To make sure that businesses adhere to all rules and regulations, there are multiple audits and various auditing procedures in place in both firms and across a range of entities. This is done by the organisations' internal staff. Internal audits are this category of audit. The rest, however, are handled by independent auditors, or chartered accountants hired specifically for the job.
These could be audits of laws, audits of the GST, etc. When an organization's turnover exceeds a predetermined threshold, these audits typically occur. Internal audit reports are primarily written for management, which is a significant distinction between internal and external audits. The external audit report, in contrast, is intended for shareholders and government officials.
A Statutory Audit is what?
To determine whether the records and financial statements are accurate, a chartered accountant performs a statutory audit. A statutory audit looks at financial statements, ledgers, bank accounts, other papers, and bookkeeping records. However, it can also include business-related documents like challan, bills, purchase orders, invoices, and more.
A statutory audit's main objective is to determine if a company displays its financial status in a fair and accurate manner. All public and private limited businesses are required by law (or statute), in accordance with the Companies Act 2013 and the Companies (Audit and Auditors) Rules, 2014, to carry out a statutory audit of the financial filings.
What is the Process of Statutory Audit?
The term "statutory audit" refers to an audit that is required by law. A statute is a rule or law passed by the legislative branches of the government. These laws are passed at a variety of levels, including the state, the federal government, and local governments. The audit entails a thorough examination of the organization's financial records as well as other data. It is an examination of the records of the entities by various people, governmental organization's, etc. A statutory audit makes sure that the financial statements of the organization present a true and fair picture. The organization is free of fraud.
Statutory audits are not required for all firms. All public businesses, investment firms, brokerage firms, banks, and insurance organization's are investigated by auditors. For some non-profit organization's, statutory audits are also required. Small businesses are typically excluded from this rule. A corporation must meet certain requirements, such as having less than 50 employees and being a specified size, in order to be excluded from an audit.
Various Forms of Statutory Audit
The following categories of statutory audits are recognized under the Companies Act of 2013 and the Companies (Audit and Auditors) Rules, 2014, but are not limited to:
Billing and metering audit Telecom Regulatory Authority of India Financial Audit Companies Act 2013- Section 139 Cost Audit Companies Act 2013- Section 148 Secretarial Audit Companies Act 2013- Section 208 (TRAI)
Tax Audit Section 44AB of the Income Tax Act of 1961
National Health Mission concurrent audit and internal audit
Financial audits of banks, trusts, partnership firms, HUFs, cooperative societies, LLPs, insurance companies, etc.
Branch audits, stock audits, concurrent audits, etc. under Section 35(5) of the GST Audit under the CGST Act 2017.
Credit rating agencies and stock brokers were audited under the Banking Act.
Securities and Exchange Board of India (SEBI)
NSDL, the National Securities Depository Limited, conducts concurrent and internal audits of its depository activities.
Evaluation of Cooperative Societies' Performance
The Cooperative Societies Act.
Procedure for Statutory Audits
The diversified statutory audit process involves understanding the controls and operational environment of a corporate entity. The steps that must be taken as part of the statutory audit process are as follows:
1. Getting to know the entity and its operating environment.
To check for ethics, the auditor looks at the regulatory and industry norms. The statutory audit system includes surveys, checklists, questionnaires, and official notices.
2. Educating Oneself about Internal Control Systems
Asking employees or even external auditors can help an auditor understand how well-controlled an entity's activities are. The auditor can learn about operation control just by reading trade magazines or audit reports and working papers from the prior year.
3. Examining the controls' operational efficacy
The statutory audit process includes operational measures for fraud or error prevention as well as professional evaluation of business practices by regulatory auditors. Then they consent to the norms and business procedures of the regulators. These operational controls are sufficient, correctly implemented, understood by all personnel involved in the process, and they are also audited.
4. Examining the Balances of the Accounts
Account balances are reviewed to determine whether financial reports adhere to legal requirements, regulatory standards, and industry norms and are error-free.
5. Testing Account Information
Following that, the auditor performs tests of accounts and balances on the account balances of a bank, insurance company, or hedge fund to make sure the audited statutory financial statements are accurate and complete.
