Audit of Educational Institution

The Audit of Educational Intuitions, sometimes referred to as Audit of Books in the

education industry, is a process of systematic evaluation and documentation of financial
statements, taxes, expenditures, and incomes, obtained by the educational organizations such as
schools, colleges and universities from Registration & Academic Fee, Payment Transactions,
Fines & Penalties, Funds & Donations, Hostel Accommodation, Assets & Investments, Grants
from Government or other local bodies, and via other sources.

Main Source of Collection

 Admission fees, tuition fees, examination fees, fines, etc.

 Securities from students.
 Donations from public
 Grants from Government for building, prizes, maintenance, etc.

Types of Expenses / Payments

 Salary, allowances and provident  Festival and function expenses

fund contribution for teaching and
 Library books
non-teaching staff.
 Newspaper and magazines
 Examination expenses
 Medical expenses
 Stationery & printing expenses
 Audit fees and audit expenses
 Distribution of scholarships and
stipends  Electricity expenses
 Purchase and repair of furniture &  Telephone expenses
fixture
 Laboratory running & maintenance
 Prizes
 Laboratory equipment
 Expenses on sports and games
 Building Repair & maintenance

Preliminary Audit of Educational Institutions

Following points need to be considered by an Auditor while conducting audit of educational

institutions:
 It is to be confirmed whether the letter of his appointment (the Auditor’s) is in order.
 The Auditor should obtain a list of books, documents, register and other records as
maintained by the educational institutions.
 He should examine the audit report of last year and should note down the observation
and qualification, if any.
  He should note down the important provisions regarding to accounts and audit from the
Trust Deed, Charter of Regulations.
 He should examine the Minutes of Meetings of the Board of Trustee or the Governing
Body for important decisions regarding the sale or purchase of fixed assets, investments
or delegation of finance power.
 In case of colleges and university, the Grants Commission provides Grants to them
subject to certain conditions. The Auditor should study all the conditions concerning
grants.
 The Auditor should examine the Code of State regarding grant-in-aid.
 He should be aware of all the provisions and rules of related laws concerning books of
account and audit.
 Examine the support, generally pledge cards, for pledges. Other audit procedures may
include investigation of credit standing of pledgors, aging of accounts, review of
collections, and confirmation from pledgors.
 Review of correspondence relating to gifts, with notation of the amount and nature of
any restrictions.
 Comparison of total gifts received in the current period with prior periods and with fund-
raising estimates prepared by management. Investigation of substantial differences.
Consideration of test confirmation of gifts received.
 Determination of propriety of interfund transfers, particularly with respect to those
involving restricted funds.
 Determination of collectibility of interfund advances.

Internal Control System

The Auditor should independently check the internal control system regarding
authorization procedures, record maintenance, safeguarding of assets, rotation and division of
staff duty, etc. Following are some of the important aspects that need to be considered by an
Auditor to keep a check on the internal control system:
 Whether internal control and internal check system is working, if yes, how effectively.
 Is there is any system to physically verify the fixed assets, stores and consumables at
regular interval.
 An Auditor should verify the control system concerning proper authorization, obtaining
quotations, proper maintenance of accounts and record regarding purchase of fixed
assets, purchase of material, investment, etc.
 Whether bank reconciliation statement is prepared at regular intervals and what kind of
action is taken for uncleared cheque which were pending since long.
 Whether waiver of fees is properly sanctioned by appropriate authorities.
 The person who is collecting fees and the cashier should not be the same person.
  Class wise fees receivable and the actual fees received reconcile or not.
 Whether collected fees is deposited in bank on a daily basis.
 Fees collection register should be maintained on a daily basis.
 Whether approved list of supplier of sports material, stationery, lab items are readily
available.
 Whether control system for payment is adequate or not.
 The system of letting out conference hall and class rooms, etc. for seminars and
conventions.
 Whether fees structure is properly authorized along with change in fee structure if any.

Audit of Assets and Liabilities

The following points need to be considered while conducting an audit of Assets and Liabilities:
 Verification of Assets register should be done considering grants on purchase of assets, if
any received from State Government/ University Grant Commission (UGC).
 Verification of depreciation is very important; it should be according to useful life of
assets or as per the Companies Act, whichever is applicable.
 If donation is received in the form of investment, an Auditor has to check all related
correspondence with the donor.
 All the applicable requirements of law should be fulfilled for the purchase of investments
and fixed assets.
 An Auditor should read and note down the state code and provisions relating to the
conditions and procedures of Grants. He should also verify the requirements of
State/UGC which are to be fulfilled by educational institutions for receiving Grants and
also for continuations of Grants.

