Statutory audit under Companies Act 2013
Statutory audit under Companies Act 2013 states that it is compulsorily required for every business to have their accounts audited every financial year (April 1 - March 31), regardless of their capital or turnover. Statutory audit under Companies Act 2013 provides two types of audits.
Tax audits: Tax audits are mandatory for individuals whose business turnover for a year exceeds Rs 1 crore, and for professionals with gross statements over Rs. 50 Lakhs. This is made mandatory by section 44B of India’s Income-tax Act, 1961.
Statutory audit under Companies Act 2013 also ensures that tax audit provisions are made accessible to be availed by any entity, be it an individual, partnership, or an organization. If an entity does not comply with these provisions, then that entity could attract a penalty of 0.5% of the yearly turnover, or of Rs. 100,000/-.
Statutory audit of companies: Statutory audit of companies begins with the appointment of the third-party auditor by the company directors. For the purpose of the statutory audit of companies, auditors are appointed at the annual general meetings (AGM) of various companies. The appointed auditor will remain so, until the next AGM. Under the Companies Act, 2017, auditors can be appointed for a period of 5 years, except in individual and partnership firms where the appointment period is a maximum of one or two terms.
A third party chartered accountant or accounting firm can be appointed as the auditor of the company. However, the following people cannot be appointed;
- A company employee.
- Partner of a company employee.
- Any person who owes an amount greater than Rs. 1000/- to the company.
- Any person who holds securities or shares with the company.
Statutory audit applicability
Statutory audit applicability pertains to all companies who must have their books audited, regardless of the nature of their business, by appointing a statutory auditor. However, with respect to certain companies, statutory audit applicability is based on certain criteria:
- Limited Liability Partnership : If annual turnover exceeds Rs 40 lakh or if paid-up capital exceeds Rs. 25 lakhs, then a statutory audit is required for the LLP.
- Proprietorship : If annual turnover exceeds Rs 1 crore for a business or if annual gross receipts exceed Rs. 25 lakhs for a professional service, then the proprietorship is required to be audited by a qualified charted accountant.
- Private Company/ Public Company : Statutory audit is mandatorily required regardless of profits, or losses incurred, and yearly turnover.
- Individual/HUF/Partnership Firm : Zero statutory audit applicability for these kinds of firms.
Statutory audit report
The statutory audit report provides a final analysis of the organization’s finances and accounts to the Indian government. The statutory audit report is the result of audits authorized by law. Statutory audits are performed by knowledgeable and qualified chartered accountants who work as external and independent parties.
Statutory audit report format
A statutory audit report format comprises the following:
- Title of the statutory audit report : Shows that it was prepared by a third party or an independent statutory auditor
- The addressee of the statutory audit report : Shows that person or organization to whom the report is handed to.
- Statutory auditor’s responsibility : To prepare a fare honest report that covers the state of the company’s financial condition, through the audit of financial statements
- Statutory auditor’s opinion : To present an unbiased opinion of the company’s financial statements.
- The premise of the auditor’s Opinion : The auditor should state the reason behind the auditor’s opinion, by sharing facts from the financial statements.
- Other auditor responsibilities : In some cases, auditors are also issued other responsibilities as well, such as to report legal and regulatory requirements.
- Statutory auditor’s signature : The signature of the auditor who audits
- The place where the report is signed : This refers to the location where the auditor prepares and signs the statutory audit report.
- Date of the report : Finally, the date on which the auditor signs the statutory audit report.
How to conduct the statutory audit?
The statutory audit procedure begins with analyzing the internal auditor’s report to verify the company’s current financial health. The statutory audit procedure, for logging details regarding the sales and purchases made by the company to be followed, is then decided upon comparing the internal auditor’s report with the previous year’s statutory audit report. This helps in understanding how the company’s accounts department records the financial transactions involved in sales and purchases. To shed more light on the statutory audit procedure, see the steps below:
- The current financial year’s internal audit report is analyzed, by the statutory auditor.
- The statutory auditor then verifies whether the internal auditor’s instructions and opinions have been followed through by senior management, especially the discrepancies that have been reported.
- The statutory auditor then checks the previous financial year’s statutory audit report to analyze its summaries and conclusions.
- This further helps the statutory auditor to determine the statutory audit procedure to be followed for capturing information on the transaction of sales and purchases, based on the procedure followed by the company’s auditor or account’s department.
- Then next step for the statutory auditor is to familiarize himself/herself with the accounting software used by the company.
- The statutory auditor compares the entries for purchases and sales in the software, against the bill, to verify the transactions before vouching for the system.
- The statutory auditor then verifies the expenditure approval method followed by the company and then vouches for the same.
- The same procedure is followed for company purchases as well.
- The auditor can then inquire about company policies regarding brand partnerships, franchises, marketing tie-ups, as well as sales and purchases.