The Goals of an Audit
Audits of financial statements, including statutory audits, give auditors the chance to go through financial statements created by firm management and give their assessment on whether they adhere to applicable financial reporting standards. An audit of a company's financial records by an outside party is required. A statute or law that regulates business ethics and principles requires this audit.
The following are the goals to be attained:
Mistake detection and avoidance
Fraud detection and prevention
Principles made in error
What Are the Benefits of a Statutory Audit?
The following are some significant benefits of the statutory audit:
As the auditor correctly validates the statements, the financial reports become more authentic.
It assists in enhancing management's ability to carry out their duties effectively.
Because the financial reports are accurate and free of errors, fraud, misrepresentation, and mistakes, the organization's reputation is enhanced.
Reduce the possibility of fraud in an organization.
Because there are no errors, fraud, misrepresentations, or inaccuracies in the financial reports, the organization's reputation is enhanced.
Gaining the confidence of shareholders, banks, and the government is beneficial.
If internal controls are there and functioning properly or not, the auditor makes a comment on them. He also provides the company with advice regarding the areas where internal control is lax and risk is higher.
Even though some small businesses may not need to be audited, if they do so, it will help them maintain robust processes and make it simpler for them to secure bank loans and other services.
The drawbacks of statutory audits
These are a few of the statutory audit's significant drawbacks:
The audit report's precision could be impacted by sampling.
The quality of the audit could be impacted if there are any conflicts of interest among the audit team.
In the case of statutory audits, outsourcing raises the price because audit reports are unquestionably expensive.
Error may be possible when evidence is limited.
Using novice audit personnel
The accuracy of the audit may occasionally be impacted by time constraints.
A sampling-based audit is conducted by the auditor since a thorough review cannot be performed. This means that they are only able to provide a reasonable assurance; they cannot provide perfect confidence.
The auditor's judgment is crucial to many aspects of an audit. Individual differences may exist.
A statutory audit is one that is mandated by the law or rules. It aids the auditors' ability to express a judgment on whether the financial statements accurately and fairly depict the situation within the organization. An audit is conducted by someone outside of the organization, typically a Chartered Accountant, which enhances the reliability of the financial statements. It can be used by numerous users for a variety of objectives.
Based on additional information they gathered while conducting their audit, the auditor creates an audit report. By doing so, the organization's fraud risk is reduced, and multiple organizations' systems and business processes are also improved.
FREQUENTLY ASKED QUESTIONS:
1. How long can a statutory auditor are appointed for?
The position belongs to the next auditor, or the one chosen for a certain class of companies after the first auditor. An auditor may be re-appointed after a 5-year absence for a single term of 5 years, followed by a 5-year cooling-off period.
2. when it comes to the auditing process, what do you mean by audit trail?
For effective verification to take place, an audit trail means comparing the transaction to its source data.
3. Is a statutory audit required for an OPC?
An OPC must appoint a statutory auditor for five years using form ADT-1 because an OPC must conduct a statutory audit within 15 days of the first Annual General Meeting.
4. How do authorities carry out a statutory audit?
Sending surveys, questionnaires, checklists, and official notices are all part of the statutory audit process.
Understanding Controls: An auditor can learn about an organization's operational controls through speaking with workers or even external auditors.
5. Is statutory audit an internal or external process?
A chartered accountant hired specifically for the organization's needs conducts the external audit. Unattached to the organisation, such a person.
6. Why is it necessary to conduct a statutory audit?
In order to determine if a company is giving an honest and accurate picture of its financial situation, a statutory audit examines data such as bank balances, financial transactions, and accounting records.
7. Is conducting a statutory audit necessary?
All businesses are required to conduct the statutory audit. Every organization registered as a Public Limited Company or Private Limited is required by the Companies Act to have an annual audit performed on its financial records.
8. What is required for the statutory audit?
The auditor should make sure the company pays all of its statutory obligations to the government on time, including GST, Income Tax, Customs Duty, Wealth Tax, PF, etc.
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