Audit of Income of Educational Institutions

The following points need to be considered by an Auditor while conducting audit of the Income
of Educational Institutions:
 Fees and charges received on account of admission fees, tuition fees, sports fees,
examination fees etc. should be verified based on the approved fees structure.
 Verification of counterfoil copies of fees receipt with fees received register should be
done.
 Prescribed conditions by the State Government and the University Grants Commission
should be verified whether fulfilled or not.
 Cash book should be verified with counterfoil of receipt book and fees register.
 Fees receivable and actual fees received should be reconciled.
  Charges and fees received and receivable should be examined on account of hostel
accommodation, mess, housekeeping and clothing, etc.
 Cash book should be verified with the donation received register.
 Donation received should be accounted for according to the nature of donation means
careful distinction should be there for revenue nature donation and capital nature
donations; the same procedure is to be followed for Grants received.
 The purpose and utilization of grant should be same.
 Investment register and cash book should be verified for income received on account of
interest on investment and dividends, etc.

Audit of Expenses of Educational Institutions

The following points need to be considered by an Auditor while conducting audit of Expenses
of Educational Institutions:
 Electricity expenses, telephone expenses, water charges, stationery and printing,
purchase of sports items should be properly verified with quotation, purchase bills,
inward register and Bills received from service providers, etc. All purchases should be
authorized by appropriate person.
 In case where hostels purchase food items, provisions, clothing, etc. should be properly
verified.
 Payment made on account of salary should be verified from terms of appointment and
increment policy. Auditor should verify the computation of salary and check whether all
required deductions are made out of it or not like advance salary, loan installment,
absence from duty, etc. The Net Salary Payable amount will be verified from cash book
and bank pass book for salary paid.
 Terms and conditions, cash book, voucher and receipts should be the basis for the
verification of scholarship paid.
 Appropriate provision should be made on account of outstanding payments.

The fund groups usually encountered in an educational institution are as follows:

• Current funds
• Loan funds
• Endowment and similar funds
• Annuity and life income funds
• Plant funds
• Agency funds
 UNRESTRICTED CASH FUND
 Includes those economic resources of the institution which are expendable for any
purpose in performing the primary objectives of the institution, i.e., instruction,
research, extension, and public service, and which have not been designated by the
governing board for other purposes.
 A separate fund subgroup may be established for the unrestricted current funds of
auxiliary enterprises.
 The balance sheet accounts of unrestricted current funds consist of the usual asset and
liability accounts such as cash, shortterm investments, accounts and notes receivable,
inventories, prepaid expenses and deferred charges, accounts and notes payable, accrued
liabilities, deposits, deferred revenues, and fund balances.
 The fund balance of unrestricted current funds represents the difference between the
assets and liabilities, including deferred revenues, of unrestricted current funds.
 Changes in the balances of unrestricted current funds include the gross amounts of all
unrestricted revenues and expenditures applicable to the reporting period as determined
in accordance with the accrual basis of accounting; transfers to and from other funds for
the period; and transfers between unallocated and allocated subaccounts where such
subaccounts are maintained.
 The composition of the unrestricted current funds balances (auxiliary enterprises, reserve
for encumbrances, allocations, etc.) may be disclosed either in the balance sheet or in the
statement of changes in fund balances.

Internal Control Measures for Unrestricted Cash Fund:

1. Retention of gift documents and other supporting data and recheck of gift and grant
documents.
2. Approval of scholarship and other credits to students' accounts.
3. Billing procedures for student fees, auxiliary services, and rentals (including occupancy)
and assignment records.
4. Control of tickets, conformity with budgets, and reasonableness of gross margins of
auxiliaries.
5. Pre-numbered tickets for deposits and advance payments.
6. Coordination and independence of functions of purchasing, budgeting, approvals, and
payments for both materials and services.
7. Personnel appointment procedures and records for both academic and nonacademic
personnel.
8. Coordination of appointment procedures with budgetary controls.
Audit Procedures for Unrestricted Cash Fund:
1. Summarization of cash accounts by funds and performance of the usual audit tests
simultaneously. Consideration as to whether tests of cash funds, investments, notes
receivable, etc. should be carried out at the same time.
 2. Reconciliation and comparison of interfund accounts and determination as to whether
cash offset is practicable and reasonable.
3. Review of vouchers payable and outstanding purchase orders, and institutions
determination of charges to budgetary accounts as between materials and services
received and those representing commitments for merchandise or services to be received.

