Process of Statutory Audit: All you need to know

Introduction

Statutory audits are mandatory for all businesses, regardless of their size or nature of operations. They assure that a company’s financial statements are accurate and comply with legal and regulatory requirements. In this blog, we will discuss what statutory audits are, the types of statutory audits, the process of statutory audits, and the benefits of statutory audits.

What is a statutory audit?

A statutory audit is an independent assessment of a company’s financial statements and operations by a qualified external auditor. Businesses must conduct statutory audits, as per legal and regulatory requirements.

Types of statutory audits

According to the Companies (Audit and Auditors) Rules, 2014, many types of statutory audits exist. The following types of statutory audits are the most common. However, there are many more available.

• A financial audit is prescribed under Section 139 of the Companies Act, 2013.
• Tax audit, which is prescribed under Section 44AB of the Income Tax Act, 1961.
• GST audit is prescribed under Section 35(5) of the GST Act, 2017.
• The concurrent and internal audits for depository operations are the types of statutory audits that are prescribed under NSDL (National Securities Depository Limited).
• Cost audit is prescribed under Section 148 of the Companies Act, 2013.
• A secretarial audit, which is prescribed under Section 208 of the Companies Act, 2013,
• The concurrent audit, stock audit, and branch audit are the types of statutory audits that are prescribed under the Banking Act.
• Metering and billing audits are recommended by the TRAI (Telecom Regulatory Authority of India).
• Financial audits of various institutions include banks, cooperative societies, insurance companies, trusts, HUFs, societies, LLPs, proprietorships, partnership firms, etc.
• Credit rating agencies and stock broker audits are prescribed under SEBI (the Securities and Exchange Board of India).

What is the process of the statutory audit?

The statutory audit process is complex and includes expertise in the controls and operational environment of a corporate entity. The following steps are required in the statutory audit procedure:

• Understand the operating environment: The company’s auditor can examine the industrial standards and regulatory criteria to see if they are ethical. The process of a statutory audit includes the sending of questionnaires, surveys, checklists, and formal notifications.

• Understanding controls: An auditor can learn about the operations control of the company by asking employees or even external auditors. He can also learn about operation control by reading trade publications, audit reports from previous years, or working papers.

• Test controls of the company: The process of a statutory audit includes an evaluation of the company’s procedures by the professional conducting the regulatory authority and its operating mechanisms for fraud or the prevention of error. The audits agree with industrial practices and standards set by regulators. It is also checked by the auditor that operating controls are adequate, performed properly, and understood by all the employees who are involved in the process.

• Reviewing the account balance: The auditor reviews account balances to check if the financial reports are error-free and comply with regulatory standards, statutory principles, and industry practice.

• Test account details: Next, the auditor conducts tests on the account balances of a bank, insurance firm, or hedge fund to make sure that the audited statutory financial statements are correct and comprehensive.

Role of auditors in the statutory audit process

Auditors play a critical role in the statutory audit process. They provide independent and objective assurance that a company’s financial statements are accurate and reliable. Auditors are responsible for planning and executing the audit, assessing risks and internal controls, and reporting their findings to management and the board of directors.

Auditors must adhere to the auditing standards established by regulatory bodies, such as the International Standards on Auditing (ISA). These standards guide the audit process and help ensure consistency and quality in audit practices.

Benefits of Statutory Audits

Statutory audits provide several benefits to businesses, including the following:

1. Statutory audits help businesses to comply with legal and regulatory requirements, and avoid penalties and legal consequences.

2. It ensures that a company’s financial statements are accurate and reliable, which helps in making informed decisions.

3. It helps businesses identify weaknesses in their internal controls and implement remedial actions to improve them.

4. It enhances investor confidence in a company by assuring the accuracy and reliability of its financial statements.

Conclusion

Statutory audits are an essential aspect of business operations, ensuring compliance with legal and regulatory requirements, assuring the accuracy and reliability of financial statements, and identifying areas for improvement. Businesses must conduct statutory audits regularly to maintain their financial health and credibility.