An Introduction
Statutory Audit means a type of audit mandated by the law or a statute to make sure that the book of accounts is true and fair which is presented to the public and regulators. If the business meets certain criteria, then the statutory audit is mandatory. Generally, statutory audit means financial audit.
Statutory Audit Procedure
Statutory audit is required by industry regulators and government agencies. The statutory audit procedure is varied which includes the understanding of the operating environment and controls of a business entity. The procedure includes:
Understanding the Operating Environment: Learning about the industrial guidelines and the regulation criteria, the auditor checks whether they are ethical. Statutory audit procedure includes sending of questionnaires, checklists, surveys and also formal notifications.
Understanding Controls: A business entity’s control of operations is learnt by an auditor by asking the employees or even external auditors. Even reading industry publications or previous year audit report and working papers of the company will give operation control knowledge to the auditor.
Test Controls: In the statutory audit process, evaluation of corporate procedures by a specialist conducting regulatory audit and also operating mechanisms for fraud or prevention of error are included. Then they agree with industrial practises and standard set by the regulators. Those operating controls are adequate, performed properly and understood by all the employees who are involved in the process and they are also checked by the auditor.
Test Account Balances: They perform a test on account balances to check if the financial reports are error-free and comply with the regulatory standards, statutory principles and industry practise.
Test Account Details: The auditor then performs tests of accounts and balances on a bank or insurance company or even the hedge fund’s account balances to check that the audited statutory financial statements are accurate and complete.
Internal Audit and Statutory Audit
Internal Audit is an organization or department of people within a certain company tasked to provide unbiased and independent reviews of the system and processes of the business organizations. These are employed by the company to directly perform audit by staying within the management and use the company standards with in-house resources.
Statutory Audit means a type of audit mandated by the law or a statute to make sure that the book of accounts is true and fair as presented to the public and regulators. This is conducted as per the provisions under Companies Act or even Tax Audit under Section 44AB of the Income Tax Act.
Internal audit and statutory audit are quite different. A statutory auditor cannot be the internal auditor. Statutory audit is done by the practising chartered accountant whereas internal audit is done by the employee of the company. Statutory audit is done annually while an internal audit is basically done to detect fraud or prevent errors. Internal audit and statutory audit also differ in the basic factor that the first is appointed by the management of the company while the latter is appointed by the shareholders of the company in the annual general meeting.
Non-Statutory Audit
A non-statutory audit is the review and verification process of the business of a company and it is not required by any law or statute. The non-statutory audit is a type of audit that is performed to identify an organization’s weaknesses that may hamper the productivity and also the efficiency level of the business. Statutory and non-statutory audits differ in the very fact that one is authorised and governed by law while the other is done voluntarily without any legal or statutory force.
Types of Statutory Audit
The two most common types of statutory audit are:
Tax Audit - It is an examination of the tax return by the Internal Revenue Service (IRS) to verify that the income and deductions are accurate. A tax audit is done when the IRS chooses to examine the tax return more closely and to verify that income and deductions are accurate.
Company Audit - Under section 183(3) of the Company Act 1994, company audit means that the balance sheet and the profit and loss account or the income and expenditure account, or cash flow statement of a company will be audited by the auditor of the company.
Statutory Audit - Companies and organizations perform numerous types of audits to ensure that they are operating within the law's guidelines.
While certain audits, such as internal audits, are carried out by corporate workers, others, such as statutory audits and GST audits, are carried out by external entities such as chartered accountants. Some companies are required to have external audits if they fulfill a certain condition related to annual turnover and capital infusion.
What is the Purpose of a Statutory Audit?
A statutory audit is an external entity's mandated audit of a company's financial records. This audit is required by a statute or law that oversees the principles and ethics of a company. A statutory audit examines bank accounts, financial statements, transactions, bookkeeping records, ledgers, and other key documents provided for tax purposes and government obligations in general.
However, it can also comprise documents pertaining to commercial operations, such as invoices, purchase orders, bills, challans, and more.
Importance of Statutory Audit
All public and private limited corporations are required by law (or stature) to conduct a statutory audit of their financial papers and filings, according to the Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014. In fact, in the case of the statutory audit, the business turnover and nature of the business of public and private limited firms make no difference.
