CSR Audit in India – Complete Guide

1. What is CSR Audit?

CSR Audit is the examination of a company’s Corporate Social Responsibility (CSR) activities, spending, and compliance with Section 135 of the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014.

Purpose:

• Verify whether CSR expenditure is properly utilized.

• Ensure compliance with legal obligations under Companies Act, 2013.

• Enhance transparency and accountability in social initiatives.

2. Legal Requirement of CSR Audit

• Section 135(5) of Companies Act, 2013 mandates CSR reporting.

• Rule 8 of Companies (CSR Policy) Rules, 2014 requires that CSR expenditure be monitored.

• Companies having the following criteria must spend on CSR:

Advisory: Companies meeting these thresholds must prepare a CSR policy, constitute a CSR Committee, and spend 2% of average net profits on CSR activities.

3. Why CSR Audit is Important

1. Legal Compliance: Section 135 mandates CSR compliance; non-compliance can attract fines.

2. Transparency: Ensures funds are spent only on approved CSR activities.

3. Accountability: Verifies actual expenditure versus board approvals.

4. Donor & Stakeholder Trust: For companies partnering with NGOs or CSR agencies.

5. Risk Management: Identifies misuse, misallocation, or unutilized funds.

6. Audit Report for MCA: CSR details are part of Board’s Report, included in Form AOC-4.

4. Who Can Conduct CSR Audit?

• CSR Audit must be conducted by a qualified professional:

  • Chartered Accountant (CA)

  • Cost Accountant (CMA)

  • Company Secretary (CS) (for compliance monitoring)

Key Points:

• Auditor must be independent and not involved in CSR implementation to maintain objectivity.

• CSR audit can be internal or external, but external audit adds credibility.

5. Scope of CSR Audit

6. Step-by-Step CSR Audit Process

Step 1: Pre-Audit Planning

• Identify CSR projects and expenditure for the FY

• Review CSR policy & committee approvals

• Define audit scope and objectives

Step 2: Data Collection

• CSR budgets and approvals

• Bank statements & fund transfer details

• Agreements with NGOs / CSR partners

• Internal monitoring & evaluation reports

Step 3: Field Verification

• Visit project sites if necessary

• Verify utilization of funds against invoices and agreements

• Confirm project deliverables and impact

Step 4: Audit Testing & Analysis

• Check 2% CSR expenditure compliance

• Verify Schedule VII activity eligibility

• Cross-check board resolutions and committee approvals

• Ensure funds not diverted to non-approved purposes

Step 5: Draft Audit Report

• Findings of compliance and deviations

• Recommendations for corrective actions

• Verification of disclosure in Board’s Report & MCA filings

Step 6: Final Audit Report

• Issue a signed audit report by CA / CMA / CS

• Attach supporting schedules, expenditure statements, and project reports

• Share with Board of Directors & CSR Committee

7. Documentation Required for CSR Audit

• CSR Policy of the company

• CSR Committee meeting minutes

• Board resolutions approving CSR projects

• Project agreements / MOUs with implementing agencies

• Bank statements & vouchers for CSR spending

• CSR register or ledger

• Reports of monitoring and evaluation

• Annual Report disclosure / Form AOC-4 attachments

8. Common Mistakes in CSR Compliance

9. Penalties for Non-Compliance

Advisory: CSR audit helps avoid penalties and ensures transparency for statutory filings.

10. Benefits of CSR Audit

• Ensures compliance with Companies Act, 2013

• Enhances credibility with stakeholders, investors, and society

• Confirms fund utilization and impact of CSR projects

• Helps identify gaps in internal CSR controls

• Improves Board reporting and transparency

11. Checklist for CSR Audit

• CSR Policy aligned with Schedule VII

• Board & CSR committee approvals obtained

• CSR projects documented with MOUs / agreements

• Bank statements & vouchers reconciled

• 2% of average net profit spent or disclosed if unspent

• Projects monitored and evaluated for deliverables

• Disclosure in Board’s Report & AOC-4 verified

• External audit report signed by CA / CMA / CS

12. Advisory Draft – CSR Committee / Board

Purpose: Ensure proper CSR governance and compliance

Draft Advisory Notes:

1. Approve CSR Policy and update annually.

2. Ensure CSR Committee meets at least twice a year to review projects.

3. Maintain proper documentation of all CSR activities.

4. Verify utilization of funds before transfer to implementing agencies.

5. Ensure compliance with 2% net profit requirement and Schedule VII activities.

6. Conduct CSR Audit annually by qualified CA / CMA / CS.

7. Incorporate audit findings and recommendations in Board meetings.

8. Disclose CSR report in Board’s Report & MCA filings accurately.

13. Who Needs CSR Audit?

• Companies meeting Section 135 thresholds:

  • Net profit ≥ ₹5 crore

  • Net worth ≥ ₹500 crore

  • Turnover ≥ ₹1000 crore

• Private companies meeting threshold also require CSR audit if applicable

• CSR audit is optional for companies not meeting threshold, but recommended for transparency.

