Whether you like it or not, you need also be aware of all the tedious tasks involved in operating a business in India. One of them is reporting on audits. What is an audit? The type of business could be a corporation, a sole proprietorship, or a partnership. In India, there are several different audit kinds. If foreign directors wish to gain a foothold in the Indian market, they must be aware of them. If it's possible, we'll cover various audit kinds in a "non-boring fashion" in this piece
What Is An Audit?
A physical inventory check is followed by an auditor’s review or inspection of various books of accounts to ensure that all departments are using the same documented system of documenting transactions. It’s done to make sure the organization’s financial accounts are accurate. This article will discuss about about types of Audits in brief.
Understanding Audits
Most companies receive a yearly review of their financial statements, which include the income statement, the balance sheet, and the cash flow statement, as part of their audits. Some lenders require annual external audits as part of their debt covenants. In some cases, audits are legally required due to the possibility of fraudulently misstating financial information. According to the Sarbanes-Oxley Act of 2002, publicly traded companies are also required to evaluate the effectiveness of their internal controls.
A set of standards known as generally accepted auditing standards (GAAS) is established by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) for external audits conducted in the United States. As a result of the SOX Act of 2002, the Public Company Accounting Oversight Board (PCAOB) enforces additional rules on audits of publicly traded companies. International Standards on Auditing (ISA) was developed by the International Auditing and Assurance Standards Board (IAASB).
What are the Different Types of Audits?
The Company Audit is the evolution activity and determines the financial and operational — strategic goals and exercises in organisations to determine if the organisation follows the rules and regulations. An audit’s main objective is determining if an organisation complies with all the regulations and rules. It is mandatory for all entities registered under the Companies Act as Private Limited or Public Limited companies to have their accounts audited annually. The different types of audits is defined below,
1. Internal Audit
This Audit of internal affairs is performed to determine whether the organisation’s internal operations comply with the rules and regulations.
- Anyone can perform an internal audit, including employees of the organisation.
- During this type of Audit, the auditors examine whether or not the organisation adheres to all internal regulatory standards and follows proper norms and rules.
2. External Audit
Depending on the rules and requirements of shareholders, external auditing may be mandatory for some organisations.
- The external audit report will also be presented to all shareholders during the annual general and board of directors meetings.
- Some independent professionals perform external audits with the qualifications listed in the rule.
A third party can also be appointed to conduct an external audit on behalf of an organisation if the organisation believes something needs to be made more visible to senior management.
3. Financial Audit
Performing a financial audit is essential for the organisation since shareholders invest their money in the company and must be able to determine if their money is being utilised appropriately. Making a profit is an objective of the company, and it is an income for the organisation. A financial audit aims to determine if the organisation is presenting its books of accounts accurately or concealing a number of facts.
4. Secretarial Audit
A Secretarial Audit is a specialized examination of a company’s non-financial records, focusing on its compliance with corporate laws, regulatory guidelines, and governance practices to identify and mitigate potential legal risks.
5. Statutory Audit
Such as the following:
- Statements of the bank
- Number of clients
- Earnings on investment
- By conducting an audit, the organisation increases transparency and trust among its stakeholders and the general public.
6. Performance Audit
A performance audit may be requested for a number of reasons. A firm may request a performance audit in order to evaluate any of the following objectives:
- Program effectiveness and results
- Internal controls
- Compliance with certain requirements
- Prospective analysis
- Operational audits
An auditor analyses an organisation’s processes, procedures, and systems in operational auditing and measures their effectiveness, efficiency, and productivity.
7. Employee Benefit Plan Audits
The purpose of an employee benefit plan audit is to analyse and evaluate the financial statements of an employee benefit plan.
8. Compliance Audits
A compliance audit aims to determine whether a company complies with the government’s standards, rules, and requirements. The government sets the requirements and hires an auditor to evaluate the company’s compliance.
9. Payroll Audits
Payroll auditing aims to identify errors, improve compliance, and protect the company from fraud. This Audit can be performed by either an internal auditor or a third-party auditor.
10. Forensic Audit
During a forensic audit, a forensic accountant examines a company’s financial records to identify illegal financial activities.
An organisation may need a forensic audit if individuals suspect fraud, theft, or inaccuracies (both positive and negative) in account balances.
Types of Audits – Statutory Audit in India:
A firm is required to conduct two types of statutory audits every financial year: (fiscal year). These are what they are:
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Tax Audits:
According to Section 44AM of the Indian Tax Act of 1967, every business with a yearly revenue of over ₹1 Crore and every professional making more than ₹50 lakhs must undergo a tax audit.
Tax audit reports must be submitted by September 30 following the end of the prior fiscal year in the format specified. A fine equal to 0.5 percent of turnover must be paid if the required individual or business fails to submit that report.
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Company Audits:
The Companies Act of 2013 provides a detailed explanation of the requirements and specifics of company audits. They claim that every business must have its financial statements audited by a licensed expert, regardless of its yearly turnover or type of business (auditor).
You may appoint an auditor for the length of six annual general meetings in accordance with the business laws. You are only allowed to use the same auditor for two terms if you are a partnership or sole proprietorship.
Types of Audits – Internal Audit in India:
According to India’s Company Act 2013, the below-mentioned companies should compulsorily have an internal auditing system:
- All the companies whose shares are registered on the stock exchange.
- Every Unlisted Public Company whose shares are not listed on the stock exchange but are considered in the below-mentioned criteria:
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- Paid-up share capital of ₹50 crore rupees during the previous financial year
- Financial turnover of ₹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 ₹100 crore or more at any instance during the previous financial year
- An outstanding deposit of ₹250 crore or more at any instance during the previous financial year.
- Every private company which is considered in the below-mentioned criteria:
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- A turnover of ₹200 crore or more during the previous financial year
- An outstanding borrowing or loan from public financial institutions or banks of ₹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!
Some Issues with Auditing and Auditors
- Independence: Auditors must remain independent and objective, but there may be conflicts of interest, such as when the auditor provides consulting services to the same company.
- Fraud detection: Auditors must be diligent in detecting potential fraud, but it can be challenging to identify when management intentionally misrepresents financial information.
- Quality control: Ensuring consistent and high-quality auditing practices can be challenging for large audit firms with many clients and staff.
- Liability: Auditors can face legal liability if they fail to detect material misstatements or fraud, leading to litigation and damaging their reputation.
- Communication: between auditors and clients can be challenging, especially when clients may need help understanding the audit process or the significance of audit findings.
- Regulation: Auditors are subject to various regulations and standards, which can create compliance burdens and affect their ability to perform their duties effectively.
Key Takeaways on Types of Audits:
- Generally, there are three types of audits: external audits, internal audits, and audits conducted by the Internal Revenue Service (IRS).
- It is common for Certified Public Accounting (CPA) firms to conduct external audits, and the audit report includes the auditor’s opinion.
- As a result of the auditor’s review of the financial statements, an unqualified audit opinion means there are no material misstatements.
- An external audit can include a review of the financial statements as well as the internal controls of a company.
- Managers use audits to improve processes and internal controls.
Conclusion
In this article, we discuss about Types of Audits. In accordance with CARO, 2016, the auditor is required to draft the audit report. A CARO auditor must submit all relevant financial information, including inventories, internal controls, assets, internal audit standards, and statutory dues. Get in touch with Vakilsearch, India’s best legal service provider with highly qualified lawyers for legal advice at the cutting edge of the field.
