Auditing a registered trust, society or Section 8 company requires testing the entity against its own constitutional document — the trust deed, the memorandum and rules of the society, or the memorandum of association for a Section 8 company — in addition to the financial statements, because the entity's income-tax exemption under sections 11 to 13 of the Income-tax Act depends on income actually being applied to the stated charitable objects, not merely spent. The auditor's work therefore includes classifying income by source, tracking its application against the 85% application requirement (or the accumulation provisions where it is not fully applied), and specifically testing for restricted transactions with persons specified under section 13(3) — trustees, their relatives and specified concerns.
Application of income: the test that doesn't exist in a normal company audit
A charitable trust or institution registered under section 12AB is generally required to apply at least 85% of its income to its charitable objects in the relevant year to retain exemption, with specific provisions allowing accumulation of the shortfall for defined periods subject to filing Form 10 or 9A as applicable. This is not simply a cash-flow question — 'application' includes both revenue spending on the objects and capital expenditure incurred for them, and has specific rules around what counts (loans given out, for instance, are treated differently from a grant made).
- 01Reconcile gross receipts by sourceDonations (corpus and non-corpus), grants, fee income from any activity, and investment income each have different tax treatment — tag each receipt at source rather than relying on a single income figure.
- 02Separate corpus donations from general donationsA donation specifically directed by the donor to the corpus is treated differently from application income and should not be included in the base on which the 85% application is computed.
- 03Build the application-of-income computation as a distinct working paperList qualifying revenue and capital application against the applicable income base, and compute the shortfall or surplus, cross-referenced to the income-tax return and Form 10B/10BB audit report where applicable.
- 04Check accumulation filings for any unapplied incomeWhere income was not fully applied, confirm the entity filed the required accumulation form within the statutory deadline and that any earlier accumulated amount was actually applied within the permitted period.
Regulatory requirement
The specific percentage, the accumulation mechanism, the forms required (10, 9A, 10B, 10BB) and the registration regime under section 12AB have all been revised in recent years and the detail changes periodically. Confirm the current provisions before computing the application-of-income working paper.
Section 13(3) persons and restricted transactions
Section 13 denies exemption, in whole or in part, where the trust's income or property is used or applied, directly or indirectly, for the benefit of specified persons — trustees, founders, substantial contributors, their relatives, and concerns in which they have a substantial interest. This is the charitable-sector equivalent of related-party testing, and it needs its own population: payments to trustees, rent paid for premises owned by a trustee, loans to a founder's relative, procurement from a trustee's company.
- Build the list of section 13(3) persons first — trustees, founders, substantial contributors (above the prescribed contribution threshold) and their relatives and concerns — before testing transactions against it.
- Test whether any asset of the trust (property, investment) is held in the name of, or used by, a specified person without adequate consideration.
- Confirm remuneration paid to a trustee for services rendered, if any, is reasonable and permitted by the deed, not simply paid because the trustee also happens to be an employee.
- Check investments of the trust's funds are held in the modes specified under section 11(5), where the exemption regime requires it.
The entity's own constitutional document
Unlike a company audit, where the Companies Act sets most of the structural rules, a trust's or society's rules for borrowing, investing, amending objects and admitting new trustees or members come from its own deed, memorandum or rules — and these vary trust to trust. Read the governing document early, not as a formality, since it is the actual source of several of the tests above (what the entity is permitted to do with its funds, who can be a trustee, how surplus is to be treated).
Common practice, not a requirement
Where the entity is a Section 8 company, note that it is additionally subject to the Companies Act — board meetings, related party disclosures under section 188, and the registrar filings — on top of the income-tax exemption conditions. Treating it as 'just a trust with more paperwork' misses real compliance obligations.
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
- 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.
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
- CARO & Companies ActMSME disclosure testing under Section 22 and CAROIdentifying MSME vendors, testing 45-day payment tracking and interest disclosure, and why the vendor master needs Udyam enrichment before this test is even possible.
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