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Statutory Audit
Introduction to Statutory Audit
Statutory audit is required to assess whether the company complies with the applicable laws, rules and regulations and standards and whether the financial statements reflect a true and fair view of the financial position of the company. It applies to all the companies registered in India under the erstwhile Companies Act, 1956 and Companies Act, 2013 and Limited Liability Partnerships (LLPs) having turnover exceeding Rs. 40 Lakhs or contribution Rs. 25 Lakhs.
Section 139(1) of the Companies Act,2013 read with Rule 3 of Companies (Audit & Auditors) Rules, 2014, mentions that every company shall appoint an individual/firm as an auditor.
Section 139(6) of the Act states that the first auditor of the company shall be appointed within 30 days of its date of registration.
Steps generally followed in conducting Statutory Audit:
Appointment of the Auditor:
Eligibility and Consent: The company must appoint an auditor who meets the eligibility criteria outlined in Section 141 of the Companies Act, 2013. The appointed auditor must provide written consent and a certificate confirming their eligibility.
Filing with Registrar of Companies (ROC): The company is required to inform the ROC about the auditor’s appointment using Form ADT-1 within 15 days of the Annual General Meeting (AGM) where the appointment was made.
Planning the Audit:
Understanding the Entity: The auditor gathers comprehensive knowledge about the company’s operations, industry, internal controls, and regulatory environment.
Risk Assessment: Identifying areas with a higher risk of material misstatement to focus audit efforts effectively.
Audit Strategy and Plan: Developing a detailed audit plan outlining the nature, timing, and extent of audit procedures.
Execution of the Audit:
Testing Internal Controls: Evaluating the effectiveness of the company’s internal controls to determine the reliability of financial reporting.
Substantive Procedures: Performing detailed testing of transactions and account balances to verify accuracy and completeness.
Compliance Checks: Ensuring adherence to statutory requirements, accounting standards, and regulatory provisions.
Reporting:
Audit Report Preparation: Upon completion of audit procedures, the auditor prepares a report in accordance with Section 143 of the Companies Act, 2013, expressing an opinion on the financial statements.
Submission and Filing: The audit report is presented to the company’s shareholders and filed with the ROC as part of the company’s annual filings.
Requirements for Statutory Audit
Mandatory Appointment: Every company, except for specific exemptions like One Person Companies (OPCs) and small companies, must appoint an auditor within 30 days of incorporation.
Tenure of Auditor: The auditor holds office from the conclusion of the AGM in which they are appointed until the conclusion of the sixth AGM, subject to ratification at each AGM.
Rotation of Auditors: Listed companies and certain classes of public companies are required to rotate auditors after a specified period to ensure independence and objectivity.
Special Considerations in Statutory Audit
Audit Trail Requirements: Effective April 1, 2023, companies must use accounting software that includes an audit trail feature, capturing all changes made to accounting records along with timestamps. Auditors are required to report on the existence and operation of this feature.
Corporate Social Responsibility (CSR) Compliance: Auditors must verify that companies obligated under Section 135 of the Companies Act, 2013, comply with CSR provisions, including the development and implementation of an annual CSR action plan and proper disclosure of CSR activities.
Resignation of Auditor: In the event of an auditor’s resignation, the auditor must file Form ADT-3 within 30 days from the date of resignation, detailing the reasons for resignation.
Reporting on Internal Financial Controls: Auditors are required to report on the adequacy and operating effectiveness of the company’s internal financial controls over financial reporting.
- CARO 2020 Implementation: The Companies (Auditor’s Report) Order, 2020 (CARO 2020), applicable for audits of financial statements beginning on or after April 1, 2021, introduces extensive reporting requirements for auditors, aiming to improve the overall quality of reporting.
Frequently Asked Questions
An audit ensures financial transparency, regulatory compliance, and accurate financial reporting. It also helps in risk management and enhances investor confidence.
An internal audit is conducted voluntarily to improve internal controls and operational efficiency, while a statutory audit is legally mandated to ensure compliance with financial regulations.
Businesses and professionals whose turnover or receipts exceed specified thresholds under the Income Tax Act must undergo a tax audit.
Financial statements, bank statements, invoices, ledgers, tax filings, and other relevant financial documents are necessary for a statutory audit.
A stock audit should be conducted at least once a year to reconcile physical stock with accounting records and prevent discrepancies.
GST due diligence is a comprehensive review of a company’s GST compliance, ensuring accuracy in tax filings and adherence to GST laws to avoid penalties.
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