Auditing contributions and grants: completeness, existence, conditions and restrictions

In this lesson you will

Design completeness procedures for contribution revenue
Confirm and value pledges receivable
Test grant revenue for conditions, restrictions and cutoff
Evaluate the classification and presentation of contributions

The assertions that matter

Contribution revenue is often the largest line in an NFP's statement of activities, and it behaves differently from customer revenue. There is no invoice, no shipping record and no customer with a reason to complain if a gift goes missing. The assertions that drive the work are:

Completeness: were all gifts received recorded? This is where misappropriation hides.
Existence and occurrence: do recorded pledges and grants exist and are they unconditional?
Classification: contribution or exchange, conditional or unconditional, with or without donor restrictions.
Valuation: pledges at the right amount net of allowance and discount; gifts in kind at fair value.
Cutoff: gifts and grant revenue in the right period.

AU-C 240.26 directs the auditor to presume risks of fraud in revenue recognition and to evaluate which types of revenue give rise to them. For an NFP, think through how it would happen: skimming cash gifts at events, recording conditional grants early to show a surplus, or moving restricted gifts to unrestricted to meet a covenant.

Completeness

Completeness tests start outside the general ledger and work in:

Test cash receipt controls: two people opening mail, immediate restrictive endorsement, deposit logs reconciled to the donor database and the general ledger.
Reconcile the donor database to contribution revenue by month.
Select gifts from external sources (donor acknowledgments, online giving processor reports, event registration lists, foundation grant award lists published by funders) and trace them into the books.
Compare event revenue to tickets sold and attendance.

Pledges receivable

Confirm significant pledges with donors under AU-C 505. Response rates can be low; when a donor does not reply, examine the signed pledge card and subsequent payments.
Check that each recorded pledge is unconditional. Verbal intentions and pledges with a barrier and right of release are not recognized.
Recompute the discount on multi-year pledges and assess the allowance from collection history.
Pledges for future periods carry an implied time restriction, so check the net asset class.

Grants

For each significant grant:

Read the agreement and the contribution versus exchange memo.
If conditional, identify the barrier and test revenue only to the extent the barrier was met (qualifying costs incurred, units delivered, match raised).
Recompute the refundable advance or grant receivable.
Check restrictions and release by matching expenses to the grant purpose.
For federal awards, reconcile grant revenue to the schedule of expenditures of federal awards.

Cost-reimbursement grants deserve extra attention to allowable costs. If disallowed costs are found later, revenue was overstated.

Gifts in kind

Under ASU 2020-07, test the separate line item, the category disaggregation and the valuation. Re-perform fair value for the largest items using the principal market, and observe donated inventory at year end.

Cutoff and analytics

Examine receipts for two to three weeks around year end and confirm they were recorded in the period the gift was received or the condition met. Year-end appeals and matching campaign deadlines create cutoff pressure. A gift received in January with a December postmark or a December-dated pledge card needs a policy, applied consistently, and the policy should match the date the donor made an unconditional promise. Build analytical expectations by source (individuals, foundations, government, events) and investigate swings.

Internal control over gifts

Understand how gifts move from receipt to the general ledger: who opens mail, who processes online gifts, who enters pledges, who records restrictions and who reconciles the donor database. Test the controls you plan to rely on. Where no control exists, such as a single person handling event cash, expand substantive tests and report the deficiency.

Documentation

The file should show the population of grants and pledges, the classification memo for each significant one, confirmation results, the completeness tracing, and how the results support the net asset rollforward. The nonprofit audit program gives a full step list, and conditional contributions covers the barrier analysis.

Worked example

Pledge confirmation results at Summit Children's Museum

Summit Children's Museum reports gross pledges receivable of $2,600,000 at December 31, 2026. You select 12 pledges totaling $1,900,000 and send confirmations.

Results:

8 pledges totaling $1,200,000 confirmed without exception.
2 pledges totaling $350,000 did not respond. You examine signed pledge agreements and January 2027 payments of $150,000 against one of them. Both supported.
1 pledge of $150,000 confirmed, but the donor wrote that the gift is payable only if the museum opens its new science wing by June 30, 2027, and is released otherwise. That is a barrier with a right of release, so the pledge is conditional.
1 pledge recorded at $200,000: the donor confirmed $100,000 total, so the books carry it twice. The second $100,000 is an error.

Projected misstatement: known errors are $150,000 (conditional pledge) and $100,000 (duplicate) = $250,000 on a sample of $1,900,000, or 13.2%. Applied to the $700,000 not tested, a ratio projection adds about $92,000.

Conclusion: you propose adjustments of $250,000 to remove the known errors, add the $92,000 projected misstatement to the summary of uncorrected misstatements for evaluation against materiality, ask management to review the remaining population for other conditional pledges and duplicates, and reassess the control over pledge entry.

Self-check

Answer each question before you open the answer.

Why is completeness the hardest assertion for contribution revenue?
Show answer
There is no invoice or customer with an incentive to report an unrecorded gift, so unrecorded or diverted gifts leave little trace in the books.
A donor does not respond to a pledge confirmation. What alternative procedures apply?
Show answer
Examine the signed pledge agreement, test subsequent payments and assess whether the pledge is unconditional.
Revenue on a cost-reimbursement grant is recognized up to what amount?
Show answer
Up to qualifying allowable costs incurred, because incurring those costs is the barrier. Cash received beyond that is a refundable advance.
Which revenue fraud schemes fit NFP contributions?
Show answer
Skimming cash gifts, recognizing conditional grants before the barrier is met, and misclassifying restricted gifts as unrestricted.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error