RESTRICTED CURRENT FUNDS

 Consists of those funds expendable for operating purposes but restricted by donors
or other outside agencies as to the specific purpose for which they may be expended.
 The assets of restricted current funds are almost exclusively of a liquid character such
as cash, investments, accounts receivable (including unbilled charges), and amounts due
from other funds.
 The assets are sometimes combined with those of unrestricted current funds for
reporting purposes.
 If the assets are combined, any intrafund borrowings within current funds should be
disclosed.
 Regardless of whether or not the assets are segregated, restricted current fund balances
should be disclosed separately in the financial statements and appropriately classified.

Internal Control Measures for Restricted Current Funds:

1. Establishment of a separate fund subgroup for restricted current funds consisting of
assets, liabilities, fund balances, and addition and deduction accounts for each fund
balance.
2. Establishment of appropriate budgetary procedures for the expenditures and transfers
from these funds.
3. Maintenance of adequate gift records indicating the authorized use of restricted funds to
support classification in the accounts of the institution.
4. Establishment of an adequate acknowledgment procedure covering the receipt of gifts.
5. Submission of statements of financial transactions to grantors and donors.

Audit Procedures for Restricted Current Funds:

1. Examination of selected expenditure vouchers and other documentation to determine that
the use of the resources is in conformity with gift and grant documents and that the
proper disposition of the fund balance is made upon completion of the project or grant.
2. Review of distribution of endowment income to ascertain whether donor restrictions are
being observed.
3. Tests of abstracts of gift and grant documents for conformity with original documents.
4. Review of financial data furnished to grantors and donors.
5. Substantiation of distributions from the income account of the pooled endowment fund.
 CURRENT FUNDS REVENUE
Current funds revenues include (1) all unrestricted gifts and other unrestricted
resources earned during the reporting period, and (2) restricted current funds to the extent that
such funds were expended for current operating purposes.
Educational and General Revenues
 Student Tuition and Fees.
Tuition and fee remissions or exemptions should be assessed and reported
as revenue even though there is no intention of collecting from the student. The
amount of such remissions or exemptions should be offset as expenditures and
appropriately classified as student aid or as staff benefits associated with the
functional category to which the personnel relate.
 Governmental Appropriations.
Includes all unrestricted amounts received from or made available by
governmental sources and restricted appropriations to the extent expended for
educational and general (including student aid) purposes.
 Governmental Grants and Contracts.
Amounts equal to direct costs incurred and related indirect costs recovered
are transferred from current restricted funds and reported as revenues. The amount
equal to direct costs incurred should be reported as restricted revenues and the
amount equal to indirect costs recovered should be reported as unrestricted
revenues.
 Gifts and Private Grants.
Income from funds held in revocable trusts or distributable by direction of
the trustees of such trusts should be reported under this classification, but should
be separately identified as to the source of the revenues.
 Endowment Income.
If a portion of gains of endowment or quasi-endowment funds
investments is utilized for current operating purposes, the portion so utilized
should be reported as a transfer rather than as revenues. The unrestricted income
from endowment and similar funds credited to revenues should be the total
ordinary income earned on the investments of these funds.
 Sales and Services of Educational Departments.
Includes incidental revenues of educational departments not directly
associated with the training of students.
 Organized Activities Related to Educational Departments.
If service to the students rather than instruction is the primary purpose, the
revenues should be classified under auxiliary enterprises. If services to the public
are the paramount purpose, as in the case of some hospitals operated by
universities, the revenues should be classified under a separate major category.
 Other Sources.
 Includes all items of revenues for educational and general purposes not
covered elsewhere. Examples are income and gains and losses from investments
of unrestricted current funds.
Auxiliary Enterprises
 Auxiliary enterprises are the other major category of current funds revenues and reflects
revenues from activities conducted primarily to provide facilities or services for students,
faculty, and staff.
 Interdepartmental transactions of service departments and storerooms which provide
services to the institution, as contrasted with services to students, faculty, and staff,
should not be included as revenues or expenditures.
Expired Term Endowments
 This category of current funds revenues reflects the amount of term endowment funds
that become unrestricted during the reporting period
 Such amounts may be included under other sources of educational and general revenues
if not material.
Internal Control Measures for Current Fund Revenue:
1. Budgetary control over recorded revenues, including comparison with budget estimates
and analysis of significant variations.
2. Control over revenues by recording on the accrual basis.
3. Independent control over issuance of credits, allowances (including scholarships), and
other adjustments.
4. Procedures for receiving and acknowledging gifts and grants.
Audit Procedures for Current Fund Revenue:
1. Review of each major revenue account and comparison with prior period and budget
estimate and determination of reasons for any significant variations.
2. Comparison of revenues with related statistical reports of enrollment, occupancy, meals
served, etc., prepared by departments or individuals not related to the revenue-recording
or cash-receiving functions.
3. Review and evaluation of the data underlying gifts, grants, and bequests, including gift
documents, correspondence, receipt acknowledgments and notifications of the grant
awards, minutes of the governing board, and comparison by type or nature with amounts
for prior periods.
4. Review of the latest indirect cost computation, and review of the reports on examination
of direct and indirect costs by representatives of grantors. Review of the separation of
functions and methods of apportionment of applicable expenses in cases where the
institution is administering large grants involving research centers or similar operations.
5. Review of gross margin percentages of auxiliaries and comparison with those for prior
periods and budgets.
 6. Tests of records in support of revenues from sporting events including ticket sales
records, ticket numbers, free tickets, tax reports, and contracts with other institutions.

