There are various types of audit processes conducted by companies and organizations to ensure that they are on the right side of the law.
While some of these audits, like internal audits, are conducted by internal employees of a company, other audits such as the statutory audit and GST audits are conducted by external entities such as chartered accountants. Such external audits are mandatory for some companies if they fulfill a certain condition related to annual turnover and capital infusion.
The major difference between internal audit and external audit is that, in the case of internal audit, the reports and the findings are shared only with the company’s management. While in external audits like the statutory audit, the report is shared with shareholders and with Govt authorities.
Learn more about – What is an Internal Audit? What Are The Types Of Internal Audit & Its Procedure?
In this article, we will cover what is a statutory audit and the importance of statutory audit for organizations and small businesses. We will also share the types of statutory audit and provide a glimpse into the process and objective of the statutory audit.
What is a Statutory Audit?
A statutory audit is a mandatory audit of a company’s financial records by an external entity. This audit is mandated by statute or law that governs an organization’s principles and ethics.
In general, a statutory audit is conducted by examining bank accounts, financial statements, transactions, bookkeeping records, ledgers, and other critical documents that are submitted for tax purposes and Govt requirements.
But it can also include business operations-related documents such as invoices, purchase orders, bills, challans, and more.
Importance of Statutory Audit
As per Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014, all public and private limited companies are mandated by law (or stature) to conduct a statutory audit of the financial documents and filings. In fact, the business turnover and the nature of the business of public and private limited companies don’t matter in the case of the statutory audit.
In the case of LLP (Limited Liability Partnership) firms, only these companies are mandated to perform the statutory audit:
- Annual turnover crosses Rs 40 lakh or
- Capital contribution is more than Rs 25 lakh
In the case of non-compliance of statutory audit, Govt can impose a fine between Rs 25,000 to Rs 5,00,000. The defaulting officer can be imprisoned for one year and imposed a penalty between Rs 10,000 to Rs 1,00,000 or both.
Learn more about – What Is Limited Liability Partnership (LLP)? Step-by-step LLP Registration Process
Process of Statutory Audit
The process of statutory audit starts as soon as the company is registered. The entire statutory audit procedure is exhaustive and depends on the nature of the business.
Every public and private company or LLP company that meets the above criteria should appoint an auditor within 30 days of the company’s registration.
During each AGM, the shareholders also recruit an external auditor, who holds the position from the conclusion of one AGM to the next.
Learn more about – Who Are Investors? What Are The Different Types Of Investors In Business World?
As per the Companies Act (Amendment) 2017, no auditor for statutory audit can hold the consequent position more than five times.
Learn more about – What Is The Procedure For Incorporation Of Company In India? Know The Step-By-Step Process
Objectives of Statutory Audit for a Business
The main objectives of a statutory audit are to examine and verify these documents of a business, which falls in the purview of statutory audit.
GST Checklist
- Output tax liability
- Input tax credit
- Reconcile taxable outward supplies (with GSTR 3B and GSTR – 1)
- Tax liability (with GSTR 3B and GSTR – 1)
- Reconcile Input Tax Credit availed
Learn more about – Complete Guide to GSTIN – How to Get GSTIN Number?
Tax Deducted at Source Checklist
- Tax payable as per challans and returns, or advance paid to vendors
- Tax Receivable (Form 26AS should match with Form 16A)
- ROC compliances, which includes Forms ADT, AOC, MGT, CRA, INC 22, DPT 3, MSME compliance form
- Dividend Distribution Tax, in case the company provides dividends to the shareholders
- Encashment of Provident Fund, ESIC, Gratuity, Bonus and Leaves
Others Verifications
- Cash inflow and outflow (more than Rs 10,000 cash payment is not allowed)
- Section 269ST of Income Tax Act, 1961 is not violated (the company cannot receive cash more than Rs 2,00,000)
- PAN Card records of the payers, in case they paid Rs 50,000 or more in cash
- Loans and advances should be in accord with the Companies Act, 2013 and Income-tax Act, 1961
- Verification of Section 185, 186, and 73 to 76 of Companies Act, 2013 in case of loans and advances
- Reporting of advances and loans under Section 269SS is mandatory.
Types of Statutory Audit
As per the Companies Act 2013, and Companies (Audit and Auditors) Rules, 2014, the following types of statutory audit exists (but are not limited to):
- Financial audit as prescribed under Section 139 of the Companies Act, 2013.
- Cost Audit as prescribed under Section 148 of the Companies Act, 2013.
- Secretarial audit as prescribed under Section 208 of the Companies Act, 2013.
- Tax Audit as prescribed under Section 44AB of the Income Tax Act, 1961.
- GST Audit as prescribed under 35(5) of the GST Act, 2017.
- Concurrent audit, branch audit, stock audit, etc. as prescribed under the Banking Act.
- Telecom Regulatory Authority of India (TRAI) recommends Billing & Metering Audit.
- National Health Mission (NHM) mandates Internal Audit/Concurrent Audit.
- Financial audit of banks, insurance companies, cooperative societies, partnership firms, LLPs, proprietorships, HUFs, societies, trusts, etc.
- A performance audit of cooperative societies under the Cooperative Societies Act.
- Audit of Stock Brokers and Credit Rating Agencies as prescribed by the Securities & Exchange Board of India (SEBI).
- Internal & Concurrent audit for Depository Operations under the National Securities Depository Limited (NSDL).
If you still have doubts and apprehensions on the question of what is a statutory audit and wish to know more about the process and the objectives, then we at MSMEx can help you. All you need to do is, book an appointment with MSMEx experts and become empowered with knowledge and experience live!
Related Read About
- What Are Internal And Statutory Audits? The Key Differences Between Internal Audit And Statutory Audit
- 3 Reasons Why Every Ambitious Small Business Should Hire Financial Advisor
- What Is Financial Discipline? How Does Financial Discipline Help Your Business?
- Financial Planning Checklist (Business) – A Complete Guide To Key Factors & Elements Of A Financial Plan in Business
- What Is Business Process? Why Are Business Processes Important For Business Growth?
- What Are Assets? How Assets Help A Small Business Grow? Explore 5 Different Types Of Assets
- What Are The Business Licenses? Explore The List Of Business License & Permits In India
- How To Register As A Startup Company In India? Registration Benefits & Documents Required
- What is E-Commerce GST? How to Register for Seller under GST?
- Working Capital Optimization – Explore 10 Ways To Improve Working Capital
