Misstatement Tracker
for Not-for-Profit

ISA 450 misstatement evaluation for Not-for-Profit

Not-for-profit audits introduce a dimension to ISA 450 that commercial entity audits do not have: fund-level materiality. A charity with €30M of total income might have €5M in a restricted fund for a specific capital project. A €180,000 misstatement might be below entity-level materiality but could represent 3.6% of the restricted fund, which is material to users who care about whether restricted donations were spent as intended. ISA 450.A19 allows auditors to consider qualitative factors when evaluating whether uncorrected misstatements are material. For not-for-profits, the qualitative factor is donor accountability. The tracker lets you tag each misstatement with its fund, so your evaluation can operate at both the entity level and the fund level.

Grant income recognition under IAS 20 (or the applicable charity SORP in the UK and Ireland) is the single largest source of misstatements in not-for-profit audits. The critical question for each grant is whether the funding conditions have been met. Performance conditions that must be satisfied before income can be recognised are different from restrictions on how the money can be spent. A government grant that requires the charity to deliver 500 training sessions before claiming is not recognisable until those sessions are delivered. A donation restricted to mental health programmes can be recognised on receipt but must be allocated to the restricted fund. Misclassifying a conditional grant as a restricted donation (or vice versa) creates misstatements in both income and the fund balance. These misstatements often go in opposite directions across funds, so netting them would obscure the true picture.

Donated goods and services create valuation misstatements that are difficult to quantify precisely. Under many not-for-profit frameworks, donated goods should be recognised at fair value on receipt. When a pharmaceutical company donates €400,000 of medications at list price but the charity could have purchased equivalent generics for €80,000, the appropriate valuation is debatable. If the auditor concludes that fair value is closer to €80,000 and management has recorded €400,000, the €320,000 difference is a judgmental misstatement. Donated services (pro bono legal advice, volunteer hours at imputed cost) may or may not require recognition depending on the applicable framework. When the framework requires recognition and management has not recorded the amounts, the unrecorded value is a misstatement. These estimates carry wide uncertainty bands, so record the auditor's range for each donated item alongside management's figure.

Related party transactions in the not-for-profit sector warrant particular attention under ISA 450. Trustees who also provide consultancy services, entities that share staff with the charity, and grants received from organisations where a trustee holds a position all create disclosure obligations. A missing related party disclosure is not a numerical misstatement, but ISA 450.A20 includes disclosure misstatements within the scope of the standard. If the auditor identifies a related party transaction that management has not disclosed, the omission should be recorded on the misstatement schedule and communicated to those charged with governance under ISA 450.12. The tracker supports both numerical and disclosure-only misstatement entries.