The finance director sends you a trial balance with €6.2M in grant income across 14 funding sources, each with different reporting deadlines and spending restrictions, most carrying clawback provisions. The prior-year file contains a single revenue recognition memo that says “grant income recognised when received.” You already know this file has problems. Non-profit audits don’t fail on complexity. They fail because the standard commercial audit template doesn’t fit, nobody adapted it, and the risk assessment becomes a tick box exercise instead of a genuine assessment of what could go wrong with grant income.
Auditing non-profit organisations requires specific procedures for grant income recognition under RJ 640 (the Dutch accounting standard for non-profit organisations) or IFRS, for restricted fund accounting, for in-kind contribution measurement, and for fraud risk assessment adapted to the governance structures typical of foundations and associations. ISA 315.11 requires you to understand the organisation’s nature, including its objectives and sources of funding, and for a non-profit that understanding starts with the funding model.
Key Takeaways
- How to audit grant income recognition under RJ 640 and when income should be deferred versus recognised immediately
- What ISA 240 fraud risks look like in a non-profit context where there are no shareholders but significant donor accountability
- How to test restricted fund balances and verify that spending restrictions have been respected
- What a worked example looks like for a Dutch foundation (stichting) with multiple grant sources and restricted funds
- Why non-profit audits need a different risk assessment
- Grant income recognition under RJ 640 and IFRS
- Restricted funds: the accounting and audit challenge
- ISA 240 fraud risk in non-profit governance structures
- Volunteer contributions and in-kind income
- Worked example: Stichting de Brug
- Practical checklist for non-profit engagements
- Common mistakes
- Related content
Why non-profit audits need a different risk assessment
The ISA 315 risk assessment for a non-profit looks different from a commercial entity. The objectives are different (mission delivery, not profit maximisation) and the revenue sources are different (grants, donations, subsidies, membership fees rather than sales). The governance structure is also different: a board of trustees or supervisory board with no equity interest, often part-time and unpaid. The information needs of the primary users (funders and regulators rather than equity investors) are also distinct.
ISA 315.11 through 315.24 require you to understand the organisation’s nature and its environment, including the applicable financial reporting framework. For a non-profit, this means understanding which reporting framework applies (RJ 640 for Dutch GAAP, or IFRS if the organisation reports under international standards) and who the primary users of the financial statements are (funders and regulators rather than investors). It also means understanding the key accounting judgments: grant income recognition timing, fund allocation, expense classification between restricted and unrestricted activities, and valuation of in-kind contributions.
The commercial audit template your firm uses probably assumes revenue is earned through the sale of goods or services. For a non-profit, revenue comes from conditional grants (income recognised when conditions are met), unconditional grants (income recognised when awarded), donations (income recognised when received or committed, depending on the framework), government subsidies (often with specific spending conditions and clawback clauses), and membership fees. Each source has a different recognition trigger, and the organisation may apply them inconsistently.
Materiality also works differently. ISA 320 .A4 acknowledges that the appropriate benchmark depends on the organisation. For a non-profit, profit before tax is meaningless in practice (the organisation aims to break even or run a small surplus). Common benchmarks for non-profits include total income and total expenditure. The ciferi ISA 320 materiality calculator lets you select the benchmark appropriate to the organisation type. For a grant-funded foundation, we find total income is the most relevant benchmark on most engagements because the financial statements exist primarily to demonstrate that funding was spent as intended.
Grant income recognition under RJ 640 and IFRS
RJ 640.201 through 640.210 govern income recognition for non-profit organisations under Dutch GAAP. The key distinction is between contributions with and without conditions.
An unconditional contribution (a donation with no spending restrictions or performance conditions) is recognised as income when the organisation has a right to receive it. This is straightforward. The donor commits and the income is recognised, even if the cash arrives later. The receivable is recorded at the commitment date.
A conditional contribution (a grant with spending restrictions or performance milestones, often with clawback provisions) requires more judgment. Under RJ 640.206, a conditional contribution is recognised as income to the extent that the conditions have been met. If a funder awards €500,000 for a two-year programme and the conditions specify that the funds must be spent on specified activities, the organisation recognises income as it incurs qualifying expenditure. Unspent funds are held as deferred income (a liability), not as unrestricted income.
This is the point where non-profit audits get frustrating, because most clients get the accounting wrong here and genuinely don’t understand why it matters. The cash arrives and the bookkeeper credits revenue. The balance sheet shows no deferred income liability even though half the programme hasn’t been delivered. Your audit procedure is to obtain the grant agreement, identify the conditions, compare the conditions to the expenditure incurred during the period, and determine whether the amount recognised as income matches the expenditure that satisfies those conditions.
