If you’re planning to run a business in India, then whether you like it or not, you should also know about all the boring tasks that come with it. Audit reporting is one of them. What is auditing? It’s the official financial inspection of a business. That business can be anything from company to sole proprietorship to partnerships.
There are different types of audits in India. For foreign directors, knowing about them is important if they want to establish a foothold in the Indian market. In this post, we are going to discuss about these audit types in a ‘non- boring way’, if it’s possible.
Classification of audit types in India
There are many audit types in India, and all of them can be categorized into the following:
- Statutory audit:
- Statutory audits are conducted by the Indian government to check the financial state of the company/business. Qualified auditors, working as external or independent parties, take up the task of statutory audit. The Statutory audit report is made as per the directions and forms provided by the government.
- Internal audit:
- A company/business conducts an internal audit to check up on the financial health of the company. Internal audit is conducted by the internal staff or an independent contractor.
Statutory Audit types in India
There are two common types of statutory audits that a company has to conduct each financial (fiscal year). They are as follows:
- Tax audits:
- Required under the Section 44AM of India’s Tax Act 1967, the tax audit is mandatory for every business with an annual turnover of over INR 1 Crore and for every professional who is earning more than INR 50 lakhs per year.
Tax audit report has to be filed in the prescribed format by September 30 after the end of the previous financial year. If the required person or the business fails to file that report, they have to face a penalty equal to 0.5 percent of turnover.
- Company audits:
- The details and provisions of company audits are explained in detail in the Companies Act, 2013. They state that every company, irrespective of its annual turnover or business type, has to get its financial accounts audited by a qualified professional (auditor).
As per the company laws, you can appoint an auditor for the duration of 6 annual general meetings. If you are a partnership/sole proprietorship, you can’t have the same auditor for more than two terms.
Internal Audit Types in India
There are several types of internal audits. So many in fact, that picking the most important among them is difficult. Therefore, let us give a brief introduction of some of the most common audit types of internal audit:
- Operational Audit: Operational audit is conducted to evaluate the efficiency of a particular aspect, function or department of a business. It doesn’t always require financial data, but the information about whether the department/function/aspect is performing its tasks properly or not.
- Compliance audit: There are many types of compliances that a company or any other type of business has to follow to stay in business. The compliance audit is therefore done to check whether the company/partnership/sole proprietorship is following the rules and regulations set up by the government.
- Financial audit: Financial audit is conducted to check the fairness, accuracy and reliability of the financial data. There are several companies that falsify their financial information to get a better PR. Financial auditing ensures that such fraudulent tactics don’t happen. Because accuracy and fairness are needed, independent contractors take up the task to conduct unbiased financial auditing.
- Investigative Auditing: Investigative audit takes place when there is some suspicious activity in the business entity’s finances. In other words, it’s done if something there is something wrong in the financial details of the business. Another reason to do investigative audit is to assess the risk factors of the business.
- Management Audit: management audit is done by independent contractors who provide insight of the management structure of the business. Similar to operational audit, management audit is done to check the performance of business as a whole.
Auditing is a process to check the financial and legal health of the business. At hindsight, it’s a boring task. Nevertheless, it’s necessary to ensure that your company stays afloat, both in the eyes of the Indian government, and the people.