what changes for a Section 8 company or registered trustThe financial statements are the easy part. The harder part is whether income was actually applied to charitable objects, and whether the entity stayed within its own deed.
- Related parties & disclosuresRelated-party disclosure checklist for financial statementsA related-party note that lists transactions but not relationships, or balances but not terms, is an incomplete disclosure even if every number in it is correct.
- Audit documentationAn audit documentation checklist for statutory auditsA checklist organised by when the work happens: planning, fieldwork, each paper, completion and assembly, with the deadlines that govern the last two.
- Internal audit & IFCTesting segregation of duties: a practical approachThe classic SoD conflicts, how to test for them in a small finance team where perfect separation is not realistic, and how to document the compensating controls that stand in.
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