Under IFRS, the analysis depends on whether the grant is a government grant ( IAS 20 ) or a contribution from a non-government funder. IAS 20.12 requires government grants to be recognised in income on a systematic basis over the periods in which the organisation recognises the related costs. The matching principle is explicit. For non-government contributions, IFRS lacks a specific standard for non-profit income, and practice varies. Many European non-profits apply IAS 20 by analogy, which produces the same result as RJ 640.
Regardless of framework, the audit procedure is the same. For each material grant: read the agreement, identify the conditions, calculate the proportion of conditions met based on qualifying expenditure, and test whether the income recognised matches. Document the grant name, the funder, the total award, the period, the conditions, the expenditure to date, and the income recognised. The file should tell a story: a reviewer should be able to trace from grant agreement to expenditure to income recognition without asking you to explain the logic.
Restricted funds: the accounting and audit challenge
Restricted funds are amounts that the organisation must spend for a specified purpose. RJ 640.402 requires restricted funds to be presented separately from unrestricted funds in the balance sheet. The distinction matters because the organisation cannot use restricted funds for general operations, and misclassification between restricted and unrestricted is a material misstatement if it affects how users assess the organisation’s financial position.
Testing restricted fund balances involves two assertions. Completeness: are all funds with donor-imposed restrictions classified as restricted? Existence and valuation: does the restricted fund balance accurately reflect the unspent portion of each restricted grant?
In practice, this means obtaining a schedule of all restricted funds and agreeing each fund balance to a specific grant or donation with identified restrictions. You then verify that the expenditure charged against each fund complies with the restriction. If a donor gave €200,000 for children’s educational programmes and the organisation used €30,000 of that fund to cover general office rent, the restricted fund balance is overstated and general expenditure is understated. That’s a misclassification, and depending on amounts, it may be a fraud indicator under ISA 240 (misuse of restricted funds for general purposes).
The physical separation of bank accounts helps. Some non-profits maintain separate bank accounts for each restricted fund. If they do, your bank confirmation testing under ISA 505 should confirm each account individually and agree the balances to the corresponding restricted fund. If the organisation pools all funds in one bank account (more common for smaller foundations), you need to verify the internal tracking mechanism. Is there a sub-ledger that tracks each restricted fund? Does the allocation of expenditure to funds happen at the transaction level or as a year-end allocation? Year-end allocations are higher risk because they allow management to assign expenditure to the most convenient fund rather than the correct one.
ISA 240 fraud risk in non-profit governance structures
ISA 240.11 requires a presumption that revenue recognition involves a risk of fraud. For a non-profit, this presumption applies to grant income recognition, not to sales revenue. The specific fraud risk is premature or improper revenue recognition: recognising conditional grant income before the conditions are met to show a surplus instead of a deficit, or to demonstrate to funders that the programme is on track.
The second fraud risk specific to non-profits is misuse of restricted funds. An executive director who diverts restricted programme funds to cover an operating shortfall is committing fraud even if no cash leaves the organisation. The restriction is a legal obligation to the funder. Violating it is not just an accounting error.
In our experience, governance structures in non-profits make fraud harder to detect. Many Dutch foundations (stichtingen) have small boards, sometimes only two or three members. ISA 315 .A88 notes that smaller entities may have less formal internal control environments. A foundation where the director is also the sole signatory on the bank account and approves all expenditure, while the board meets only twice a year has weak segregation of duties. Your ISA 240 risk assessment should address this directly.
Ask these questions in the planning stage: who approves expenditure? Is there a second signatory on payments above a threshold? Does the board review actual expenditure against the budget at each meeting? Does anyone independent of the director review bank statements? If the answer to more than one of these is “no,” you have an environment where management override risk under ISA 240.31 is elevated. Document the control weakness and consider whether it changes your planned nature, timing, or extent of testing.
Related-party transactions in non-profits also require attention. ISA 550.10 requires you to identify related-party relationships. In a foundation, related parties include board members, the director’s family members, organisations in which board members have a financial interest, and any entity providing services to the foundation on non-arm’s-length terms. The risk is that the foundation pays above-market rates for services provided by related parties (consultancy, property rental, IT services, or seconded staff). Obtain the register of interests (if one exists) and test a sample of payments to parties connected to management or the board.
Volunteer contributions and in-kind income
Some non-profits recognise volunteer services and in-kind donations as income and expense. RJ 640.205 permits (but does not require) recognition of in-kind contributions at fair value if the fair value can be measured reliably. Under IFRS, IAS 20.23 addresses non-monetary government grants; for non-government in-kind contributions, practice varies.
