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The Auditor's Guide to Analytical Procedures Under ISA 520
Complete guide: ISA 520 requirements quick reference, decision flowchart for when to use analytical procedures vs. tests of details, industry-specific ratio checklists for 12 sectors, threshold-setting guide by risk level, sample completed working paper, common quality-review findings, and documentation checklist.
ISA 520 Analytical Review for Nonprofits and Charities
Nonprofit and charitable organisations present a fundamentally different analytical review context because their primary objective is mission delivery rather than profit generation. Under ISA 520, the auditor must adapt expectations to reflect this: the key performance indicators are programme delivery metrics, not profitability ratios. The programme expense ratio — programme spending as a percentage of total expenditure — is the primary efficiency metric and should be stable between periods. Charity watchdogs and donors expect this ratio to exceed 75-80%, meaning at least 75-80 cents of every euro spent goes directly to programme delivery. A significant decline in this ratio warrants investigation: has the entity invested in fundraising capacity building (which may reduce the ratio temporarily but increase future programme capacity), or has administrative overhead grown without corresponding programme growth?
Fundraising Analysis and Donor Revenue Patterns
Donation revenue can be volatile and is affected by fundraising campaign effectiveness, donor retention rates, major gift timing, and economic conditions. The auditor should analyse donation revenue by source: individual donors, corporate partners, foundations, and government grants each have different patterns and risk profiles. Donor concentration is a going concern risk factor — if one donor provides more than 20% of revenue, the entity is vulnerable to that relationship. Fundraising efficiency — the cost to raise each euro of donations — should be benchmarked against sector norms and prior periods. A typical ratio is €0.10-0.25 of fundraising cost per euro raised. Increasing costs per euro raised may indicate donor fatigue, market saturation, or ineffective campaigns. Legacy income (bequests) is inherently unpredictable and should be analysed separately from regular giving as it distorts trend analysis when large one-off legacies are received.
Grant Accounting and Restricted Fund Management
Grant income recognition requires careful assessment of conditions versus restrictions under the applicable framework. Conditions create performance obligations — grant income should only be recognised when conditions are met. The auditor should verify that grant revenue corresponds to documented condition fulfilment. Restricted fund balances should be analysed for compliance — restricted donations must be spent on their designated purpose, and the entity must track restricted fund movements separately. An increasing restricted fund balance may indicate either new restricted donations or failure to deploy restricted funds appropriately. A declining balance should correlate with programme activity in the restricted area. The auditor should consider whether any restricted fund deficits exist (expenditure exceeding restricted income), which would indicate a compliance issue requiring immediate attention.
Key Ratios to Monitor for Nonprofits & Charities
- Programme expense ratio
- Fundraising efficiency
- Admin cost ratio
- Working capital ratio
- Reserve months
- Donor concentration
What Drives Account Fluctuations
Donor behaviour changes and fundraising campaign outcomes
Grant award timing and performance condition fulfilment
Programme expansion or contraction affecting expenditure mix
Fundraising investment levels and returns
Restricted vs. unrestricted fund balance movements
Seasonal Considerations
Donation income typically peaks in Q4 (end-of-year giving) and around specific awareness campaigns. Grant income depends on award cycles (government fiscal years, foundation deadlines). Expenditure may be seasonal if programme delivery is tied to specific periods (academic year, growing season for agricultural charities).
Recommended Investigation Thresholds for Nonprofits & Charities
| Account Category | Threshold % |
|---|---|
| Revenue | 10% |
| Cost of Goods Sold | 15% |
| Operating Expenses | 10% |
| Current Assets | 15% |
| Equity | 10% |
Regulatory note: Charities are regulated by the Charity Commission (UK), ANBI rules (Netherlands), or equivalent bodies. Specific reporting frameworks (Charities SORP in the UK, RJ 650 in the Netherlands) create additional disclosure and accounting requirements.
Worked Example: Nonprofits & Charities Analytical Review
An international development charity. Overall materiality on total expenditure basis €400,000, performance materiality €260,000.
Overall materiality: €400,000 | Performance materiality: €260,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Donations & Gifts | €11,800,000 | €12,500,000 | €700,000 | +5.9% |
| Grant Income FLAG | €9,500,000 | €8,200,000 | €-1,300,000 | -13.7% |
| Legacy Income FLAG | €800,000 | €2,100,000 | €1,300,000 | +162.5% |
| Programme Expenditure | €16,200,000 | €16,800,000 | €600,000 | +3.7% |
| Fundraising Costs FLAG | €2,400,000 | €2,800,000 | €400,000 | +16.7% |
| Administrative Expenses | €1,750,000 | €1,900,000 | €150,000 | +8.6% |
| Deferred Grant Income FLAG | €2,800,000 | €3,200,000 | €400,000 | +14.3% |