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 Audits: Purpose and Process
1. What is the statutory audit?
A statutory audit is a legally required review of an organization's financial statements and records. It is conducted by an independent external auditor to ensure compliance with accounting standards and relevant laws. The main objective of a statutory audit is to assure stakeholders that the financial information presented is accurate and free from material misstatements. Unlike voluntary audits, statutory audits are mandated by law for certain types of organizations or entities. This process helps build trust among shareholders, creditors, and regulators by confirming the integrity of the company’s financial reporting.
2. Who needs a statutory audit?
Statutory audits are required by various laws for specific organizations based on their size, legal structure, or sector. Generally, companies must undergo a statutory audit if they meet certain criteria related to revenue, assets, or number of employees. Entities that typically need a statutory audit include:
- Public limited companies
- Banks and financial institutions
- Certain private limited companies that exceed financial thresholds
- Non-profit organizations receiving government grants
Mandatory audit requirements are designed to protect investors and ensure transparency. Businesses should consult local regulations to determine if these audit obligations apply to them.
3. What is the difference between statutory and non-statutory audit?
A statutory audit is legally mandated, while a non-statutory audit is voluntary and conducted at the organization's request. Statutory audits are governed by government regulations and must follow specific procedures, ensuring compliance with accounting standards. In contrast, non-statutory audits are flexible and tailored to the needs of stakeholders, such as management or investors, but have no legal requirement. The key difference lies in the legal obligation and strict guidelines involved in statutory audits, whereas non-statutory audits provide additional assurance beyond what the law requires.
4. What's the difference between statutory and non-statutory?
The main difference between statutory and non-statutory relates to whether something is required by law. 'Statutory' refers to processes, actions, or bodies that are established and governed by legislation. For example, a statutory audit is a legal obligation for certain entities. 'Non-statutory,' on the other hand, refers to actions or requirements that are voluntary and not mandated by any law. Understanding this distinction is important when determining whether a process, such as an audit, is compulsory or optional within a legal framework.
5. What is the purpose of a statutory audit?
The main purpose of a statutory audit is to independently verify and validate a company’s financial statements. This audit ensures that the accounts reflect a true and fair view of the organization’s financial position. The statutory audit protects stakeholders, including investors, creditors, and regulators, by detecting errors, fraud, or misstatements. Ultimately, it helps build transparency and fosters trust in financial reporting, ensuring the company complies with legal and regulatory requirements.
6. What are the steps involved in a statutory audit?
Conducting a statutory audit involves a series of structured steps to ensure the accuracy of financial records and regulatory compliance:
- Planning: Understand the business and its risks, and prepare an audit plan.
- Internal control testing: Review and test the effectiveness of the company’s internal controls.
- Substantive testing: Examine financial transactions, account balances, and supporting documents.
- Reporting:
- Prepare the audit report, highlighting any discrepancies or issues found.
Following these systematic steps allows auditors to deliver an objective opinion on the organization’s financial health and compliance with statutory obligations.
7. Who appoints a statutory auditor?
The appointment of a statutory auditor is typically the responsibility of the company’s shareholders or board of directors, according to relevant regulations. In most cases, shareholders confirm the appointment during the annual general meeting. The process ensures that the statutory auditor is independent from management. This independence is vital for the credibility and objectivity of the audit process in verifying statutory compliance and financial accuracy.
8. Can a statutory audit detect fraud?
A statutory audit is designed to provide reasonable assurance that financial statements are free from material misstatements, whether due to error or fraud. While detecting fraud is not the primary focus, auditors are required to assess and respond to fraud risks as part of their statutory audit procedures. If significant fraud is found during the audit, it will be reported in the auditor’s findings. Overall, while a statutory audit may reveal signs of fraud, it does not guarantee detection of all fraudulent activities.
9. What documents are required for a statutory audit?
A statutory auditor reviews various documents to assess the accuracy and completeness of a company's financial records. Key documents typically required for a statutory audit include:
- Financial statements: Balance sheet, profit & loss account, and cash flow statement
- General ledger and supporting journals
- Bank statements and reconciliations
- Invoices, contracts, and agreements
- Tax returns and statutory filings
Providing accurate and complete documentation supports the auditor in fulfilling statutory and reporting requirements efficiently.
10. What are the benefits of statutory audits for companies?
Statutory audits offer several important benefits for companies. These audits help establish transparency and accountability in financial reporting. The key advantages include:
- Legal compliance: Ensures adherence to relevant accounting and government regulations.
- Risk reduction: Identifies errors, fraud, or inconsistencies early.
- Stakeholder confidence: Enhances trust among investors, lenders, and authorities.
- Improved financial control: Highlights areas for stronger internal processes and better management.
Overall, statutory audits contribute to sound corporate governance and improved reputation in the marketplace.
11. How often is a statutory audit conducted?
The frequency of a statutory audit is usually defined by local laws and regulations. For most companies that require it, a statutory audit is conducted annually. This regular audit schedule ensures that the company’s financial statements remain transparent and compliant with statutory requirements each fiscal year. Annual audits also provide timely feedback to management and stakeholders regarding the financial health and internal control environment of the organization.
12. How does a statutory audit improve financial transparency?
A statutory audit enhances financial transparency by providing an independent review of a company’s accounting records and financial statements. The statutory auditor verifies that the information disclosed is accurate, complete, and prepared according to legal standards. This process reduces the risk of errors or fraud and ensures that all stakeholders receive trustworthy financial information. The improvement in transparency strengthens stakeholder trust and aids in making informed financial decisions.
