Statutory Audit

A statutory audit is a legally mandated examination of a company’s financial records and statements by an independent auditor. It is conducted to ensure accuracy, reliability, and compliance with applicable laws and accounting standards.

Under the Companies Act, 2013, statutory audit refers to the mandatory audit of the financial statements of companies incorporated in India. The statutory audit is conducted annually by an independent auditor who examines the company’s financial records and statements to ensure accuracy, reliability, and compliance with applicable accounting standards and regulatory requirements. Here’s an overview of statutory audit under the Companies Act, 2013:

Definition and Purpose

Definition

A statutory audit is a systematic review of a company’s financial records, transactions, and operations to ensure they are accurate, fair, and compliant with relevant laws and regulations.

Purpose

Compliance: Verify that financial statements are prepared in accordance with statutory requirements and accounting standards (e.g., Generally Accepted Accounting Principles – GAAP).
Reliability: Provide assurance to stakeholders (shareholders, investors, creditors) regarding the accuracy and fairness of financial statements.
Transparency: Enhance transparency and accountability in financial reporting and governance practices.
Risk Assessment: Identify risks, internal control weaknesses, and areas for improvement within the organization.

Key Aspects of Statutory Audit

Independence and Objectivity: The auditor must be independent of the company being audited to maintain impartiality and objectivity in their assessment.
Audit Scope and Planning:
- Scope: Define the extent and nature of audit procedures based on risks, materiality, and regulatory requirements.
- Planning: Develop an audit plan outlining objectives, timelines, and resources required for conducting the audit effectively.
Audit Procedures:
- Risk Assessment: Identify and assess risks that may impact financial statements and audit outcomes.
- Testing and Verification: Conduct substantive tests and analytical procedures to verify the accuracy and completeness of financial information.
- Internal Control Evaluation: Assess the effectiveness of internal controls over financial reporting to ensure reliability and integrity of financial data.
Reporting:
- Audit Report: Prepare an audit report summarizing findings, conclusions, and audit opinions.
- Management Letter: Provide recommendations for improving internal controls, financial reporting processes, and overall governance.
Legal and Regulatory Compliance:
- Statutory Requirements: Comply with legal obligations under company law, taxation laws, and other relevant regulations.
- Filing Deadlines: Submit audit reports and related documents within prescribed timelines to regulatory authorities (e.g., Registrar of Companies in India).

Key Aspects of Statutory Audit under Companies Act, 2013

1. Applicability

Mandatory Requirement: Every company, irrespective of its size or nature of business, is required to conduct a statutory audit annually.
Exemption: Certain small companies and one-person companies may have relaxed compliance requirements regarding audit under specific conditions as per the thresholds defined under the Companies Act and rules.

2. Appointment of Auditors

First Auditor: Appointed by the Board of Directors within 30 days of incorporation.
Subsequent Auditors: Appointed by shareholders at the Annual General Meeting (AGM) for a term of 5 years, subject to annual ratification.
Rotation of Auditors: Mandatory rotation of auditors after the completion of their term as per prescribed limits to ensure independence and objectivity.

3. Audit Standards and Reporting

Compliance with Standards: Auditors must conduct the audit in accordance with the auditing standards prescribed by the Institute of Chartered Accountants of India (ICAI) and the auditing guidelines under the Companies Act.
Audit Report: Prepare and submit an audit report to the company’s Board of Directors and shareholders. The audit report includes:
- Opinion on whether financial statements give a true and fair view of the company’s financial position.
- Compliance with accounting standards and statutory requirements.
- Disclosure of any material misstatements or discrepancies found during the audit.

4. Audit Procedures

Scope: Determine the audit scope based on risk assessment, materiality, and nature of the company’s operations.
Testing and Verification: Perform substantive tests and analytical procedures to verify the accuracy and completeness of financial transactions and disclosures.
Internal Control Evaluation: Assess the effectiveness of internal controls over financial reporting to ensure reliability and integrity of financial data.

5. Filing Requirements

Annual Return (Form MGT-7): File within 60 days from the date of AGM, containing details of shareholders, directors, and other statutory information.
Financial Statements (Form AOC-4): File within 30 days from the date of AGM, including balance sheet, profit and loss account, director’s report, auditor’s report, and other financial documents.

6. Legal and Regulatory Compliance

Ensure compliance with provisions related to audit and financial reporting under the Companies Act, 2013, and other applicable regulations.
Address any qualifications or observations made by auditors in their audit report promptly.

7. Penalties and Consequences

Non-compliance with statutory audit requirements can lead to penalties on the company and its officers, including fines and imprisonment in severe cases.
Adverse audit opinions or qualified reports may impact the company’s reputation and stakeholder confidence.