CURRENT FUNDS EXPENDITURES AND TRANSFERS

Current funds expenditures include those of both unrestricted and restricted current
funds. Current funds expenditures should be summarized by function.
Educational and General Expenditures
 Instruction and Departmental Research. Expenditures for departmental research not
separately budgeted should be included in this classification.
 Organized Activities Related to Educational Departments. Includes activities listed under
the same major classification of revenue.
 Sponsored Research. These are expenditures of restricted current funds since they arise
exclusively from gifts and grants restricted to research.
 Other Separately Budgeted Research. It does not include either sponsored research or
departmental research not separately budgeted.
 Other Sponsored Programs. Includes expenditures for training programs, instructional
institutes, and similar activities. If desired, these expenditures may be included with
sponsored research under the category, Sponsored Research and Other Sponsored
Programs.
 Extension and Public Service. If these expenditures are material in amount they should be
reported as a separate major category.
 Libraries. Includes separately organized libraries, both general and departmental.
 Student Services. Includes the costs of the registrar's office, admissions office, financial
aid office, institutional subsidies to student activities, health services (unless operated as
an auxiliary enterprise), offices of deans of students, and guidance and testing programs.
 Operation and Maintenance of Plant. Appropriate allocations of operating and
maintenance costs should be made to auxiliary enterprises and any other activities not
reported under the major caption, "Educational and General."
 General Administration. Administrative costs should be allocated to auxiliary enterprises
and any other activities not reported under the major caption, "Educational and General."
 General Institutional Expense. The institution's policy will determine whether an amount
should be charged to this group or to the department or office benefited. General
institutional expenses should be allocated to auxiliary enterprises and any other activities
not reported under the major caption, "Educational and General."
 Student Aid. Expenditures for all forms of student aid financed from current funds,
restricted or unrestricted, should be charged to student aid. However, remissions of
tuition and fees granted as a result of either faculty or staff status, or family relationship
of students to faculty or staff, should be recorded and allocated as staff benefit expense
rather than as student aid. Where services are required in exchange for scholarship or
other aid, the charges should be classified as expenses of the department or organizational
 unit to which the service is rendered. Loans to students are not student aid expenditures,
but constitute a conversion of cash to receivables in the loan funds group.
Educational and General Mandatory Transfers
 Provision for Debt Service on Educational Plant. Includes mandatory debt service
provisions relating to educational plant including amounts set aside for debt retirement,
interest, and required provisions for renewals and replacements to the extent not financed
from other sources.
 Loan Fund Matching Grants. Includes mandatory transfers to loan funds required to
match outside gifts or grants.
Auxiliary Enterprise and Mandatory Transfers
 Expenditures and mandatory transfers should be separately reported.

Other Transfers – Unrestricted Current Fund

 Embraces all costs of operating the auxiliary enterprises, including charges for operation
and maintenance of physical plant, general administration, and general institutional
expenses; also included are other direct and indirect costs whether charged directly as
expenditures or allocated as a proportionate share of costs of other departments or units
 Are allocations of unrestricted resources between fund groups which are not required
either by the terms of loan or by other agreements with outside persons or agencies

Internal Control Measures for Current Funds Expenditures and Transfers:

1. To what extent are budgetary procedures used to exert control over expenditures for
educational as well as capital purposes?
2. Are management reports designed to conform with the concept of "responsibility
reporting," that is, reporting of expenditures according to those who are accountable for
their control?
3. Have the cost adjustments made by research or other grantors been reasonable
considering the related cost claimed by the institution?
4. Are all expenditures recorded through liability or commitment accounts, thus affording a
primary control over payments?

