Auditing plays a crucial role in keeping a tab on various operations within an organisation. Different audits are conducted based on internal and external requirements. For example, financial audits are done to ensure that the financial data recorded is as per the industry norms and there are no discrepancies in records. An organisation might conduct this audit internally and fix all existing problems. However, external audits, such as statutory audit, is a mandatory process that is legally required. The main objective behind conducting such audits is to verify whether the information provided by the business is accurate or not. Read on to learn more about statutory audits and their importance.
Understanding statutory audits
A statutory audit is an external audit where an independent auditor or entity officially inspects a company’s financial records. It gives an accurate picture of a business’s financial well-being and identifies any existing discrepancies. Critical financial information is reviewed, including bank balances, bookkeeping records, financial transactions, profit and loss statements, balance sheets, etc. There is nothing wrong with being subject to statutory audits. Publicly listed companies have to go through statutory audits necessarily. In addition, all banks, investment banking and insurance firms are subject to statutory audits.
How does a statutory audit function?
Now that we have a fair understanding of what a statutory audit entails, let’s dive into how it takes place. The term ‘Statutory’ holds a special meaning. It means that the audit is required as per the statute or law. Financial statements, return on investments, expenditures, and other monetary elements are reviewed during a statutory audit. The main objective is to learn about the management of funds, accuracy of records, filing status, etc.
Statutory auditors are also responsible for reviewing the organisation’s internal auditing guidelines and accounting principles. In addition, they have the authority to conduct inquiries, and reviews, prepare questionnaires and receive official confirmations from creditors and debtors. Statutory audits are kept in place by the authorities to limit fraudulent activities and ensure that key stakeholders’ interests are protected.
Who can conduct a statutory audit?
Statutory audit is an external audit process, so internal auditors employed by the organisation cannot partake in this process. The law states that a statutory audit can only be conducted by an independent chartered accountant or a firm of chartered accountants, LLPs (with majority partners practising in India), who have the required qualifications to conduct the audit. The Companies Act 2013 has also offered a list of people disqualified from conducting statutory audits. Let’s take a quick look into who cannot perform the statutory audits.
- A company employee or officer
- Any person who’s a relative/partner/employee of the organisation’s employee
- A corporate body other than LLP registered under the Limited Liabilities Partnership Act (2008)
- An individual convicted by the court of law
Please note that there can be other exceptions as well, in addition to the ones mentioned above.
Key advantages of conducting a statutory audit
A positive statutory report can work in favour of the organisation. It can boost the confidence of stakeholders and might attract new investors. Let’s dive into some crucial advantages of conducting a statutory audit.
- A statutory audit helps ensure transparency and establishes the authenticity of financial records.
- The upper management of the company is responsible for addressing shareholders’ concerns. A spotless statutory audit report can help them boost the shareholder’s confidence.
- Conducting statutory audits curbs malpractices and leaves no room for errors in financial records. As a result, people are more accountable and liable for their work.
- Conducting statutory audits is a mandatory part of the compliance process for many organisations. Statutory audit services can help you save a lot of time and money.
Consequences of not complying with statutory audit provisions
A statutory audit is mandatory for most companies that fall under the listed criteria. Not complying with the provisions of statutory audits can have grave consequences for the organisation. Companies that are required to conduct statutory audits but fail are liable to pay a fine between INR 25,000 to INR 5,00,000. The auditor failing to comply with the statutory audit provisions is liable to pay a fine between INR 1 and 25 lakhs. It can also include a jail term of up to 12 months. You can always opt for statutory audit services from reputed providers to avoid these legal and financial troubles.