written by | May 6, 2022

What is a Statutory Audit? Types, Importance, and Process

There are numerous audits and different audit processes in the companies and different entities to ensure that companies comply with all the laws and regulations. The internal employees of the organisations undertake this. These types of audits are known as internal audits. In contrast, the others are undertaken by separate auditors, i.e. chartered accountants appointed for the same.

These may be statutory audits, GST audits, etc. These audits generally take place when the organisations exceed a certain turnover limit. The major difference between internal and external audits is that the internal audit report is for the management. In contrast, the external audit report is for shareholders and government officials.

Did you know?

All public and private companies need to undergo a statutory audit irrespective of their nature of business or turnover. 

Also Read: What are the Different Types of Audits and Levels of Assurance?

What is the RBI Circular on Statutory Audit?

What is a Statutory Audit?

A statutory audit is an audit that a chartered accountant conducts to decide whether the records and financial statements are correct. A statutory audit examines bookkeeping records, transactions, ledgers, bank accounts, other documents and financial statements. However, it can also comprise documents of commercial operations, such as invoices, purchase orders, bills, challans and more.

The primary goal of a statutory audit is to establish whether an organisation presents its financial condition fairly and truthfully. As per the Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014, all public and private limited companies are mandated by law (or stature) to conduct a statutory audit of the financial documents and filings.

How does Statutory Audit Work?

The meaning of the phrase statutory audit is the mandatory audit as per the laws. A statute is a regulation or law passed by the government's legislatures. These statutes are enacted at different levels, such as the state, central and municipalities. The audit involves a detailed analysis of the organisation's financial information and other data. It is a review of the records of the entities by different individuals, government bodies, etc. A statutory audit ensures that the organisation's financial statements reflect a true and fair view. There are no frauds in the organisation.

Special Considerations

All businesses do not require statutory audits. Public enterprises, investment organisations, brokerage organisations, banks and insurance companies are all subject to audits. Statutory audits are also for certain non-profit organisations. In most cases, small enterprises are exempt. To be excluded from an audit, a company must be of a specific size and have a certain number of employees, usually less than 50.

Also Read: NFRA proposes to exempt compulsory statutory audit for MSMEs

The Types of Statutory Audit

As per the Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014, the following types of statutory audits exist (but are not limited to):

Financial Audit

Companies Act 2013- Section 139

Cost Audit

Companies Act 2013- Section 148

Secretarial Audit

Companies Act 2013- Section 208

Billing & Metering Audit

Telecom Regulatory Authority of India (TRAI)

Tax Audit

Income Tax Act 1961- Section 44AB

Concurrent Audit/Internal Audit

National Health Mission

Financial Audit of Insurance Companies, Partnership firms, HUFs, cooperative societies, LLPs, proprietorships, trusts, banks, etc.

GST Audit

CGST Act 2017- Section 35(5)

Branch Audit, Stock Audit, Concurrent Audit, etc.

Banking Act

Audit of Credit Rating Agencies and Stock Brokers

SEBI - Securities and Exchange Board of India

Concurrent & Internal audit for depository operations

NSDL - National Securities Depository Limited

Performance Audit of Cooperative Societies

Cooperative Societies Act

Statutory Audit Procedure

The statutory audit procedure is diverse, and it comprises an awareness of a corporate entity's working environment and controls. The following are the necessary steps in the statutory audit procedure:

1. Obtaining an Understanding of the Entity and Its Operating Environment 

The auditor examines the industrial standards and regulation criteria to see ethics. Questionnaires, checklists, surveys and formal notifications are part of the statutory audit system.

2. Getting an Understanding of the Internal Control Systems

An auditor can learn about a company entity's operations control by asking workers or even external auditors. Even reading industry publications or previous year's audit reports and working papers will provide the auditor with an understanding of operation control.

3. Testing the Operating Effectiveness of the Controls

Evaluation of business procedures by a professional conducting regulatory audit and operational measures for fraud or error prevention are all part of the statutory audit procedure. Then they agree to the regulators' standards and industrial practices. Those operating controls are adequate, are carried out correctly and are understood by all employees participating in the process, and they are also audited.

4. Reviewing the Account Balances

The review account balances to see if financial reports are error-free and follow regulatory standards, statutory principles and industry practices.