. Advanced CSR Audit Considerations

a. CSR Implementation Models

Companies can implement CSR through:

1. Direct Implementation

   • Company spends CSR funds directly on projects.

   • Requires robust internal tracking and monitoring.

2. Through Registered Trusts or Societies

   • Only Section 8 companies or registered NGOs eligible.

   • MOUs, fund release schedules, and utilization certificates required.

3. Through Government Schemes

   • Contribution to approved government programs is allowed.

   • Proof of payment and acknowledgment needed for audit.

Advisory: Auditor must verify eligibility of implementing agency, whether NGO or government scheme.

b. CSR Spend Eligibility

• Only Schedule VII approved activities qualify. Examples:

  • Eradicating hunger, poverty, malnutrition

  • Promoting education, vocational skills

  • Gender equality & women empowerment

  • Environmental sustainability

  • Healthcare & sanitation

  • Disaster management

• Ineligible Spend:

  • Administrative salaries (except project management costs up to 5%)

  • Donations to political parties or business-related expenses

Auditor verifies fund utilization aligns with Schedule VII.

c. CSR Expenditure Accounting

• CSR funds must be accounted separately in books of accounts.

• Must be reflected in Financial Statements under “CSR Expenditure” line item.

• Auditor ensures no double counting of CSR spend.

d. Carry Forward & Unspent Funds

• CSR Committee can approve unspent funds to be carried forward to next FY.

• Audit verifies:

  • Amount approved for carry forward

  • Board resolutions recorded

  • Funds not diverted to other expenses

Advisory: Companies failing to spend 2% must explain in Board’s Report.

e. CSR Audit Frequency

• Must be conducted annually, after end of financial year.

• Internal checks can be done quarterly for larger projects to prevent misuse.

2. Advanced Audit Techniques

1. Sample Testing

   • Verify a random sample of transactions to ensure correctness.

2. Project Site Visits

   • Physical verification of CSR projects may be required.

3. Compliance Verification

   • Check MOUs, invoices, fund transfers, project completion reports.

4. Impact Assessment

   • Evaluate if project outcomes meet the stated objectives.

5. Digital Audit Trail

   • Use ERP / accounting system reports for fund allocation & utilization.

3. CSR Reporting on MCA Portal

• CSR details are part of Board’s Report in Form AOC-4.

• Information includes:

  • CSR committee details

  • Amount approved and spent

  • Projects undertaken, beneficiaries, and location

  • Unspent funds, if any

• Auditor verifies accuracy of disclosures.

4. Audit of CSR through Third Parties / NGOs

• When CSR is implemented via NGOs or Section 8 companies:

  • Auditor must check:

    • NGO is validly registered

    • Funds used only for approved purpose

    • Utilization certificates obtained

    • Monitoring reports received

Advisory: Without proper verification, CSR expenditure may be disallowed in audit.

5. Board / CSR Committee Oversight Responsibilities

• Approve CSR policy and project list

• Approve budget allocation annually

• Ensure proper documentation for all expenditures

• Track fund release and project monitoring

• Conduct CSR Audit and implement recommendations

Advisory: Board is accountable for non-compliance, even if audit is done.

6. Advanced Compliance Notes

• Companies not spending 2%: Must explain reasons in Board Report.

• Section 8 / CSR implementing NGOs must provide utilization certificates.

• Companies can pool CSR funds for large projects, but audit must ensure correct allocation.

• CSR audit can include environmental and social impact assessment for larger projects.

7. Penalties / Legal Implications (Advanced)

8. CSR Audit Benefits Beyond Compliance

• Improves reputation and CSR credibility

• Strengthens stakeholder trust, investors, and community relations

• Helps improve internal controls for fund management

• Provides insights for future CSR planning

• Reduces risk of penalties and adverse audit remarks

9. Advanced Checklist – CSR Audit

• CSR policy aligned with Schedule VII

• CSR Committee constituted and minutes maintained

• Board resolutions for annual CSR allocation approved

• Fund transfers properly recorded and documented

• Project agreements / MOUs in place

• Bank statements & invoices reconciled

• Physical verification of key projects (if required)

• Utilization certificates from implementing agencies obtained

• Disclosure verified in Board Report & MCA AOC-4

• CSR audit report issued by CA / CMA / CS

• Recommendations implemented for next FY