Statutory Audit: Definition, Objectives & Examples

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Statutory Audit: Definition, Objectives & Examples

A statutory audit is a mandatory requirement by the law, since it ensures that a company’s book of accounts is true and fair. A statutory audit is generally referred to as a ‘financial audit’. 

The Companies Act, 2013 necessitates all the companies registered under the act to undergo a statutory audit on an annual basis. The audit must be conducted by a qualified CA (auditor), who is registered with Institute of Chartered Accountants of India (ICAI). 

In this article, we will discuss statutory audit: definition, objectives & examples.

What is Statutory Audit?

Put simply, statutory audit is an independent assessment of a company or institution’s financial accounts. This is why statutory audit is generally known as a ‘financial audit’. The role of the auditor is to report on whether an organization’s financial statements are true and fair, and are in accordance with all the relevant guidelines as well as the legislations. 

Being subject to a statutory audit does not mean that a company or institution is under the lens of the government for wrongdoing. It is basically a legal formality for preventing wrongdoing, such as misappropriation of funds, from taking place by ensuring an examination is done on an annual basis for various records by a qualified CA (auditor). As they say, prevention is better than cure.

If a company fails to adhere to the rules associated with the statutory audit, it is liable to be penalized by the law. Due to this, it is important to take the process of statutory audit seriously.

Objectives of Statutory Audit

To understand what a statutory audit is more clearly, let’s take a look at its objectives:

• To identify and prevent any errors
• To identify and prevent fraudulent activities
• To address any clerical errors
• To manage the compensating errors
• To resolve errors of principles

Examples of Statutory Audits

Let’s understand the statutory audit further by taking an example:

Many state laws make it mandatory for all the municipalities to submit a statutory audit on an annual basis. This may require examination of all accounts and financial statements, and making the results of such an examination publicly available. The intention here is to hold the local government accountable for how the money acquired from the taxpayers is utilized. 

Government agencies actively participate in the audits on a regular basis as the same helps to ensure any funds which have been handed out by the larger governmental entities of state level have been utilized in an appropriate manner and in accordance with the associated rules and legislations for their use.

It is normal for the international entities to have some foreign governments which require access to the statutory audit’s results. Let’s assume that ABC Corp. is based in Europe but has an operating branch located in Asia. It may be a legal requirement in an Asian country to have a statutory audit on such a company’s business units.

Types of Audit

Mentioned below are the types of audits that exist in India (but are not limited to) as per the Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014:

• Financial Audit
• Secretarial Audit
• Billing & Metering Audit
• Tax Audit
• Concurrent Audit/Internal Audit
• GST Audit
• Cost Audit
• Audit of Credit Rating Agencies and Stock Brokers
• Concurrent & Internal audit for depository operations
• Performance Audit of Cooperative Societies
• Branch Audit, Stock Audit, Concurrent Audit, etc.

Due Date for Statutory Audit under Companies Act, 2013

Statutory audit under the Companies Act, 2013, is conducted every year and must mandatorily be completed within 6 months from the financial year’s end. For instance, if a company’s financial year ends on 31st March, the statutory audit must be conducted and completed by 30th September of the same year.

Legal Consequences of Not Conducting Statutory Audit

If a company fails to conduct a statutory audit under the Companies Act, 2013, it will have to face legal consequences, such as fines and penalties which can be heavy on the pockets of the stakeholders of the company.

Also, the auditor must comply with the audit obligations while conducting the statutory audit. Failure of compliance with such obligations would result in imposition of fine or penalties on such an auditor.

Let’s take a look at the fines and penalties which can be imposed for not conducting a statutory audit:

• Fine imposed on the company: As per the Section 147 of the Companies Act, 2013, if a company fails to conduct a statutory audit for its financial statements, it is liable to pay a fine which can range from Rs. 25,000 to Rs. 5 lakhs.
• Fine imposed on the auditor: Auditors are subject to fines stated under Section 147 in case of non-compliance with the audit obligations which can range from Rs. 25,000 to Rs. 5 lakhs.

Thus, it is necessary for the companies to conduct a statutory audit to avoid legal consequences. It is also necessary for the auditor to conduct the auditing process in accordance with the audit standards to avoid any fines or penalties.

Provisions Regarding Statutory Auditor

Mentioned below are the provisions regarding the auditor as per the sections 139 - 147 of the Companies Act 2013. 

• The right to access all the financial records, books and information of the company is granted to the statutory auditor with unrestricted availability. In addition to this, they are authorized to request any further information deemed necessary for the audit. 
• The duty of composition of the auditor’s report lies with the auditor only. Such a report must clearly state whether a company’s financial statements represent its financial status and affairs in an accurate and truthful manner
• In case the report issued by the auditor indicates that the financial statements are inaccurate and not fairly represented, a clear reason must be provided for the same.
• If any fraudulent activities are identified by the auditor amidst the auditing process, they are obligated to report the same to the relevant authorities of the central government.
• At the time of the auditing process and the subsequent provision of the Audit Report, the auditor must strictly adhere to the auditing standards as per the Companies Act, 2013 and also comply with the ICAI’s guidelines.

Conclusion

Statutory audit plays an essential role in upholding an organization’s financial integrity and accountability. An auditor is responsible for issuing a report on whether an organization’s financial statements are true and fair, and are in accordance with all the relevant guidelines as well as the legislations. The right to access all the financial records, books and information of the company is granted to the statutory auditor with unrestricted availability. In addition to this, they are authorized to request any further information deemed necessary for the audit. In case any fraud is identified by the auditor, they must report it to the relevant authorities of the central government.

A statutory audit is a legal formality for preventing misappropriation of funds from taking place by ensuring an examination is done on an annual basis for various records. Need assistance in an audit for your company? Get in touch with Registrationwala. 

Frequently Asked Questions (FAQs)

Q1. What are the different kinds of reports which a statutory auditor is authorized to issue?

A. A statutory auditor is authorized for the issuance of a qualified report, unqualified report, disclaimer of opinion report or an adverse audit report after the auditing process has been completed.

Q2. Can the management of a company or an institution alter/change the statutory audit report?

A. No, the management is not permitted to change or alter the statutory audit report. The statutory audit report is based on the external auditor’s opinion and cannot be altered by the management due to any reason.

Q3. Is it possible for the statutory auditor to resign before providing the audit report?

A. Yes, the statutory auditor may resign before issuing the audit report if: (i) they are not able to form an opinion on the company or institution’s financial statements, (ii) are limited in their scope of operations or (iii) unable to complete the audit owing to personal reasons. In order to resign, they can provide a letter of resignation to the company or institution’s management which mentions the cause of resignation.

Q4. Can an internal auditor of a company or an institution be the statutory auditor as well?

A. No, an internal auditor of a company or an institution cannot be a statutory auditor. As a legal requirement, the statutory auditor must be an independent auditor for conducting the statutory audit.

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