Statutory Audit Meaning
A statutory audit, also known as a financial audit, is one of the main types of audit 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 opinions in the audit report. It helps the stakeholders to rely onFinancial 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. 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 benefit from this audit. They can take their call based on the accounts as they are audited and authentic.
Table of contents
- A statutory audit is also known as a financial audit. It is one of the principal audit types conducted according to the statutes relevant to the entity.
- Its main objective is to collect all valuable details for the auditor’s opinion on the company’s financial position and obtain an appropriate and unbiased scenario as on the balance sheet date through checking the financial records.
- It is helpful for the stakeholders to get an advantage from the audit, increases the financial statements’ genuineness, and checks the company’s financial statements.
Statutory Audit Explained
A statutory audit is one of the main types legally required 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 on theA 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. 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 verifies the company’s financial statements. After verifying and gathering information, the auditor will conclude by writing anAn 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. 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 financial statements’ true and fair view.
The applicability of statutory 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., misappropriation of funds by ensuring continuous examination of data may be in the scope of other types of audits.
A statutory auditor can ask for the company’s financial books, records, or information. It is his right, and the management cannot deny him the same.
After doing the entire verification and gathering information as per the statutory audit checklist, the auditor is supposed to conclude by writing an audit report based on the various evidence and information on the true and fair view of the financial statements.
The various types of statutory audit is based on the requirements regulation and aim of the jurisdiction and organization. Some common types of the same are as follows;
- Company Audit – This is the most common type and is done for the financial statements of companies which may be pulbil or private. Their main aim to provide a true and fair view of financial statements of the business to its stakeholders.
- Tax audit – This is required as a statutory requirement. This process of applicability of statutory audit ensures that the tax related data is accurate and as per the rules and regulations. It is done to prevent tax evasion and any legal issues related to the same.
- Bank audit – This is required in any financial institution like banks or credit unions to identify any loopholes in the financial system followed by them. The statutory audit in banks also identifies whether the institution complies with the banking rules, risk management process and capital adequacy.
- Insurance Audit – Tis is doen in insurance companies to assess their reserve, solvency and compliance to regulations so that te policyholders do not face any problems during claims.
- Audit in government and public sector – The government and public sector agencies undergo audit to ensure that the funds collected is used in a transparent and efficient way and there is accountability of the entire process.
- Audit of Charitable trusts – Organization that fall under the category of charity and non-profit organization need to conduct this audit process to ensure and demonstrate that the funds coming in are used effectively. This helps gain the trust and confidence of doners.
- Environmetal audit – This is extremely important and helps in assessing whether the organization complies with the environments rules and regulation and how much effort they are making to mitigate the negative impact of their operational process in the environment.
However, it should be noted that the process may vary depending on the jurisdiction and entity.
The requirements of this type of audit depends on the country where the business is operating and the accounting standards followed over there. The basic requirements in the statutory audit checklist are listed below:
- Mandatory factors – Some countries have the rule that if a company crosses some mandatory factors related to size, number of employees or total revenue earned and assets owned, the company has to undergo this type of audit procedure.
- Financial Reporting – Some countries also follow some fixed standards related to financial reporting which are mandatory for the purpose of operation inthat country.
- Auditor appointment – It is compulsory to appoint an auditor for this purpose who is independent and qualified external professional.
- Audit execution – The process should be conducted as per the accounting standards and proper assessment of risk, control and verification of financial transactions should be made to ensure a fair view of financial statements.
- Reporting – The auditor’s opinion ha sto be reported in the annual financial statements and reports which also has to be properly documented so that the management, investors, creditors and other stakeholders can have access to it and take financial decisions.
- Auditor’s independence – The auditor should have the independence and objectivity during the process and express their findings with integrity and in an unbiased way.
- Good communication – Through the audit process is is necessary for the auditors and the management to have a good communication and flow of information so that any issue is resolved in a prompt manner.
- Audit report filing – Some companies and countries need to file the report of statutory audit with the regulatory and tax authorities or else there may be penalties and legal issues.
Let us understand the concept of statutory audit in banks or any other entity with the help of a suitable example.
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 available to the common public. This audit aims to check that all the spending is genuine and backed with proper sanctions 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.
Similar to all financial concepts this process of statutory audit report also has its own advantages and limitations. Let us study the advantages first.
- 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 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 mitigate the risk and results in the improvement of the company’s performance
- On producing financial statements audited by an independent auditor, loans are easy, as the audited statements are more reliable and authentic. The financial statement of the small company for whom audit might not be applicable gets more value if audited. With the help of the audited financial statements, it becomes easier for companies to get banking loans and other facilities.
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Some noteworthy limitations of the above process of statutory audit report are given below.
- 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., will charge a relatively much less amount to conduct the audit compared with the firm not engaged.
- The employees might get disrupted for performing their regular work to answer the day-to-day query of the auditor or while providing the auditor with any reports or data required of them. It might result in stretching the employees’ work 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 the 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 bloodhounds. Their reporting is based on the sample data and not the total data. Moreover, frauds are planned, 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 100 % of transactions. Auditor merely expresses his opinion on the financial statements and data provided to him and, at no point, gives total assurance.
- An auditor comments on the going concern of the organization, but nowhere assures its future viability. Stakeholders should not vest their money by only seeing that the organization has data audited.
Statutory Audit Vs Internal Audit
Both the above are two different audit processes that are conducted in organizations and having different purpose. Let us study the differences in detail.
- The purpose of the former is to ensure that the financial statements present a fair and accurate view of the financial condition of the business, whereas the latter has the purpose of evaluation and improvement of operational procedure, risk management and control, etc.
- The scope of the former is only in the financial statements whereas the scope of the latter includes various areas like operation, finance, rules and policies, systems, etc.
- The former is conducted on an annual basis in the organization as made mandatory by law, whereas the latter can be done on annually or in any other frequency as required by the size, industry type of business process.
- In case of the former, the auditor has the independence of conducting the audit and giving their opinion on the true and fair presentation of financial statements because they are external professionals, but the internal auditors are part of the organization who is expected to be unbiased in the audit process.
- The statutory audit is made with relation to the accounting standards of the set by the regulatory authority of the country whereas the latter is tailormade as per the needs and requirements of the entity.
Frequently Asked Questions (FAQs)
The statutory audit applies to limited companies, non-profit organizations, banks, financial institutions, and insurance companies.
A statutory audit is performed at the year-end to create an opinion on the company’s financial statement. In contrast, an external audit is conducted by an independent auditor. Therefore, an external audit provides an independent opinion on the financial statements.
The company’s Board of Directors must appoint an Auditor within 30 days of its incorporation and audit each financial year’s financial statements.
A statutory audit must be performed by an independent, qualified, and licensed auditor who is not an employee or officer of the organization being audited. In addition, the auditor must be a recognized professional accounting body or a government-approved regulator body.
This article has been a guide to Statutory Audit and its meaning. We explain its differences with internal audit, limitations, requirements, types & example. You can learn more about accounting from the following articles –