Audit Procedures for Current Funds Expenditures and Transfers:

1. Review of procedures for evaluating and reporting contributed services.
2. Review of procedures for evaluating and reporting (for tax, insurance, and other purposes)
lodging, meals, or other perquisites furnished to employees.
3. Comparison of expenses with prior year expenses and with budget authorizations, and
explanation of significant variations.
4. Analysis of campaign and fund-raising costs. If costs of endowment and building
campaigns have been charged against the proceeds of such campaigns, determine that such
charges are proper.
5. Consideration of special audit emphasis in the payroll, purchasing, and disbursement areas
in view of the following typical factors and tendencies of educational institutions:

a. Payroll—Salaries and wages usually constitute a very significant portion of total

expenditures. If controls over distribution of payroll checks are weak, surprise control of
payroll distributions, review and comparison of payroll check endorsements with
employee signatures in personnel records, discussions with department heads about
selected employees, and review of student-faculty ratios and trends should be considered.

b. Purchasing and disbursements—Often the procedures surrounding initiation of purchases,

receipt of goods and services, and the ultimate payment of invoices are decentralized. If
controls over these activities are weak, audit emphasis on approvals and support for
disbursements, including visits to selected departments to examine or discuss with
appropriate officials specific materials or services received, should be considered.

LOAN FUNDS
 The loan funds group consists of loans to students, faculty, or staff, and of resources
available for such purposes.
 The assets of loan funds may consist of cash, notes receivable for loans granted, and
temporary investments of cash available for loans.
 Notes receivable for loans should be carried at face value less allowance for doubtful
loans. Provision for doubtful loans should be charged to the equity account of the specific
loan fund.
 Liabilities which appear in the balance sheet of loan funds might consist of amounts due
collection agencies for collection fees, amounts due unrestricted funds for unremitted
share of administrative costs, and amounts due as refunds on refundable loan funds.
 Changes in loan funds should be reported in the statement of changes in fund balances
of loan funds.
 Interest on loans to students is not ordinarily recorded in the loan funds until collected.
 For appropriate disclosure, the source of the funds available for loan purposes at the
balance sheet date should be separately identified in the financial statements, such as
donor- and governmental restricted loan funds including funds provided by mandatory
transfers required for matching purposes, unrestricted funds designated as loan funds, and
funds returnable to the donor under certain conditions.
Internal Control Measures for Loan Funds:
 The academic representatives develop the broad policies of the financial assistance
program.
 The administrator of financial aid is responsible for administering the program including
review of applications, evaluation of need and qualifications of applicants, and amounts
and lands of aid appropriate in the circumstances.
 The financial officers of the institution are responsible for the custody and disbursement
of funds for financial assistance, receipt and custody of the loan notes and the accounting
for, reporting, and collection of the loans.
 The usual segregation of duties between the disbursing of funds and the recording of
receivables and custody of assets are equally applicable to loan fund administration.

Audit Procedures for Loan Funds:

1. A test of compliance with special terms and conditions found in restricted loan funds,
such as loans limited to students originating from particular geographical areas, loans
limited to students pursuing particular courses of study, government loan funds, and so
forth.
2. A test of records documenting authorization for forgiveness of repayment of all or a
portion of the amount due.
3. A review of conformity with requirements covering refunds of loan funds, transfers to
other funds, and interest on loans.
4. A general review of procedures for maintaining records of names, changes of address,
and other data with respect to loans receivable.

ENDOWMENT AND SIMILAR FUNDS

 Endowment and similar funds group generally includes endowment funds, term
endowment funds, and quasi-endowment funds.
 Endowment funds are funds with respect to which donors or other outside agencies have
stipulated, as a condition of the gift instrument, that the principal is to be maintained
inviolate and in perpetuity and invested for the purpose of producing present and future
income which may either be expended or added to principal
 Quasi-endowment funds (funds functioning as endowment) are funds which the
governing board of an institution, rather than a donor or other outside agency, has
determined are to be retained and invested. Since these funds are internally designated
rather than externally restricted, the governing board has the right to decide at any time to
expend the principal.
 Annuity and life income funds, if insignificant in amount, may also be included in this
group. If significant, these funds should be reported in a separate fund group. The caption
"Endowment and Similar Funds" should be used where endowment, term endowment,
quasi-endowment, annuity, and/or life income funds are combined or grouped.
  Each endowment and similar fund is accounted for in a separate fund. Each fund will
include its own accounts for cash and investments unless the investments are pooled with
the investments of other funds
 Transfers of investments between funds require that consideration be given to the market
or appraised value of the securities because any change in value up to the date of the
transfer should accrue or be charged to the owning fund for the holding period.
 Fund-raising expenses should not be charged to the principal of endowment and similar
funds unless they directly relate to the proceeds of a campaign for this purpose.

