What are the Practical Steps in a Statutory Audit
Auditing

What are the Practical Steps in a Statutory Audit?

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In India, a statutory audit has to be conducted to inspect a company’s financial records. The financial records of the companies are expected to give a true and fair view of the financial condition of the company. Therefore, statutory audits can play an important role in transparency and compliance with financial reporting by companies that attain thresholds set in this law.

This article deals with the practical steps for carrying out statutory audit in India from the time when an independent auditor is appointed till the final audit report is submitted.

Introduction

The audit provides an important tool to review the compliance and operations of organizations along with the company’s financial records. Various categories of audits may be conducted in the organizations for different purposes, like tax audits verifying taxable revenue and claimed deductions, cost audits examining the costs and expenses attributed to running a business, and, above all, statutory audits to check compliance with the Companies Act.

The audits like tax audits and cost audits are conducted by the professionals, while as mandated under Companies Act of 2013, statutory audits are done by an independent auditor appointed by the company itself.

About Statutory Audit

Statutory audit means the auditing of financial statements provided by the Companies Act, 2013, where all the threshold criteria are met, mandating a company to get its financial statements audited. Threshold criteria normally involve aspects based on turnover, assets, or listing status. The statutory audit is indeed an annual necessity.

An audit is an evaluation of the business financial records to analyses if the financial reports reflect the organization’s financial health & performance, and, in this process, check if all the applicable laws & regulations and accounting standards have been followed for safeguarding stakeholders’ interest.

The purpose of this audit is to confirm the correctness and non-manipulation of the data disclosed in that specific company’s financial statements so that it meets the requirements of Indian Accounting Standards and other related regulations.

Internal Audit and Statutory Audit

An internal audit is an organizational structure of a company that has the mandate of offering independent reports concerning the organization’s systems and processes. Such audits may be conducted by employees within the organization, using in-house resources and company standards.  However, a statutory audit is mandatory by law or statute as an audit is required to ascertain the truth and fairness of the book of accounts, either under the Companies Act or the Income Tax Act.

Even statutory and internal audit are different with each other. Statutory audit is done every year and should be finished within 6 months from end of financial year; however, the concern of internal audit is done with an aim for fraud detection and errors prevention.

While the internal audit is done by the company employees, the statutory audit is done by a practising chartered accountant.

The former is appointed by the shareholders in the annual general meeting while the latter is appointed by the company’s management.

How to Conduct a Statutory Audit?

The statutory audits commence once the business is incorporated. Every private company or public company registered under the Act must undergo statutory audits of the financial filings and documents.

The various steps involved in the process of Statutory audit of the company are as follows: –

