FCRA Audit in India – Complete Guide

1. What is FCRA Audit?

FCRA Audit is the statutory audit of organizations receiving foreign contributions in India, under the Foreign Contribution (Regulation) Act, 2010 (FCRA) and related rules.

Purpose:

• Ensure foreign funds are used for permitted purposes

• Compliance with FCRA provisions and Ministry of Home Affairs (MHA) regulations

• Maintain transparency and accountability of NGOs / associations receiving foreign contributions

Applicable to:

• NGOs, trusts, societies, associations registered under FCRA

2. Legal Basis of FCRA Audit

• FCRA, 2010 – Sections 17, 18, 19

• FCRA (Registration of Societies, Associations, Trusts) Rules, 2011

• FCRA Annual Return Form FC-3 – Submission mandatory for all organizations receiving foreign contributions

• Rule 13(1) – Mandates audit of accounts by a Chartered Accountant (CA)

3. Who Can Conduct FCRA Audit?

• Only a Practising Chartered Accountant (CA) registered in India can conduct FCRA audit.

• Auditor must be independent and not involved in management of the organization.

• Auditor cannot audit organizations where conflict of interest exists, e.g., partners or relatives managing funds.

4. Why FCRA Audit is Important

1. Legal Compliance – Mandatory under FCRA for organizations receiving foreign contributions.

2. Transparency & Accountability – Confirms funds are spent for approved purposes only.

3. Government Reporting – FC-3 (Annual Return) requires audited accounts.

4. Audit Report Validity – Essential for FCRA renewal of registration or prior permission.

5. Risk Mitigation – Prevents misuse, diversion, or penalties under FCRA.

5. Scope of FCRA Audit

6. Step-by-Step FCRA Audit Process

Step 1: Planning & Engagement

• Obtain engagement letter

• Define audit scope (full financial year or specific programs)

• Review prior year audit report and FCRA compliance history

Step 2: Data Collection

• FCRA-designated bank account statements

• Receipts of foreign contributions (FC-3 reporting)

• Board / trust resolutions approving fund use

• Agreements with implementing agencies / partners

• Expense vouchers, invoices, and salaries (if applicable)

Step 3: Verification

• Ensure all funds received through FCRA account

• Cross-check utilization against approved purposes

• Verify proper allocation of restricted or donor-specified funds

• Check compliance with administrative expenditure limits (max 50% of total foreign contribution can be spent on administrative expenses, unless otherwise notified)

Step 4: Audit Testing

• Sample test of expenditures for authenticity

• Physical verification for certain program activities (if necessary)

• Ensure no diversion for prohibited purposes, e.g., political activities

Step 5: Draft Audit Report

• Include findings of compliance and deviations

• Recommendations for corrective actions

• Confirm reporting aligns with FC-3 Annual Return

Step 6: Final Audit Report

• Signed by Practising CA

• Includes:

  • Audit observations

  • Receipts and utilization statement

  • Bank reconciliation

  • Compliance with FCRA 2010

• Submit FC-3 along with audited accounts to Ministry of Home Affairs

7. Documents Required for FCRA Audit

• Copy of FCRA registration certificate

• FCRA designated bank account statements

• Receipts of foreign contributions

• Bank vouchers, invoices, and bills for expenditures

• Board / trustee resolutions for fund utilization

• Agreements / MOUs with implementing partners

• Ledger of foreign contribution income and expenditure

• Prior audit reports (if any)

• Annual Return (FC-3 draft prepared)

8. Common Mistakes in FCRA Compliance

9. Penalties for Non-Compliance

10. Benefits of FCRA Audit

• Ensures full compliance with FCRA

• Helps maintain NGO credibility with donors and government

• Avoids penalties and legal action

• Provides insights for fund utilization and internal controls

• Enables smooth FCRA renewal or prior permission

11. Advisory Draft – NGO / Trust / Society

Purpose: Ensure FCRA compliance and accountability

Draft Advisory Notes:

1. Maintain a single designated FCRA bank account for all foreign contributions.

2. Obtain board approval / trustee resolution for all foreign fund utilization.

3. Maintain detailed documentation for receipts, MOUs, project expenses, and administrative costs.

4. Conduct annual FCRA audit through a qualified CA before FC-3 submission.

5. Ensure administrative expenditure does not exceed prescribed limits.

6. Report all foreign contribution income & expenditure in FC-3.

7. Implement audit recommendations for compliance improvement.

8. Maintain audit trail for at least 10 years for MCA / MHA verification.

12. Advanced / Additional Information Not Covered Above

1. FCRA Renewal Compliance

   • Audited FC-3 reports are mandatory for renewal of FCRA registration every 5 years.

   • Non-compliance delays renewal.

2. Digital Filing & MCA Integration

   • FC-3 forms are filed online via MHA FCRA portal; audit report attached digitally.

3. Foreign Donor Restrictions

   • Funds from prohibited countries or organizations cannot be accepted; auditor must verify donor eligibility.