Statutory Auditing Procedures
The statutory audit procedure begins as soon as the company is registered. The full statutory audit method is extensive and is dependent on the business's type.
The statutory audit procedure begins as soon as the company is registered. The full statutory audit method is extensive and is dependent on the business's type.
Within 30 days of the business's registration, every public and private corporation or limited liability partnership (LLP) that fits the aforementioned conditions should appoint an auditor.
Example of Statutory Audit
All municipalities are required by state law to produce yearly accounts that have been duly audited by an auditor. Moreover, the instruction includes that audited statements and reports are made available to the common public. The goal of this audit is to ensure that all expenditures are legitimate and have been sanctioned and approved properly. It makes the local government accountable for the appropriation of money. At the same time, it double-checks that the amount disbursed at the federal or state level reaches the lower level and that no taxpayer funds have been misappropriated. As a result, municipalities are responsible for conducting a statutory audit.
FAQs on Statutory Audit
1. What are the prerequisites for a statutory audit?
Statutory audits can be conducted on a variety of different organizations and persons. Although some private organizations may be subject to statutory audits, this is especially important for public companies. There are varied criteria depending on a company's income level, and organizations who deal with client funds, such as attorneys or pension providers, may face more stringent rules. Under the Companies Act 2006, certain companies are eligible for audit exemptions, but it is critical to understand the regulations that apply to these exemptions.
2. What makes a statutory audit different from a non-statutory audit?
Audits aren't only performed when they're needed by law. Non-statutory audits are assessments of a company's finances that are conducted on a voluntary basis and are not required by financial institutions. These can be demanded by shareholders, for example, or carried out internally to keep track of the company's finances. Unlike statutory audits, non-statutory audits often consider financial accounts and reports, but they are not limited to them. Non-statutory audits can be used to evaluate a company's financial strength in a range of areas, ranging from human resource management to market research.
3. What is the meaning of Statutory Audit?
Statutory audit, also known as financial audit, is one of the main types of audits which is to be done as per the statutes applicable to the entity. Its major goal is to gather all relevant data so that the auditor may render an opinion on the truthful and fair representation of the company's financial status as of the balance sheet date. Public enterprises, banks, brokerage and investment organizations, and insurance companies are all subject to audits.
4. What does a statutory audit accomplish?
The goal of a statutory audit is for the auditor to provide his opinion without being swayed in any way. He'll go over the financial records and give his opinion in the audit report. It makes it easier for stakeholders to trust financial statements. Other stakeholders, including shareholders, gain from this audit. They can make their decision based on the accounts, which have been audited and verified. It aids the company in risk mitigation and improves the company's performance.
5. What are the benefits of performing a statutory audit?
As an independent party, the auditor verifies the financial statements, which strengthens the validity and trustworthiness of the financial accounts. It demonstrates that management has used due caution in carrying out its duties. It also specifies how to comply with non-statutory standards such as corporate governance.
6. State the differences between statutory and internal audit.
The differences between statutory and internal audit are:
Legal Requirement: Statutory audit is a legal requirement but an internal audit is the necessity of management and not a legal obligation.
Appointment: Statutory auditor is appointed by the shareholders of a company but as far as the internal audit is concerned, they are generally appointed by the management.
Qualification: Statutory auditor qualification is specified under the provision of law but for internal auditors, there is no specific qualification required.
Status: A statutory auditor is an independent person who is appointed by the shareholders but the internal auditor is the staff of the company.
Removal: Statutory auditor can only be removed by the annual general meeting while internal auditor can be removed by the management anytime.
7. State the differences between statutory and external audit.
In India, statutory audit and external audit are almost the same. It is an audit by a practicing chartered accountant which has its operations exterior to the company for which the audit is performed. Statutory auditors are actually a part of the external audit process and are focused on the various financial accounts associated and are appointed by the shareholders of the company. The main responsibility of statutory auditors is performing the process of the annual statutory audit of the financial accounts of the company. As part of this effort, statutory auditors often deal with the examination and evaluation of the internal controls to manage the risks of affecting the financial accounts of the company.