Internal Control Measures for Endowment Funds:

1. Segregation of similar funds in fund groups and maintenance of asset accounts for each
fund or merged assets for groups of funds.
2. Maintenance of adequate information for each individual fund indicating nature of
principal, restrictions on investment of principal or use of income, termination, etc. This
usually involves the maintenance by the institution of an up-to-date register of each
endowment fund containing summary information about the donor, time and amount of
gift, type of fund, any external or internal restrictions, and reference to formal acceptance
by the institution, as well as individual files of correspondence with donors and their
representatives and copies of all bequests and other documents pertinent to the
administration of a gift.
3. Adequate internal reporting of new gifts and the status and changes in principal of all
individual or merged funds.
4. Maintenance and periodic review of a record of contingent bequests.
5. Periodic review of basis of distribution of gains and losses to individual funds.

Audit Procedures for Endowment Funds:

1. Review of summary of investments of all funds and performance of the usual audit tests
of all investment, principal, and income and gain accounts simultaneously.
2. Review of basis of valuation, amortization of premiums and accumulation of discount
policies, and changes in participation in pooled investments. Tests of additions to and
deductions from the pool or pools. Tests of computations where unit or share method of
accounting for pooled investments is utilized.
3. Consideration of necessity for a valuation allowance if quoted market values of
investments are substantially less than cost and there appears to be a permanent
impairment in value.
4. Determination that the titles of the fund groups adequately describe the nature of the
accounts included therein and that all of the individual funds of a particular group have
the same general characteristics.
 5. Determination that disclosure is made in the classification of donor-restricted funds as
contrasted with unrestricted funds designated by the governing board to serve as quasi-
endowment funds.
6. Review of gift acknowledgment procedures and determination that restrictive covenants
are being followed.
7. Review of distribution of investment income and tests of accuracy of credits to restricted
funds.
8. Review of distribution to individual funds of gains and losses on disposal of investments.
9. Consideration of obtaining confirmation from legal counsel of the propriety of any
disposition of realized or unrealized gains.

PLANT FUNDS
 The plant funds group consists of (1) funds to be used for the acquisition of physical
properties for institutional purposes but unexpended at the date of reporting; (2) funds set
aside for the renewal and replacement of institutional properties; (3) funds set aside for
debt service charges and for the retirement of indebtedness on institutional properties;
and (4) funds expended for and thus invested in institutional properties.
 Separate fund balances should be maintained.
 When physical plant assets are sold or otherwise disposed of, the carrying value should
be removed from the asset accounts and net investment in plant should be reduced
accordingly.
 Student fees specifically assessed for debt service or plant expansion in such a manner as
to create an obligation equivalent to an externally imposed restriction should be reported
as additions to the appropriate plant fund subgroup.
 Indebtedness incurred to finance plant acquisition, construction, and the like, should be
included as a liability of the unexpended plant funds subgroup until the proceeds of the
indebtedness are expended, at which time the expended amount and the related liability
should be transferred to the investment-in-plant subgroup.
 Board-designated balances in each of the fund subgroups except for investment in plant
—as opposed to funds restricted by donors for plant fund purposes, should be disclosed.
 Transfers from other fund groups to plant funds for the acquisition of physical properties,
renewals and replacements, and debt service should be represented by the appropriate
transfer of cash or other liquid assets
 Temporary advances from other fund groups to plant funds should be made only upon
authorization or approval of the governing board stipulating the terms of repayment.
Internal Control Measures for Plant Funds:
1. Control by the governing board over capital budgets and changes therein.
2. Recording of commitments and appropriations as well as expenditures in control or
project accounts as part of the regular system of accounting.
3. Maintenance of plant ledgers.
 4. Periodic internal physical inventory of moveable equipment.
5. Custodial control of both fixed and moveable equipment and control of interdepartmental
movements.
6. Procedures for control over disposals and salvage.
7. Maintenance of records of property in the custody of, but not owned by, the institution.
8. Authorization and documentation procedures for creation of long-term debt, including
records of assets or revenue pledged, sinking funds, or installment payments required.
9. Records documenting building fund campaigns including records of restricted or special
gifts.
10. Receiving and acknowledgment procedures for gifts of fixed assets.
11. Procedures for provisions and transfers from unrestricted current funds based on
requirements for renewals, replacements, and retirement of indebtedness.