5. Account Details Testing

The auditor then conducts tests of accounts and balances on the account balances of a bank, insurance firm or hedge fund to ensure that the audited statutory financial statements are correct and comprehensive.

The Objectives of an Audit

Financial statement audits, including statutory audits, allow auditors to examine financial statements prepared by company management and express their opinion on whether they are prepared and presented by certain applicable financial reporting standards based on certain auditing standards. It 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.

Following are the objectives to be realised: -

  • Detection and prevention of errors
  • Detection and prevention of fraud
  • Clerical errors
  • Compensating errors
  • Errors of principles

The Advantages of a Statutory Audit

Some of the important advantages of the statutory audit are as follows:

  1. It increases the authenticity of the financial reports as the auditor properly verifies the statements.
  2. It helps to improve the management to perform their job efficiently.
  3. Improves the organisation's reputation because the financial reports are free of errors, fraud, misrepresentation and inaccuracies.
  4. Minimise the risk of fraud in an organisation.
  5. It improves the organisation's reputation because the financial reports are devoid of errors, fraud, misrepresentation and inaccuracies.
  6. It helps to gain the trust of shareholders, banks and the government.
  7. The auditor includes a comment on the organisation's internal control, whether they are there and working efficiently or not. He also advises the organisation about the areas where internal control is weak, and risk is more.
  8. Even though audit might not apply to certain small companies, if they get themselves audited, it helps them keep their systems strong and easily obtain bank loans and other facilities.

Statutory Audit - Disadvantages

Some of the important disadvantages of the statutory audit are as follows:

  1. Due to sampling, the accuracy of the audit report may be affected.
  2. If there is any conflict of interest among the audit personnel, it can affect the quality of the audit.
  3. Audits are undoubtedly costly reports, and in the case of statutory audits, outsourcing increases the cost.
  4. Evidence constraint may lead to the possibility of error.
  5. The hiring of inexperienced audit staff.
  6. In certain cases, time limits may also affect the accuracy of the audit.
  7. The auditor performs an audit on a sampling basis and cannot do 100% checking. Thus, they cannot give absolute assurance; only a reasonable assurance is possible.
  8. Numerous things in an audit depend on the judgment of the auditor. It may vary from person to person.

Conclusion

A statutory audit is an audit that is made necessary by law and regulations. It helps the auditors give their opinion on whether the financial statements reflect a true and fair view of the organisation's state of affairs. Since a person external to the organisation, usually a Chartered Accountant, conducts an audit, it increases the trustworthiness of the financial statements. Many users can rely on it for different purposes.

The auditor prepares an audit report based on other evidence they have obtained during the conduct of their audit. This helps to limit the fraud risk in the organisation and helps improve the different systems and business processes of the various organisations.

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FAQs

Q: Can a statutory auditor be appointed for more than five years?

Ans:

The subsequent auditor, i.e., appointed after the first auditor for a specified class of companies, shall hold the office. For one term of 5 years and then a cooling period of 5 years is to be provided, i.e., an auditor can be re-appointed after a break of 5 years.

Q: What do you mean by audit trail in the audit process?

Ans:

 An audit trail implies checking the transaction from its source data to ensure proper verification can occur.

Q: Is statutory audit compulsory for One Person Company (OPC)?

Ans:

Since an OPC is required to undertake a statutory audit within 15 days of the first Annual General Meeting, an OPC must appoint a statutory auditor for five years using form ADT-1.

Q: How do authorities conduct a statutory audit?

Ans:

Statutory audit procedure includes sending questionnaires, checklists, surveys and formal notifications. 

Understanding Controls: An auditor learns about a business entity's operations control by asking the employees or even external auditors.

Q: Is statutory audit internal or external?

Ans:

It is an external audit performed by a chartered accountant specially appointed for the organisation's purpose. Such a person is independent of the organisation.

Q: Why is a statutory audit required?

Ans:

A statutory audit evaluates information such as bank balances, financial transactions and accounting records to assess whether an organisation provides an honest and accurate portrayal of its financial status.

Q: Is it mandatory to have a statutory audit conducted?

Ans:

The statutory audit is mandatory for all businesses. Under the Companies Act, every organisation registered as a Public Limited Company or Private Limited must get its books audited every year.

Q: What is necessary for the statutory audit?

Ans:

The auditor should ensure that the organisation pays its statutory dues on time to the government, such as GST, Income Tax, customs duty, wealth tax, PF, etc.

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