Statutory Audit

Companies are governed by the Companies Act 2013. This act requires every company registered under the Companies Act 2013 to get there accounts audited. Thus an audit conducted for such a companies that is governed by Company law will be known as a statutory audit.
 
All the regulations set by Companies Act and as well as the generally accepted auditing standards should be abided by while conducting an audit. The applicable accounting standards should also be adhered to. VJM & Associates LLP has years of experience in helping clients conduct statutory audits in a systematic and well planned manner.
Statutory Audit

Know More about Statutory Audit

An audit is an examination of financial records, information and statements and expressing an opinion that whether financial records is prepared in accordance with statute under which audit is carried out. When this audit is governed by a statute or law, it is categorized under statutory audit.To explain, a company is governed by the Companies Act 2013. This act requires every company registered under the Companies Act to get his accounts audited by a practising Chartered Accountant. Thus an audit conducted for such a company that is governed by Company law will be known as a statutory audit. All the regulations set by Companies Act and as well as the generally accepted auditing standards should be abided by while conducting an audit. The applicable accounting standards should also be adhered to.An auditor should be an independent professional and must have expert knowledge of relevant statute. Further, it should be noted that the opinion expressed in the statutory audit should be independent and free of ambiguity. When the statutory audit is to be carried under the law, it has to be carried out according to the scope of audit set by that law.
  1. As per (Standard on Auditing) SA 200 “ Overall objectives of Independent Auditor “ the objective of a statutory auditor while carrying out an audit of any financial statements is as follows :
    • To obtain reasonable assurance about whether the financial statements as a whole are free from any material misstatement; and
    • To report on the financial statements, and communicate as required by the SA’s in accordance with the auditors’ findings
  1. The scope of the statutory audit implies the tasks that are to be done while carrying out an audit. It can also be termed as the responsibilities of a statutory auditor. Following are the various measures undertaken while doing a statutory audit:
    • Identify and examine all the overall aspects that need to be audited of an enterprise pertaining to the financial statements.
    • Auditor need to ascertain correctness, sufficiency and  reliability of the information and source data. For this purpose the auditor should evaluate accounting systems and internal controls.
    • Auditors should determine that Disclosure of overall relevant information in the financial statements has been made in accordance with statute and accounting standards.
    • A detailed study and analysis of internal control and accounting system
    • Verification of accounting transaction and balances through necessary test on check basis, enquiries and verification
    • Financial statements are compared to the summary of transactions and events recorded in the underlying accounts
    • Assessing the consistency of accounting policies that are applied while the financial statements are prepared by the management and also the disclosure to the effect should be adequate
    However, a statutory auditor cannot be held responsible for performing duties outside his scope of the audit. Also, if the constraint of the scope of audit impacts his unqualified opinion he should mention the same as a qualified or disclaimer opinion in his report.
  • The major characteristics covered while doing a statutory audit of the financial statements of an accounts are summarised below:
    • An overall examination of internal controls and system of accounting establishes the satisfaction that recording of transactions is appropriate
    • A review of procedures and system applied by the management to find out material inadequacy or weakness in the internal controls which may lead to fraud and error
    • Verification of arithmetical accuracy in the books of accounts with regards to postings, balances, etc
    • To ascertain if the proper difference is maintained in revenue and capital nature of transactions
    • Also, all the income and expenditure accounted for pertains to corresponding accounting period
    • Checking of supporting documents to establish the validity and authenticity of transactions
    • The financial statements namely balance sheet and profit and loss account or income and expenditure account are compared with the underlying accounts
    • The existence, value, and title of the asset as disclosed in the balance sheet are verified
    • The liabilities as mentioned in the balance sheet are verified
    • The true and fair position of the results in profit and loss account or income and expenditure account is verified
    • All the statutory compliances applicable to the enterprise are complied by the management within the proper time schedule and as per the norms set by the statutory governing body
    • Reporting is done to the pertinent person or body as required
  1. An organisation has multiple stakeholders such as Shareholders, Bankers, Creditors, Customers, Management etc. Financial statements represent the financial position of the company and are used by all the stakeholders to determine credibility of the company. As any error or fraud or misstatement may lead to heavy losses to the stakeholders.Therefore, statutory audit is carried out to determine whether financial statements represent the true and fair view of the state of affairs of the company.To understand the efficiency of the state of affairs which are based on reliable financial statements, conducting the statutory audit is cardinal. Apart from this, there are other advantages also which are briefed as under:
    • The financial interest of the stakeholders who are associated with the company is safeguarded due to the statutory audit
    • The statutory audit refrains and controls the employees from perpetrating embezzlement or defalcations
    • An audited statement of accounts form a base for calculating and settling taxes, for ascertaining the purchase consideration of the enterprise, or for negotiations of loan proposals
    • An audited statement of accounts help in settlement of trade disputes
    • When claims are to be made for damages in case of fire, or any other calamity, only audited financial statements can be considered as reliable and base for calculation
    • Determination of losses and wastage is done by statutory audit. This, in turn, helps to understand the deficiency of internal control measures applied by the management
    • Statutory audit ascertains proper upkeeping of books of accounts and records. The pooling of data also becomes easier
    • Audited financial statements form a base for calculation of settlement of dues at the time of admission and death or retirement of partners
    • Many a time to avail Governmental subsidies, grants, policies, etc it is mandatory to carry out the statutory audit
    • For participating in tenders also it is a prerequisite to carry out the statutory audit
  • Under most of the statutes, A practising Chartered Accountant is qualified to carry out statutory audit such as Audit under Companies Act, 2013, Tax Audit under Income Tax Act, 1961, GST audit under GST law etc. Following role is played by VJM & Associates LLP, Chartered Accountants,  in the coherent, methodical, well organized, systematic conduction of statutory audit:
    • VJM & Associates LLP conducts audits in a systematic and well planned manner keeping in mind all  provisions of corresponding statute and accounting standard. It helps in determining reliability of financial statements. These statements augment the business of the organization.
    • Considering the importance of financial statements, statute has authorised only practising Chartered Accountant to carry out the audit.
    • Client-based solutions instead of stereotype functions
    • A risk-based assessment of embryonic threats to an enterprise is done, to let the management of any enterprise be well prepared for the future in every sense
    • An expert in the field anticipates and arranges for internal control and financial control guidelines as well as audit based for compliances for an enterprise
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FAQs on Statutory Audit

