Statutory Audit

STATUTORY AUDITS:

Description: A statutory audit is a mandatory audit of a company’s financial records by an external entity. This audit is mandated by statute or law that governs an organization’s principles and ethics.

In general, a statutory audit is conducted by examining bank accounts, financial statements, transactions, bookkeeping records, ledgers, and other critical documents that are submitted for tax purposes and Govt requirements. But it can also include business operations-related documents such as invoices, purchase orders, bills, challans, and more.

Checklist of companies require Statutory audits:

• Banks or investment firms
• Insurance companies
• Brokerage firms
• Public companies

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 fulfil a certain condition related to annual turnover and capital infusion.

Procedure for statutory audit:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Advantages of Statutory Audit:

• It increases the authenticity and credibility of financial statements as an independent party, i.e., the auditor is verifying the financial statements.
• It confirms that management has taken due care while delivering their responsibilities.
• It also states compliance with the non-statutory requirements like corporate governance etc.
• The auditor also comments on the strength of the organization’s internal control and internal checks among the departments or segments. He also suggests the area where internal control is weak and prone to risk. It helps the company mitigate the risk and results in the improvement of the company’s performance
• On producing financial statements audited by an independent auditor, loans are easy, as the audited statements are more reliable and authentic. The financial statement of the small company for whom audit might not be applicable gets more value if audited. With the help of the audited financial statements, it becomes easier for companies to get banking loans and other facilities.