What are the different types of audits in India?

Last Updated at: Oct 23, 2019

There are different types of auditing that exist in India according to the current industry practices. We, as a top legal accounting firm, share the list of the various forms of audit.

Audits are usually classified into two types:

  1. Statutory audits
  2. Internal audits

Statutory audits take place to report the current state of a company’s finances and account to the Indian government. These audits are mandated by the law to ensure the fair practice of accounts management. Statutory audits are performed by knowledgeable and qualified Chartered Accountants who work as external and independent parties. The internal audit is usually conducted at the request of the internal management so that they can get a proper idea of all the financial functioning and efficiency. These audits can be done by an independent party or by the internal staff of the company.

According to India’s Company Act 2013, the below-mentioned companies should compulsorily have an internal auditing system:

  1. All the companies whose shares are registered on the stock exchange
  2. Every Unlisted Public Company whose shares are not listed on the stock exchange but are considered in the below-mentioned criteria:
    • Paid-up share capital of Rs. 50 crore rupees during the previous financial year. 
    • Financial turnover of Rs. 200 crore or more during the previous financial year.
    • An outstanding loan or borrowed amount from the public financial institutions or banks with an amount exceeding Rs. 100 crore or more at any instance during the previous financial year.
    • An outstanding deposit of Rs. 250 crore or more at any instance during the previous financial year.

Ask a Free Legal advice

3. Every private company which is considered in the below-mentioned criteria:

  • A turnover of Rs 200 crore or more during the previous financial year. 
  • An outstanding borrowing or loan from public financial institutions or banks of  Rs. 100 crore or more at any instance during the previous financial year.

The internal auditor may or may not be an employee of the company. 

Statutory audits in India

Statutory audits are carried out every fiscal year from April 1 to March 31. As per Companies Act, 2013 it is mandatory for every company to have their books audited irrespective of the sales turnover or capital. There two important statutory audits in India:

  1. Tax audits
  2. Company audits

Tax audits

According to Section 44B of India’s Income Tax Act, 1961 tax audits are mandatory. It ensures that every individual who business turnover exceeds Rs 10 million in any preceding year and every individual working in a profession with gross receipts of more than Rs. 5 million should have their financial accounts audited by an independent chartered accountant.

Please note that the provision of tax audits is applicable to everyone, be it an individual, a business organization, a partnership firm or any other entity. A non-compliance with the tax audit provisions could attract a penalty of 0.5% of the turnover of Rs. 100,000, whichever is lower.

As of now, there are no specific guidelines regarding the appointment or removal of a tax auditor.

Company audits

As per the Companies Act, 2013 it is essential to conduct to a company audit. All companies regardless of its type of business or turnover should have their annual accounts audited each financial year. This process can be successfully executed when the company directors appoint an auditor for the audit. Furthermore, at every annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will maintain the position from one AGM to the conclusion of the next AGM.

According to the Companies Act, 2017 it allows auditors to be appointed for a term period of 5 years. But in the case of individuals and partnership firms, auditors cannot be appointed for more than one or two terms. It is compulsory for the auditor to be changed after the end of the term. 

 It is possible for an independent chartered accountant or firm to be appointed as the auditor of a company. 

Below is the list of individuals who cannot be an auditor as per the Companies Act:

  • A body corporate
  • An officer or employee of the company
  • A person who is a partner with an employee of the company
  • Any person who is indebted to a company for a sum exceeding Rs 1,000 or who have guaranteed to the company on behalf of another person a sum greater than Rs. 1,000.
  • A person who has held any securities in the company after one year from the date of start of the Companies (Amendment) Act, 2000.

The auditor is expected to prepare the audit report in accord with the Company Auditor’s Report Order (CARO), 2016. According to CARO, an auditor is expected to report the various details of the company, such as inventories, internal controls, assets, internal audit standards, statutory dues along with the other financial details.

Connect with our team of highly professional experts who work on the proximal edge to provide legal solutions.

Senior Executive - Content in Vakilsearch