If the organisation recognises volunteer hours as income, your audit procedure is to verify the number of hours (volunteer timesheets or sign-in records) and the fair value per hour (what would the organisation pay for equivalent services?). Then verify that the total recognised matches those inputs. The valuation is inherently subjective. A charity that uses volunteer solicitors for legal work might value those hours at €200/hour. A charity that uses volunteer administrators might value hours at €20/hour. Both may be reasonable, but both require documented support for the rate used.
If the organisation does not recognise in-kind contributions, verify that the accounting policy is applied consistently and disclosed. The risk here is not overstatement but comparability: if the organisation recognised volunteer income in the prior year and stopped this year without changing the accounting policy note, the year-on-year comparison is misleading.
Most mid-tier firms audit non-profits where volunteer recognition is not material. Focus your time on grant income and restricted funds, which are where the material misstatement risk actually sits.
Worked example: Stichting de Brug
Client scenario
Stichting de Brug is a Dutch foundation providing integration services for refugees in the Rotterdam metropolitan area. Total income for 2024 is €3.8M across 6 grant sources (municipality of Rotterdam, Ministerie van SZW, EU AMIF fund, two private foundations, and individual donations). Total expenditure is €3.6M. Net assets are €890,000 of which €340,000 is restricted. The foundation applies Dutch GAAP (RJ 640). Two paid staff members handle all financial administration. Performance materiality is €38,000.
Map income sources to recognition triggers
The team obtains all 6 grant agreements and one summary of individual donation records. Each is classified as conditional or unconditional.
| Source | Amount | Conditional? | Recognition trigger |
|---|---|---|---|
| Municipality of Rotterdam | €1,400,000 | Yes | Quarterly activity reports accepted by municipality |
| Ministerie van SZW | €900,000 | Yes | Programme milestones (specified in annex) |
| EU AMIF | €680,000 | Yes | Eligible expenditure per EU cost categories |
| Private foundation A (Stichting Oranje Fonds) | €420,000 | Yes | Restricted to youth integration programme |
| Private foundation B (VSBfonds) | €250,000 | No | Unconditional gift, recognised on award date |
| Individual donations | €150,000 | No | Recognised when received |
Documentation note: “Income source mapping: 6 grants and individual donations classified per RJ 640.201-210. Four conditional sources require expenditure-based recognition. Two unconditional sources recognised on receipt/award. Refer WP J.1.1 for individual grant agreement summaries.”
Test the largest conditional grant (municipality)
Rotterdam’s municipality grant of €1,400,000 requires quarterly activity reports. Acceptance of Q1 through Q3 has been confirmed (€1,050,000 recognised). The Q4 report (covering October through December, €350,000) was submitted in January 2025 but not yet accepted at the audit date. Based on expenditure records and programme delivery evidence, the team evaluates whether Q4 conditions were met.
Stichting de Brug recognised €1,350,000 (full Q1-Q3 plus €300,000 of Q4). Only €260,000 of Q4 expenditure was incurred by 31 December. Proposed audit adjustment: reduce grant income by €40,000, increase deferred income by €40,000.
Documentation note: “Municipality grant: €1,400,000 total. Q1-Q3 confirmed by funder (€1,050,000). Q4: €350,000 allocated, €260,000 qualifying expenditure incurred by year-end per expenditure analysis. Client recognised €300,000 for Q4. Overstatement of €40,000. Audit adjustment A.03 posted. Refer WP J.2.1.”
Test restricted fund balances
From the restricted fund schedule, two restricted funds exist: Oranje Fonds youth programme (opening balance €180,000, income €420,000, expenditure €260,000, closing balance €340,000) and a legacy donation for staff training (opening balance €0, income €12,000, expenditure €8,500, closing balance €3,500). Total restricted funds: €343,500 per audit (no adjustment needed).
Each fund’s expenditure is agreed to invoices matching the restriction criteria. All 8 invoices charged against the training fund relate to external training courses. Of the 47 invoices charged against the youth programme fund, 44 relate to youth integration activities. Two invoices (combined €2,100) are for general office supplies not specifically attributable to the youth programme. One invoice (€800) is for a board dinner. All three invoices (€2,900 total) are reclassified from the restricted fund to unrestricted expenditure. Below materiality, but documented.
Documentation note: “Restricted fund testing: Two restricted funds verified. Oranje Fonds fund: 47 invoices tested, 3 misclassified (€2,900, reclassified to unrestricted). Training fund: 8 invoices tested, no exceptions. Total reclassification: €2,900 (below materiality, no formal adjustment, included in schedule of uncorrected misstatements). Refer WP K.1.1.”