Statutory audit is an audit prescribed and governed by a statute or law. Hence it is a compulsory audit. This audit depends on the constitution of an entity. Every enterprise which is registered under the specific governing body has to follow the regulations as set by the law regarding the audit. 

Thus one can say that statutory audit is a compulsory audit if the governing law states the same. E.g. Companies Act, 2013 requires every company to carry out the statutory audit. Whereas, Limited Liability Partnership Act required audit of an LLP only if turnover of the LLP exceeds INR 40 lacs during a Financial year.

Phrases such as “Statutory Audit” and “tax audit” are not formally used in any statute rather for the purpose of ease of understanding these terms are used. In common parlence, statutory audit is governed by the specific law or statute that governs the entity while tax audit is governed by the Income tax Act. Statutory audit is to be done as and when the relevant law states while tax audit is to be done if the turnover or gross receipts of an entity during the year crosses a specified limit.

Statutory audit is carried out as required by law while the non-statutory audit is carried to determine efficiency of the entity either by the management or any independent party. The focus of the statutory audit is majorly on financial activities while the non-statutory audit may focus on financial aspect or may consider any other aspect such as expenditure audit, Debtors audit, stock audit etc. 

The due date for the statutory audit is decided by the Governing body which prescribes the audit. 

For example, as per Companies Act, 2013, every company is required to hold Annual General Meeting within 6 months from close of the Financial year and Company is required to present its audited financial statement in such AGM for adoption. 

21 days clear notice is required to hold AGM. Accordingly, statutory audit under Companies Act should be carried out to ensure this compliance. Due date for the Tax audit for corporate is 30th September of the following Financial year. However, for FY 2019-20, it is extended to 31st October 2020.

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