Responsibilities and Standards

Auditor’s Responsibilities:
- Conduct audit in accordance with International Standards on Auditing (ISA) or other applicable auditing standards.
- Exercise professional skepticism and judgment in evaluating financial statements and internal controls.
- Communicate audit findings and recommendations clearly and objectively to management and stakeholders.
Professional Standards:
- International Standards on Auditing (ISA): Issued by the International Auditing and Assurance Standards Board (IAASB) to guide auditors in performing audits with integrity and competence.
- Generally Accepted Auditing Standards (GAAS): Used in the United States to establish audit procedures and reporting standards.

Statutory audit under the Companies Act, 2013, is crucial for ensuring transparency, accountability, and reliability in financial reporting by companies in India. By adhering to prescribed audit standards, conducting thorough examinations of financial records, and submitting accurate audit reports, companies can enhance stakeholder trust and comply with regulatory requirements effectively. Continuous monitoring of audit findings and proactive measures to address audit recommendations are essential for maintaining corporate governance and financial integrity in organizations.

At Ujjwal Gupta & Co

We, at Ujjwal Gupta & Co, are dedicated to delivering personalized, high-quality solutions tailored to meet your financial and business needs. With our team of professionals and a client-first approach, we ensure that every challenge is met with expert guidance and strategic insight.

We are dedicated to ensuring your business’s success by providing best service practice available in the industry and that too at a cost effective pricing. Our team of experts is excited to work with you and provide the support you need to thrive in the Indian business landscape.

Our only motive is to create Value for Our Clients and accordingly, have a Client Value System at our Office.

So, let us help you navigate the complexities of finance and compliance, empowering you to focus on what matters most — growing your business. Get in touch today, and take the first step towards financial peace of mind.

What is a statutory audit?

A statutory audit is a legally required examination of the accuracy and fairness of a company’s financial statements. It is mandated under various laws, including the Companies Act, 2013, to ensure that financial records comply with statutory requirements and provide a true and fair view of the company’s financial position.

Is statutory audit mandatory for all companies in India?

Yes, statutory audit is mandatory for:

All public and private limited companies.
Limited Liability Partnerships (LLPs) if their annual turnover exceeds ₹40 lakh or capital contributions exceed ₹25 lakh.
Certain other entities as required by specific regulations (e.g., banking companies, insurance companies).

Who can conduct a statutory audit?

Only a qualified Chartered Accountant (CA), registered with the Institute of Chartered Accountants of India (ICAI), can conduct a statutory audit in India. In case of a firm, it must be a firm of CAs.

What is the objective of a statutory audit?

The main objective of a statutory audit is to provide an independent and objective opinion on whether the company’s financial statements are accurate, complete, and in compliance with applicable accounting standards, laws, and regulations. The auditor ensures that the financial statements present a true and fair view of the company’s financial performance and position.

What documents are required for a statutory audit?

For a statutory audit, the following documents are typically required:

Balance sheet, profit and loss statement, and cash flow statements.
Bank statements, vouchers, and receipts.
Ledgers and journals for various accounts.
Records of assets and liabilities.
Details of related party transactions.
Tax filings and compliance certificates.

When should a statutory audit be conducted?

A statutory audit must be conducted annually. The audit for a financial year is usually completed after the financial statements are prepared and must be presented to the company’s shareholders at the annual general meeting (AGM). Companies must ensure that the audit is completed before filing their annual returns with the Registrar of Companies (RoC).

What is the role of a statutory auditor?

The statutory auditor is responsible for:

Examining the financial records and ensuring compliance with accounting standards and laws.
Identifying any material misstatements or irregularities.
Assessing the effectiveness of internal controls and risk management systems.
Providing an independent opinion on the fairness of the financial statements in the audit report.
Reporting fraud or financial irregularities to the management and, if significant, to the government authorities.

What is included in a statutory audit report?

A statutory audit report typically includes:

The auditor’s opinion on whether the financial statements present a true and fair view.
Details about any qualifications, emphasis of matter, or adverse opinions.
Information on the scope of the audit, the audit procedures conducted, and any limitations faced.
Recommendations or findings on internal controls or operational efficiency, if applicable.

What are the penalties for non-compliance with statutory audit requirements?

Companies that fail to conduct a statutory audit face penalties under the Companies Act, 2013:

A fine on the company ranging from ₹25,000 to ₹5 lakh.
Directors and officers of the company may be fined from ₹10,000 to ₹1 lakh or face imprisonment.
The auditor could face penalties or disqualification if found negligent or complicit in any wrongdoing.

What is the relationship between statutory audit and tax audit?

Statutory audit is required under the Companies Act for all companies, while a tax audit is required under Section 44AB of the Income Tax Act for businesses with turnover exceeding ₹1 crore and professionals with receipts exceeding ₹50 lakh. Both audits may overlap in terms of documentation, but they serve different purposes: statutory audit for compliance with corporate law and tax audit for compliance with tax regulations.