This post discusses what is statutory audit and its importance. It discusses its process briefly and explains its various objectives. There are numerous types of statutory audits listed in the article.
There are numerous types of statutory audit processes conducted by organizations and businesses to ensure that all their actions are legal. Know about the Practical Steps in a Statutory Audit.
Even though most of these audits, such as internal audits, are conducted by internal employees of a business, other types of audits such as GST audits are conducted by external entities like a chartered accountant. These external audits are compulsory for some companies if they reach certain criteria regarding capital infusion and annual turnover. Lets check the practical steps in a statutory audit.
The primary difference between an external audit and an internal audit is that for internal audits the findings and the reports are only distributed to the company’s management.
However, in external audits, similar to statutory audits, the report is distributed to government authorities and the various Shareholders of the company. Please read this article if you want to know more about what a statutory audit is, its types, and the process.
Know About Statutory Audits
A statutory audit is a compulsory audit of the financial records of a business conducted by an external entity. This audit is made compulsory according to the law or statute that governs a company’s ethics and principles.
Usually, a statutory audit is done by checking bank accounts, transactions, ledgers, financial statements, booking records and various critical documents that are submitted for government records and tax purposes. However, it also has business operations-related documents like purchase orders, challans, invoices, bills, etc.
What is the Importance of Statutory Audits?
According to the Companies (Audit and Auditors) Rules of 2014 and Companies Act of 2013, every private and public limited company is compulsorily made by statute or law to conduct a statutory audit of the financial filings and documents.
The nature of the company and the company turnover of private and public limited companies don’t matter about the statutory audit.
In the case of Limited Liability Partnership or LLP firms, only these businesses are compelled to conduct the statutory audit:
- Capital contribution is over ₹25 lakhs or
- Annual turnover is more than ₹40 lakhs.
If these companies do not comply with the statutory audit, the government can charge a fine from ₹25,000 to ₹5,00,000. The particular defaulting officer will have to pay a penalty between ₹10,000 and ₹1,00,000 and face imprisonment for up to one year.
Process of Statutory Audits
As soon as the business is registered, the process of a statutory audit begins. The whole statutory audit process is quite exhaustive depending on the type of company. Every LLP company or private and public business that reaches the criteria mentioned above must appoint an auditor within 30 days after the registration of the business. For each AGM, the shareholders have the choice of recruiting an external auditor who has the position from the conclusion of that particular AGM to the next.
Objectives of Statutory Audits for a Business
The primary objectives of a Company Statutory Audit are to verify and check the financial documents of a company which comes under the purview of a statutory audit.
GST Checklist for Audit
- Input tax credit
- Output tax liability
- Tax liability (with GSTR – 1 and GSTR 3B)
- Reconcile taxable outward supplies (with GSTR – 1 and GSTR 3B)
- Reconcile input tax credit availed.
Tax Deducted at Source Checklist
- Tax Receivable (Form 26AS should be the same as Form 16A)
- Tax payable according to returns, challans or advances given to vendors.
- Dividend Distribution Tax, if the business offers dividends to the shareholders.
- ROC compliances that have Forms AOC, ADT, DPT 3, CRA, MGT, INC 22, and MSME compliance forms.
- Encashment of Gratuity, Leaves, Bonus, ESIC, and Provident Fund.
Other Verifications
- Section 269ST of the Income Tax Act, 1961 should not be violated. The business should not get cash over ₹ 2,00,000.
- Cash outflow and inflow (over ₹10,000 cash payment is not allowed).
- Advances and loans should be as per the Income Tax Act, 1961 and Companies Act 2013.
- The PAN card records of the payers if they gave ₹50,000 or over in cash.
- It is compulsory to report loans and advances under Section 269SS.
- In the case of advances and loans, verification of Section 186, 185, and 73 to 76of the Companies Act 2013.
Types of Statutory Audits
According to the Companies (Audit and Auditors) Rules, 2014, there are numerous types of statutory audits that exists. The following types of statutory audits are the most common, however, there are much more available.
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Cost audit
This was prescribed under Section 148 of the Companies Act, 2013.
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Financial audit
This was prescribed under Section 139 of the Companies Act, 2013.
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Tax Audit
This type of statutory audit is prescribed under Section 44AB of the Income Tax Act, 1961.
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Secretarial Audit
This type of audit is prescribed under Section 208 of the Companies Act, 2013.
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Concurrent Audit, Stock audit, branch audit
These types of statutory audits are prescribed under the Banking Act.
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GST Audit
It is prescribed under 35(5) of the GST Act, 2017.
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NHM (National Health Mission)
This has made Concurrent audits or internal audits compulsory.
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Metering and Billing Audit
This audit is recommended by the TRAI (Telecom Regulatory Authority of India).
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Performance Audit
This type of statutory audit is made of cooperative societies prescribed under the Cooperative Societies Act.
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Financial audits of various institutions
These institutions are the banks, cooperative societies, insurance companies, proprietorships, trusts, HUFs, partnership firms, societies, LLPs, etc.
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Concurrent and Internal audits for Depository Operations
This is prescribed under the NSDL (National Securities Depository Limited).
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Credit Rating Agencies and Stock Brokers audits
This is prescribed under SEBI (Securities and Exchange Board of India).
Conclusion:
Statutory audits are quite important for companies that fulfill certain criteria mentioned above. It is mandated by several laws and statutes and all companies whether private or public have to conduct a statutory audit or they may face serious action.
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