  1. Appointment of an auditor- The first process of statutory audit involves nominating an independent auditor who should not hold direct financial stake in the company; he should be qualified as per ICAI norm. The appointed auditor will serve a term of five years, subject to renewal, and can be reappointed in subsequent Annual General Meetings. Once a company appoints an auditor, then within 15 days from the date of the appointment this detail must be dispatched to the Registrar of Companies. Failure to do this may bring penalties on the company and its officers.
  2. Auditing planning- Before conducting the audit, the auditor intends on the nature and purpose of the going-concern audit. It may also contain, for instance, essential organization knowledge, recognizing hazards, and developing a special audit plan.
  3. Conducting a Risk Assessment- While carrying out the risk assessment, the auditor especially identifies those parts of the internal control structure that seem to need the most attention, as well as those accounts which are likely to contain material mistakes. It sharpens the review where the higher risks are likely to be realized and gives a more precise focus towards them.
  4. Audit Testing- This stage involves very significant procedures, including analytical review and verification of account balances, transactions, and supporting documents. Such procedures help gather adequate audit evidence to support claims in the financial statements.
  5. Regulatory & Compliance assessment – A statutory audit also checks for the level of compliance that an organization holds against laws and rules. An auditor looks for compliance with tax law and company rules and rules specific to the industry for such companies that are regulated by special regulatory groups, e.g. banks or insurance companies, or quoted on a stock exchange besides the extra rules laid down by groups like Reserve Bank of India or SEBI.
  6. Internal control checking – one element of a statutory audit is checking how well an organization manages its system of internal control. The auditor checks the internal control’s design and its working. This helps to find problems, recommend fixes, and lower the chance of fraud and mistakes.
  7. Audit findings and reporting-audit; At the end of audit process, the auditor produces a report that outlines findings such as material issues, control or non-compliance detection. These findings are then documented in a test report and presented to company management, the board of directors, and shareholders. Sometimes, the auditors may recommend ways and means of enhancing the organization’s accounting systems,/compliance,/risk management programs, etc. The Auditor must discuss any major problems directly with management, such as tax liabilities or non-compliance with regulatory requirements.
  8. Follow-up Actions- Management is responsible for the action plan and the subsequent action that is, the actual implementation of the auditor’s recommendations and or other corrective actions that the auditor considers necessary after issuing the audit report.
  9. Final Audit Report and Submission- The final report of this statutory audit is issued under section 143 of the Companies Act 2013, and submission means completion of the audit. The audit report contains the auditor’s impression in regard to the necessity to endorse the production of main financial statements which could also encompass four forms: Unqualified i.e clean; Qualified; Adverse; or Disclaimer of opinion where an auditor cannot form an opinion based on insufficient evidence. The audit report must be sent to the shareholders at the AGM and this has to be filed with the MCA. It has also to be sent within one month of the Annual General Meeting to the Registrar of Companies.
  10. Continual Improvement- While regulatory audits may be conducted once in a while, they are an important addition to the organizational financial performance and responsibility. Performances of audits of an organization should be used as a reference for improvement of the financial reporting system. It means that organizations have to learn from previous audits, therefore, should draw lessons on the preparation process of financial reporting.

Outcome of Audit Report

Audit Reports are essential documents for a company.  For public listed companies, the opinion of the auditor is of utmost importance since it determines investor confidence and monitors them by the regulators.

The recommendation of an auditor with a qualified or adverse opinion normally leads to further investigation and validation by the regulators such as SEBI, Securities Exchange Board of India. An unqualified opinion in an audit simply means that the financial reporting of the company seems to be reliable.

Impacts of failure in conducting Statutory audit

If the organization fails to conduct statutory audit under Companies Act 2013, it leads to invoke immense legal consequences. for instance, hefty fines and penalties imposed on auditors or companies.

Every organization need to ensure that they are not in violation of these rules and avoid any legal measures against them.  The categories of fines are as follows-

  • Fines for Companies– As prescribed in section 147 of the Companies Act, in case any company is liable for violation under mandatory auditing of company reports, the company is penalized with fines of amount ranging anywhere between Rs 25000 to Rs 500000.
  • Fines for Auditors- In case any auditor fails to fulfill his audit duties or acts in contravention of law, he will have to pay the fine that may be imposed between Rs 25,000 to Rs 5 lakhs.
  • Continuity of Non-Compliance-This means, for instance, a daily penalty is levied on companies and auditors in the case of non-compliance until compliance is recorded. The quantum of the daily penalty could be from five hundred to five thousand rupees.

Conclusion

The statutory audit process ensures transparency and accountability while bringing the legal provisions into practice in India. This audit act as a very important tool to allow the companies to present an accurate picture of their financial health. From the appointment of the auditor up to the final report, all these steps ensured legal compliance of the company along with the requirement of Indian Accounting Standards.

It is more of a vehicle of good corporate governance for companies, not just a compliance law. An audit helps businesses determine the risks they face, and in so doing, enhances the internal processes to make the company comply with the regulatory framework.

Bibliography

The Companies Act of 2013 (Act No. 18 of 2013)

The Companies (Audit and Auditors) Rules, 2014

https://www.mca.gov.in/

https://www.icai.org/

https://www.icsi.edu/home/

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About author
Advocate by profession, currently pursuing an LL.M. from the University of Delhi, and an experienced legal writer. I have contributed to the publication of books, magazines, and online platforms, delivering high-quality, well-researched legal content. My expertise lies in simplifying complex legal concepts and crafting clear, engaging content for diverse audiences.
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