Audit Considerations for Non-Profit Organisations

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), the revenue sources are different (grants, donations, subsidies, membership fees rather than sales), and the governance structure is different (a board of trustees or supervisory board with no equity interest, often part-time and unpaid).

ISA 315.11 through 315.24 require you to understand the organisation’s nature, its environment, and 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), who the primary users of the financial statements are (funders, regulators, the public rather than investors), and what the key accounting judgments are (grant income recognition timing, fund allocation, and expense classification between restricted and unrestricted activities).

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 often meaningless (the organisation aims to break even or run a small surplus). Common benchmarks for non-profits include total income, total expenditure, or total assets. The ISA 320 materiality calculator lets you select the benchmark appropriate to the organisation type. For a grant-funded foundation, total income is typically the most relevant benchmark 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, the income is recognised, and the cash may arrive later. The receivable is recorded at the commitment date.

A conditional contribution (a grant with spending restrictions, performance milestones, or 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.

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. Your working paper should make it possible for a reviewer 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, agreeing each fund balance to a specific grant or donation with identified restrictions, and verifying 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.

Governance structures in non-profits often 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, approves all expenditure, and reports to a board that meets twice a year has weak segregation of duties. Your ISA 240 risk assessment should address this directly.

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, and any organisations in which board members have a financial interest. The risk is that the foundation pays above-market rates for services provided by related parties (consultancy, property rental, IT services). 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), the fair value per hour (what would the organisation pay for equivalent services?), and the total recognised. 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 non-Big 4 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.

1. 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.

2. 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.

3. 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.

4. 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.

Practical checklist for non-profit engagements

1. Obtain every grant agreement for income above performance materiality. Classify each as conditional or unconditional under RJ 640.201. Map the recognition trigger for each conditional grant before testing.
2. Set materiality using an appropriate benchmark. Use total income or total expenditure rather than profit. Document why the benchmark is relevant to the primary users of the financial statements.
3. Test restricted fund balances by agreeing expenditure charged to each fund back to invoices that match the restriction criteria. Flag any expenditure that does not match the restriction.
4. Assess ISA 240 fraud risk with specific reference to the governance structure. Document the payment authorisation process, the board’s oversight frequency, and any single-signatory thresholds.
5. Verify the largest conditional grant. Confirm that the funder has accepted the performance reports that support the income recognised. If a performance report is pending acceptance at audit date, evaluate whether the recognition conditions were met based on expenditure evidence.
6. Check in-kind contribution consistency. Verify that in-kind contributions are recognised consistently with the prior year and the disclosed accounting policy. If the policy changed, verify that the change is properly disclosed.

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, the bookkeeper records income, and 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 PCAOB’s 2023 staff guidance on non-profit audits noted that 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

Frequently asked questions

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.