Assess fraud risk and governance
Stichting de Brug has a three-member supervisory board (raad van toezicht) that meets quarterly. The director (bestuurder) is the sole signatory on payments under €10,000. Above €10,000, a board member co-signs. The team notes that the €10,000 threshold means the director can independently authorise most individual transactions. The team tests a sample of 15 payments between €5,000 and €10,000 for proper authorisation and supporting documentation. No exceptions found. The team also tests all 6 payments above €10,000 for dual authorisation. No exceptions.
Documentation note: “ ISA 240 fraud risk assessment: Management override risk assessed as elevated due to single-signatory threshold (€10,000). Mitigating factor: board co-signs above threshold, board reviews full expenditure quarterly. Testing: 15 payments (€5k-€10k) tested, no exceptions. 6 payments above €10k tested for dual signature, no exceptions. Conclusion: no fraud indicators identified. Control weakness documented in management letter point ML.04.”
Practical checklist for non-profit engagements
Common mistakes
- Recognising conditional grant income in full when the cash is received, without assessing whether the conditions have been met. The AFM has flagged this pattern in non-profit audits: the cash arrives and the bookkeeper records income, but the audit team does not test whether the grant conditions have been satisfied by year-end.
- Failing to test restricted fund balances at the transaction level. Reviewing the fund schedule in aggregate tells you the arithmetic is correct. It does not tell you whether the expenditure charged to the fund actually meets the restriction. The restriction is a legal obligation, and misclassification can trigger clawback provisions.
- Using profit before tax as the materiality benchmark. The AICPA Audit and Accounting Guide: Not-for-Profit Entities (AAG-NPO) covers non-profit audit considerations in detail. Using an inappropriate benchmark leads to materiality levels that do not reflect the information needs of the primary users (funders and regulators, not equity investors).
Related content
- ISA 320 materiality calculator. Lets you select alternative benchmarks (total income, total expenditure, total assets, or net assets) for entities where profit is not a meaningful measure.
- ISA 240 : Fraud risk in audit. Covers the presumption of fraud risk in revenue recognition and management override, with specific application to non-standard revenue streams.
- How to document going concern under ISA 570 . Non-profits face going concern risk when key funding sources are not renewed or when restricted funds must be returned. This post covers the documentation framework.
Related content
Frequently asked questions
How should conditional grant income be recognised under RJ 640?
Under RJ 640.206, a conditional contribution is recognised as income to the extent that the conditions have been met. If a funder awards a grant with spending restrictions, the organisation recognises income as it incurs qualifying expenditure. Unspent funds are held as deferred income (a liability), not as unrestricted income. Obtain each grant agreement, identify the conditions, and test whether income recognised matches the expenditure that satisfies those conditions.
What materiality benchmark should be used for a non-profit?
Profit before tax is often meaningless for a non-profit that aims to break even. ISA 320 .A4 acknowledges that the appropriate benchmark depends on the organisation. Common benchmarks include total income, total expenditure, total assets, or net assets. For a grant-funded foundation, total income is typically most relevant because the financial statements exist primarily to demonstrate that funding was spent as intended.
What are the ISA 240 fraud risks specific to non-profit organisations?
The two specific fraud risks are premature recognition of conditional grant income (recognising income before conditions are met to show a surplus) and misuse of restricted funds (diverting programme funds to cover operating shortfalls). Governance structures with small boards and single-signatory payment authority create elevated management override risk under ISA 240.31 .
How do you test restricted fund balances?
Obtain the restricted fund schedule, agree each fund balance to a specific grant with identified restrictions, and verify that expenditure charged against each fund complies with the restriction at the invoice level. Reviewing the fund schedule only in aggregate tells you the arithmetic is correct but does not confirm whether the expenditure actually meets the restriction.
Should volunteer contributions be recognised as income?
RJ 640.205 permits but does not require recognition of in-kind contributions at fair value if fair value can be measured reliably. If recognised, verify the number of hours (timesheets or sign-in records), the fair value per hour (equivalent market rate for the services), and the total. Most mid-tier firms audit non-profits where volunteer recognition is not material.
Further reading and source references
- RJ 640, Organisaties zonder winststreven (Non-profit organisations): paragraphs 201–210 on income recognition and 402 on restricted funds.
- IAS 20 , Government Grants and Disclosure of Government Assistance: paragraph 12 on systematic recognition of grant income.
- ISA 315 (Revised 2019), Identifying and Assessing Risks of Material Misstatement: paragraphs 11–24 on understanding the entity.
- ISA 240 , The Auditor’s Responsibilities Relating to Fraud: paragraphs 11 and 31 on revenue recognition fraud risk and management override.
- ISA 320 , Materiality in Planning and Performing an Audit: paragraph A4 on benchmark selection for non-commercial entities.