In India, the laws pertaining to Statutory Audit are prescribed under the Companies Act, 2013. In general terms, it is an audit of the Financial Statements of the Company, i.e., the Balance Sheet and Profit & Loss Account. It is mandatory to conduct a statutory audit, and it has to be performed by an Independent Chartered Accountant if a business meets certain criteria. Thereafter, a report is to be prepared by the Auditor stating the facts, opinion, adverse remarks, and disclaimers of information (if any) observed in the format prescribed by the regulator. An Independent Auditor means the auditor should not have any relation with the auditee (the company in which the audit is required to be performed).
Types of Statutory Audit
1. Tax Audit
A Tax Audit is an examination of Tax Records under the Income Tax Act, 1961. It is an evaluation of the business or tax returns of individuals by the state tax authority.
2. Company Audit
A Company Audit means verification of Financial Statements, i.e., the Balance Sheet, Profit or Loss Account, Income and Expenditure Statement, and Cash Flow Statement of the auditee company. It is required to be conducted at the end of every financial year.
Objectives of Statutory Audit
The objective of a Statutory Audit can be categorized into Primary Objectives and Subsidiary Objectives.
Primary Objectives of Statutory Audit
- Examination of the financial statements of the company.
- Evaluation of arithmetical accuracy of books of accounts, including verification of casting, posting, balancing, etc.
- Confirmation of the appropriate distinction between revenue and capital nature of transactions.
- Verification of the authenticity and validation of transactions.
- Confirmation of the value of assets and liabilities.
- Presentation of a correct and fair picture of operating results via the Income Statement and Balance Sheet.
- Confirmation of proper appropriation of funds.
Subsidiary Objectives of Statutory Audit
- Detection and deterrence of errors
- Detection and deterrence of frauds
Tests under Statutory Audit Procedure
An auditor has to carry out an array of tests to complete the Statutory Audit in compliance with government rules & regulations. This process starts with confirming the internal working environment of the company in consonance with industry standards and ends with the examination of financial accounts and balances.
Evaluation of Operating Environment
An auditor evaluates whether or not internal practices of the organization are in harmony with industry guidelines & regulatory benchmarks and that the practices are ethical.
Evaluation of Operating Controls
An auditor examines the operating controls of the business entity by communicating with industry consultants, employees, external auditors or by reviewing industry publications and audit reports of previous years.
Evaluation of Controls
An auditor evaluates whether the corporation executes and controls operating mechanisms for prevention of fraud or error, following the industry standards and regulatory guidelines.
Examination of Account Balances
An auditor examines the account balances to confirm the authenticity & validation of financial reports along with their compliance with regulatory standards, statutory principles, and industry practices.
Examination of Account Details
An auditor evaluates the accounts and balances available with a bank, insurance company, or financial institute to ensure that the balances and corporate financial statements are accurate and fair.
Crucial Takeaways
- A Statutory Audit is a legal requirement to check the accuracy of a company's financial statements & records.
- A Statutory Audit examines the records held by a business entity, government entity, or individual, involving financial analysis.
- The Statutory Audit confirms the proper management of funds and the accuracy of filings.
- A Statutory Audit applies to firms, including banks, public companies, brokerage & investment firms, and insurance companies.
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Process of Statutory Audit
The whole process of Statutory Audit can be divided into the following steps:
1. Review
- The auditor should obtain a deep understanding of the business, Financial Statements, and books of accounts prepared by the business, along with its internal controls.
2. Statutory Audit
- In the next step, the auditor will verify the Financial Statements of the auditee on a sample basis.
- The important aspect of any audit is to create a sample audit.
3. Reporting
- Based on the data and information collected from various procedures, the auditor will prepare a report.
- The report will express an opinion on the Financial Statements based on audit evidence, portraying a true and fair view of the financial position.
- The report will state whether the financial statements prepared by the management are free from material misstatements.
Types of Audit Opinion
1. Modified Opinion
A Modified Report means that financial statements are materially misstated. This report can be of three types:
- Qualified Opinion: Given when an auditor finds that financial statements are not prepared according to GAAP standards.
- Adverse Opinion: This is the worst type of audit report. It states that the financial statements are materially misstated and do not present a true and fair view.
- Disclaimer of Opinion: This occurs when the auditor is unable to express an opinion on the financial statements due to insufficient evidence.
2. Unmodified Opinion
- This is a clear audit opinion, stating that the Financial Statements are free from any material misstatement.
Who Is Eligible to be Appointed as a Statutory Auditor?
As per Section 141 of the Companies Act, 2013, the Statutory Auditor of a company should be a Chartered Accountant practicing in India. In the case of an auditee firm, the maximum number of partners in such a firm should be Chartered Accountants practicing in India.
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