4. Impact Assessment

   • Auditor may include social impact verification for large donations/projects.

5. Internal Control Assessment

   • Auditor may suggest better fund tracking, project monitoring, and reporting mechanisms.

6. Carry Forward / Unutilized Funds

   • Funds not spent in the FY must be properly accounted and reported.

7. Cross-verification with Annual Reports / Income Tax

   • Auditor checks FCRA expenditure consistency with audited financial statements.

13. Advanced Checklist – FCRA Audit

• Verify FCRA registration certificate and validity

• Confirm use of single designated FCRA bank account

• Review receipts of foreign contributions for eligible donors

• Verify utilization of funds as per approved purposes

• Check adherence to administrative expenditure limit (50%)

• Review agreements / MOUs with implementing agencies

• Check project completion reports and monitoring documentation

• Prepare audited statement of foreign contribution income & expenditure

• Attach audited report to FC-3 Annual Return for submission

• Implement audit recommendations for process improvement

Additional / Advanced Information on FCRA Audit

1. FCRA Audit for Different Entities

FCRA applies to a variety of organizations. Audit approach differs slightly:

Advisory: Auditor must tailor procedures based on entity type and funding structure.

2. Audit of Foreign Donations in Kind

• Contributions can be cash or kind (equipment, materials, etc.)

• Auditor must assign value to in-kind contributions and ensure proper utilization records

• Include receipts and project acceptance letters in audit documentation

3. Multi-Donor Funds / Projects

• Organizations may receive donations from multiple foreign donors for same project

• Auditor ensures fund segregation and proper allocation

• Prevents mixing of funds from different donors which may violate donor-specific conditions

4. Compliance with FCRA 2020 Amendments

• FCRA Act 2020 introduced stricter rules for:

  • Designated bank account with SBI, New Delhi (mandatory for all organizations)

  • Administrative expenses cap strictly enforced

  • Prohibited persons / organizations from receiving foreign funds

• Auditor must verify new compliance points, including bank account restrictions and donor approvals

5. Administrative & Operational Controls

• Internal controls for FCRA compliance include:

  • Fund approval process by Board / Trustees

  • Tracking of fund utilization against approved purpose

  • Regular reconciliation of FCRA bank account

  • Proper documentation of MOUs, invoices, vouchers, and reports

• Auditor evaluates effectiveness of internal controls

6. FCRA Audit Reporting – Advanced Notes

• Audit report must include:

  • Receipts and utilization statement

  • Verification of donor-specific restrictions

  • Notes on funds unspent or carried forward

  • Observations on internal controls

• Recommendations for process improvement are often included

• Auditor may include impact assessment verification for larger projects

7. FCRA Audit for Non-Resident Projects / Branches

• If NGO has branches in multiple states, auditor verifies:

  • Proper bank account usage

  • Accurate reporting of funds utilization per branch

  • Consolidation in FC-3 Annual Return

• Important for large national-level NGOs receiving multiple foreign contributions

8. Digital & ERP Verification

• Some organizations maintain digital fund tracking systems / ERPs

• Auditor can:

  • Verify automated fund allocation and expense reports

  • Detect errors or inconsistencies before submission

• Ensures transparent audit trail and accountability

9. Common FCRA Audit Mistakes to Avoid

10. Audit of Multi-Year Projects

• Some projects span multiple years; auditor must:

  • Verify funds allocated for each financial year

  • Confirm proper reporting of unspent funds

  • Check carry-forward and utilization in subsequent audits

11. Advisory Notes for Trustees / Board

1. Maintain single FCRA designated bank account at SBI, New Delhi.

2. Obtain board resolutions before accepting / using foreign contributions.

3. Track donor restrictions and ensure funds are used only for approved purposes.

4. Maintain complete documentation: MOUs, agreements, invoices, vouchers, and project completion reports.

5. Conduct annual FCRA audit through qualified CA.

6. File FC-3 Annual Return accurately with audit report attached.

7. Implement audit recommendations for better internal controls and compliance.

8. Keep audit trail for at least 10 years, as required by MHA.

12. Advanced Benefits of FCRA Audit

• Ensures compliance with updated FCRA 2020 rules

• Improves credibility with foreign donors

• Minimizes risk of MHA penalties or FCRA suspension

• Helps in renewal of registration or prior permissions

• Strengthens internal control over fund utilization

• Provides trustworthy financial statements for stakeholders

13. Penalties / Consequences for Non-Compliance

14. FCRA Audit Checklist (Advanced)

• Verify FCRA registration certificate and validity

• Ensure use of single designated FCRA bank account

• Review foreign contribution receipts and donor details

• Check utilization aligns with approved FCRA purposes

• Validate MOUs, agreements, invoices, vouchers, and project reports

• Confirm administrative expenses within allowed limits

• Verify carry-forward and unspent fund reporting

• Consolidate multi-branch / multi-project accounts if applicable

• Attach audit report to FC-3 Annual Return

• Implement auditor recommendations and improve internal controls