Statutory Audit Meaning
Statutory audit, also known as financial audit, is one of the main types of audit which is to be done as per the statutes applicable to the entity. Its primary purpose is to gather all relevant information so that the auditor can give his opinion on the true and fair view of the company’s financial position as on the balance sheet date.
The purpose of the statutory audit is that the auditor gives his view independently without being influenced in any manner. He will check the financial records and provide opinion thereon in the audit report. It helps the stakeholders to rely on financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.. Stakeholders, other than shareholders, also get benefited from this audit. They can take their call based on the accounts as they are audited and authentic.
Example of Statutory Audit
State law has given instructions to all the municipalities that they should submit their annual accounts duly audited by an auditor. Moreover, the instruction includes that audited statements and reports are made available to the common public. The purpose behind this audit is to check that all the spending is genuine, backed with proper sanction and approval. It makes the local government accountable for the appropriation of money. At the same time, it also cross-checks that the disbursed amount at the federal or state level reaches the lower level, and there is no misappropriation of taxpayers’ money. So, the municipalities are liable for the statutory audit.
Advantages of Statutory Audit
- It increases the authenticity and credibility of financial statements as an independent party, i.e., the auditor is verifying the financial statements.
- It confirms that management has taken due care while delivering their responsibilities.
- It also states regarding compliance with the non-statutory requirements like corporate governance etc.
- The auditor also comments on the strength of the organization’s internal control and internal checks among the departments or segments. He also suggests the area where internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company. is weak and prone to risk. It helps the company to mitigate the risk and results in the improvement of the performance of the company.
- The financial statement of the small company for whom audit might not be applicable get more values if audited. With the help of the audited financial statements, it becomes easier for companies to get banking loans and other types of facilities. On producing financial statements audited by an independent auditor, loans are easy, as the audited statements are more reliable and authentic.
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- The cost associated with an audit can be very high. But an audit firm engaged in looking after the day to day work, including accounts preparation, etc., then it will charge relatively very less amount to conduct the audit as compared with the firm not engaged.
- The employees might get disrupted for performing their regular work to answer the day to day query of auditor or while providing the auditor with any reports or data required to them. It might result in stretching the work of the employees beyond office hours and may sometimes cause distress among the employees.
- The financial statements include judgemental as well as subjective matters. Judgemental issues may vary with persons. Sometimes personal business is also included.
- There are inherent limitations of audits like it has to finish in due time, internal control within the organization, limited power of auditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws., etc. One has to understand that auditors are watchdogs and not the bloodhounds. Their reporting is based on the sample data and not the total data moreover, as frauds are the planned one so it will be more challenging to find.
- There are many areas in which auditors have no other option than to take representation from management. It is a danger if management itself is involved in fraud. In that case, they will give the manipulated image.
- The auditor does not assess and review the 100 % transactions. Auditor merely expresses his opinion on the financial statements and data provided to him and, at no point, gives total assurance.
- An auditor comment upon the going concern of the organization, but nowhere assures for its future viability. Stakeholders should not vest their money by only seeing that the organization is having data audited.
- Applicability of audit to any organization doesn’t state that it is an inherent sign of doing wrong acts. Instead, it is the way that helps in preventing such activities. E.g., like misappropriation of funds by ensuring continuous examination of data, which may be in the scope of other types of audits.
- A statutory auditor can ask for the company’s financial books, records, or information concerning that. It is his right, and the management cannot deny him for the same.
- After doing the entire verification and gathering information, the auditor is supposed to conclude by writing is an audit report based on the various evidence and information on the true and fair view of the financial statements provided to him.
Statutory audit is one of the main types of audits, required legally to review the accuracy of a company or government’s financial accounts. It is conducted to gather different information so that the auditor can give his opinion on the true and fair view of the company’s financial position as on the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. date.
The statutory audit increases the authenticity and credibility of financial statements, as an independent party is verifying the financial statements of the company. After doing the entire verification and gathering information, the auditor will conclude by writing is an audit reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements. based on the various evidence and information on the true and fair view of the financial statements provided to him.
This article has been a guide to what is the Statutory Audit and its Meaning. Here we discuss the example of statutory audit along with advantages and disadvantages. You can learn more about accounting from the following articles –