Audit Procedures for Plant Funds:

1. Examination of provisions of gifts and bequests for plant purposes.
2. The review and testing, by reference to appropriate documents, of the validity of
capitalizing expenditures of current funds representing equipment purchased by such
funds. Determination that title to the equipment so acquired is vested in the institution.
3. The review and testing of transactions of building fund-raising campaigns.
4. Review of procedures relating to the receipt of gifts in kind, including methods used in
valuing such gifts.
5. Review of provisions of long-term debt agreements and observation that requirements
have been met, including the nature and extent of pledging of assets and revenues and
approval by governing board.
6. Examination on a test basis of documents supporting other changes in fund balances.

OTHER FUND GROUPS

 Annuity Funds
- Annuity funds group consists of funds acquired by an institution subject to agreements
whereby assets are made available to the institution on the condition that the institution bind
itself to pay stipulated amounts periodically to designated individuals.
- Annuities can be issued only under regulations promulgated by the agency and, in
some instances, investments of the annuity funds must be deposited or a security deposit made
with the governmental jurisdiction.
- Upon termination, the principal of annuity funds is transferred to the fund group
designated by the grantor or, in the absence of such a designation, to unrestricted current funds
revenue and accorded the same treatment as unrestricted expired term endowments.
 - The assets of annuity funds include cash, securities, and other types of investments, the
valuation of which is determined and reported in a manner comparable to that for investments of
endowment and similar funds.
- The liabilities of annuity funds include indebtedness against any of the assets of the
funds, annuity payments currently due, amounts due to other funds for advances made on annuity
payments, and the actuarial amount of annuities payable.
- The basic statement of changes in annuity fund balances is usually combined with the
changes in life income funds.
Internal Control and Audit Procedures for Annuity Funds: Internal control features and
audit procedures which may be applicable to annuity funds do not differ materially from those
applicable to endowment funds. The annuity liability and fund balance amounts should be
tested by reference to life expectancy and interest tables.

 Life Income Funds

- The life income funds group consists of funds contributed to an institution subject to
the requirement that the institution periodically pay the income earned on the assets to designated
beneficiaries.
- Life income funds are usually accounted for as a separate fund group but are
combined for reporting purposes with annuity funds. When amounts are not material, both of
these fund groups may be reported as a subclassification of endowment and similar funds.
- The transactions of life income funds should be reported separately and not as current
funds revenues or expenditures.
- Upon termination, the balance of the fund is transferred to the fund group designated
by the grantor or, in the absence of a designation, to unrestricted current funds and accorded the
same treatment as unrestricted expired term endowments.

Internal Control and Audit Procedures for Life Income Funds: Internal control features and
audit procedures which may be applicable to life income funds conform generally to those
appropriate for endowment fund.

 Agency Fund
- The agency funds group consists of funds held by an institution as custodian or fiscal
agent for others such as student organizations, individual students, or faculty members.
- Agency funds should be accounted for as a separate fund group although, if
immaterial in amount, they may be reported as assets and liabilities of current funds.
 - Transactions of agency funds represent charges or credits to the individual asset and
liability accounts and are not transactions of unrestricted or restricted current funds.
- Accountability for agency funds usually requires the submission of periodic reports of
transactions and balances to the individual or organization that owns the net assets.
Internal Control for Agency Funds: Internal control over agency funds is similar to the control
exercised over cash, investments, and other assets of the institution. Control is improved by the
segregation of such funds in a separate fund group for accounting and reporting purposes.
Internal control is exercised by requiring the approval of transactions by the owning individual or
organization. In the case of student organizations, additional review may be exercised by a
faculty advisor or administrator.
Audit Procedures for Agency Funds: Audit procedures applicable to agency fund assets are
comparable to procedures performed with respect to similar assets of other fund groups. Audit
procedures applicable to liabilities consist primarily of a test of the transactions, including a
review of documentation and confirmation on a test basis with the owning individuals or
organizations.
 OTHER FUNDS
The accounting, reporting, and auditing of other fund groups administered by the
institution—such as pension funds—are comparable with the procedures for endowment and/or
agency funds, and in some instances are comparable with those of commercial pension funds. A
review of internal control must be performed in order to tailor the audit procedures to the needs
of the particular engagement with respect to these special funds.

