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(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:
- Getting appointment letter & board resolution copy
- Getting NOC from the previous auditor
- Filing no disqualification status to the company
- Filing of Form ADT-1 to ROC
- Letter of engagement
- Assessment of internal control
- Formulation of internal audit program action plan and calendar
- Conduction audit as per IGAAP, Companies Act, ICAI Accounting Standards and Auditing Standards.
- Forming an opinion on the financial statement prepared by the company
- Reporting to shareholders
- Attending AGM
Statutory Audit Requirement
- Companies
All companies such as Private Limited Company, One Person Company, Limited Company, Section 8 Company, Nidhi Company, Producer Company, irrespective of nature of business and sales turnover must appoint a Statutory Auditor.
- Certificate of Incorporation (In case of Private or Public Company)
All the companies irrespective of the turnover and Limited Liability Partnership (LLP) if the annual sales turnover exceeds Rs. 40 lakhs or the capital contribution exceeds Rs. 25 lakhs, irrespective of the nature of business, must have the accounts audited.
- Registration Certificate (In case of society)
The proprietorship firm must complete a tax audit by a Chartered Accountant, if the annual sales turnover exceeds Rs. 1 crore in terms of business or the annual gross receipts exceed Rs. 25 lakhs in terms of a profession.
Some important areas of consideration in a Statutory Audit
1: Testing of Internal Controls
A test of controls is an audit procedure to assess the effectiveness of control used by a client entity to detect and prevent fraud and errors. Depending on the results of this test, auditors may choose to rely upon the client’s system of internal controls as part of their auditing activities. However, if the test reveals that controls are weak, the auditors will enhance their use of substantive testing.
2: Verifying Balance Sheet Items
A Balance Sheet audit involves the evaluation of the accuracy of information found in a company’s Balance Sheet. Auditors conduct this evaluation based on supporting documents such as:
* Secured loans, including the latest bank statements, bank reconciliation statements, and sanctioned letters confirming the interest rate on loan.
* Fixed assets including copies of invoices showing any addition to the assets, books showing depreciation working, list of assets not yet accounted in the books.
3: Verifying Profit & Loss Account Items
Some of the essential considerations while testing Profit & Loss A/C items include the following:
* Comparison of year-over-year numbers as well as industry benchmarking
* Conducting trend analysis to find out whether the metrics are improving or deteriorating
* Checking the individual breakups of sales and purchases.
* In the case of preliminary expenses, checking whether they have been capitalised within five years.
* Verifying if the valuation of closing stock has been done as per AS-2.
4: Testing TDS related compliances
Some of the points to keep in mind while evaluating the TDS compliances are:
* Checking the voucher entries of TDS related transactions.
* Verifying all the source documents relating to TDS.
* Reconciling the books with challans and returns.
5: Some other important checks:
* Checking whether the dividend paid by the company is within the specified limits.
* Checking Provident Fund, ESIC, Gratuity, Bonus and Leave encashment payments with the applicable provisions of the respective acts.
* Checking whether the loan/advances of the company are permitted by the Companies Act, 2013 and Income Tax Act, 1961.
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Frequently Asked Questions
- Can a CA, being a relative of a company’s director or Key Managerial Personnel, be its statutory auditor?
No, as per section 141(3)(f), a person whose relative is a director or is in the employment of a company as a director or Key Managerial Person shall not be eligible for appointment as an auditor of that company.
- Who can conduct a statutory audit?
Only a Chartered Accountant, or a firm or a Limited Liability Partnership firm (LLP) having a majority of partners, practising in India, qualified for appointment as an auditor of the company can be appointed as an auditor of the company.
- What is the penalty for non-compliance with a statutory audit?
For non-compliance with the statutory audit provisions, the fine may range from Rs. 25,000 to Rs. 5,00,000 for the company.
For every officer in default, the fine may range from Rs. 10,000 to Rs. 1,00,000.
- What is the applicability of Statutory Audit?
Private Company/ Public Company: Statutory Audit is mandatory for a company irrespective of its turnover, profits, etc. If the company is incurring loss even then, a statutory audit is required.
LLP: Statutory Audit is applicable if the turnover of the LLP in any financial year exceeds Rs. 40 Lakhs or its contribution exceeds Rs. 25 Lakhs.
- What is the difference between an internal audit and a statutory audit?
Internal Audit is carried out to provide unbiased and independent reviews of the system and processes of the business organisations. It is done to detect fraud or prevent errors.
A statutory Audit is a type of audit mandated by the law or a statute to ensure that the books of accounts are true and fair as presented to the public and regulators.
Statutory audit is done by a practising chartered accountant, whereas internal audit is done by the company’s employee.The company’s shareholders appoint a statutory auditor in the annual general meeting, while an internal auditor is appointed by the company’s management.
