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 and 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 to Auditor has to give his view independently without being influenced in any manner. He will check the financial records and will give his opinion thereon in the audit report.
- The statutory audit will help the stakeholders to rely on financial statements. Stakeholders other than shareholders also get benefited from the statutory audit as 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, they are also instructed to make the audited statement and report 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. This makes the local government accountable for the appropriation of money. At the same time, it is also cross-checked that the disbursed amount at the federal or state level reaches the lower level and taxpayers’ money is not misappropriated. So, the municipalities are liable for the statutory audit.
Advantages of Statutory Audit
- It increases the authenticity and credibility of financial statements as the financial statements of the company are being verified by an independent party i.e., the auditor.
- It confirms that management has taken due care while delivering their responsibilities.
- It also states regarding the compliance with the non-statutory requirements like corporate governance etc.
- The auditor also comments upon the strength of internal control within the organization along with internal checks among the departments or segments. He also suggests the area where internal control is weak and prone to risk. It helps the company to mitigate the risk and results in 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 it is audited one because with the help of the audited financial statements it becomes easier for the companies to get banking loan and other types of facilities on producing of financial statements which are audited by an independent auditor as the audited statements are more reliable and authentic.
Disadvantages/Limitations of Statutory Audit
- The cost associated with an audit can be very high. But if any audit firm is already engaged for 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 which is not engaged for doing the same.
- The employees might get disrupted for performing their normal work in order to answer the day to day query of auditor or while providing the auditor any reports or data required to them. This 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 matter. Judgemental issues may vary with persons. Sometimes personal business is also included.
- There are inherent limitations of audits like it has to be done in due time, internal control within the organization, limited power of auditor, etc. One has to understand that auditors are watchdogs and not the bloodhounds. There reporting is based on the sample data and not the total data. Moreover, as frauds are the planned one so it will be more difficult to find the same.
- There are many areas in which auditors are left with no other option than to take representation from management. This is a danger if management itself is involved in frauds as in that case they will give the manipulated representation.
- 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 only seeing that the organization’s data are being audited.
- Applicability of audit to any organization doesn’t state that it is an inherent sign of doing wrong acts. Rather it is the way that helps in preventing such activities like misappropriation of funds by ensuring that data are being continuously examined which may be in the scope of other types of audits.
- A statutory auditor can ask for the company’s any financial books, records or information in relation to that. It is his right and he cannot be denied by the management for the same.
- After doing the entire verification and gathering information 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 audit which is required legally in order to review the accuracy of a company or of government’s financial accounts. The statutory audit is conducted with the purpose is 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 sheet date.
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The statutory audit increases the authenticity and credibility of financial statements as the financial statements of the company are being verified by an independent party. After doing the entire verification and gathering information auditor will 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.
This has been a guide to what is 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 –