Additional Notes:
 The Philippine Council for NGO Certification is a private, voluntary, non-stock, non-
profit corporation that will serve as a service organization whose main function is to
certify non-profit organizations that meet established minimum criteria for financial
management and accountability in the service to underprivileged Filipinos.

 PCNC certification is used by the Bureau of Internal Revenue as a basis in granting

“donee Institution status” to qualified non-stock, non-profit organizations.

 Any non-stock, non-profit corporation (as defined in the Corporation Code of the
Philippines) duly registered with the Securities and Exchange Commission, such as
corporate foundations and non-government organizations, can apply for PCNC
certification.

The following organizations can apply for certification:

a. Non-stock, non-profit domestic corporations or associations organized under Philippine
laws and operated exclusively for religious, charitable, scientific, youth and sports
 development, cultural or educational, or social welfare purposes, or for the rehabilitation
of veterans;
b. Civic leagues or organizations not organized for profit but operated exclusively for the
promotion of social welfare;
c. Non-stock, non-profit educational institutions.

Certification Process of PCNC

 The certification process involves the following steps:
a. Applicant organization files its Letter of Intent and duly accomplished Application for
Certification for Donee Institution Status, and gives a down payment of P1,000.00;
b. Applicant organization submits duly accomplished PCNC survey form with complete
attachments, and pays the balance of the application fee of P9,000.00;
c. The PCNC Secretariat forms the evaluation team and arranges the evaluation visit;
d. The evaluation team conducts the evaluation visit and the PCNC Board deliberates on
the evaluation team’s recommendation;
e. If the evaluation result is favorable, the PCNC issues a Certification to the applicant
organization and submits Certification results to the BIR for issuance of the BIR
Certificate of Donee Institution Status. If the evaluation result is not favorable, the
PCNC will inform the applicant organization of the results and recommendation.

 Only donations to certified non-governmental organizations (NGOs) shall be deductible

in full. Donations to all other certified private nonstock, non-profit organizations are
entitled to the 5% limited deduction (Sec. 34 (H), Tax Reform Act of 1997).

 The 5% limited deduction is deducted from the taxpayer’s taxable income as computed
after expenses arising from trade, business, or profession have been deducted, but before
any deductions (full or partial) arising from donations are made.

 Tax incentives as provided in law are biased in favor of donations in the form of tangible
assets such as cash and property. The law does not provide tax incentives for donations in
the form of services/technical skills. Professional and company services can, however, be
booked and designated as cash donations, and as such can be used to claim tax benefits.

 Claims for deductions must be made in the taxable year when “paid or accrued” or
“paid or incurred”, depending on the method of accounting by which net income is
computed. (Sec. 45, Tax Reform Act of 1997)

 All certified non-stock non-profit corporations/NGOs are required to issue a certificate

of donation (BIR Form 2322) on every donation or gift they receive. Such certificate
shall be accomplished by the said certified nonstock non-profit organization/NGO in
triplicate and distributed within 30 days after the receipt of the donation. (Sec. 3, Rev.
Regulation 13-98) Refusal to issue the Certificate of Donation can be a ground for
revocation by the donor of the donation. Furthermore, such refusal being a violation of
 the provisions of the law warrants PCNC’s canceling the organization’s certification and
revocation of the BIR’s Certificate of Registration.

 A corporate donor can revoke a donation to a donee institution when the donee fails to
comply with any of the conditions imposed by the donor. The property donated must be
returned to the donor. Depending on the cause for the revocation, donor may also claim
for damages. (Art. 764, New Civil Code of the Philippines)

 A corporate donor can set terms and conditions to effect a donation provided that they
are not contrary to law, public policy, or public order. For purposes of complying with
the requirements of the BIR, the donation is assumed to take effect upon the occurrence
of or compliance with the conditions set forth in the deed of donation.

 Donations that are revoked or pre-terminated would revert to the situation as if no

donation were made. Accordingly, taxable income would not have been reduced by the
amount of donation and the donor would have become liable for income tax based on a
higher tax base. The donor would have to file an amended income return reflecting the
higher taxable income and tax obligation.

 Donations that are contained in a testamentary will and made effective at the time of the
testator’s death are subject to the laws on succession (testamentary) and are accordingly
subject to estate taxes.