Statutory Audit Consultant in India
In India, Statutory Audit is governed by the Companies Act, 2013. It refers to the audit of a company’s financial statements, including the Balance Sheet and Profit & Loss Account.
Key Aspects of Statutory Audit:
- It is mandatory for businesses meeting specific criteria.
- The audit must be conducted by an Independent Chartered Accountant who has no relationship with the company being audited.
- Facts and observations
- Opinion on financial statements
- Adverse remarks, if any
- Disclaimers where applicable
- The report must follow the format prescribed by the regulatory authorities.
Statutory audits help ensure financial transparency, compliance with legal requirements, and accuracy in financial reporting.
Types of Statutory Audit in India
Statutory Audit is broadly classified into two types:
1. Tax Audit
A Tax Audit involves the examination of tax records under the Income Tax Act, 1961. It ensures that businesses and individuals comply with tax laws and accurately report their income, deductions, and liabilities. The audit is conducted by a Chartered Accountant and may be reviewed by the state tax authority.
2. Company Audit
A Company Audit involves the verification of a company’s financial statements, including:
- Balance Sheet
- Profit & Loss Account (or Income & Expenditure Statement)
- Cash Flow Statement
Who Requires to Get its books of Account Audited?
- Company under companies act 2013
- Limited liability partnership
- Proprietrships and partnerships firms
Objectives of Statutory Audit
The objectives of a Statutory Audit are classified into Primary Objectives and Subsidiary Objectives.
The main goals of a statutory audit include:
- Examination of Financial Statements – Ensuring the company’s financial statements accurately reflect its financial position.
- Verification of Arithmetical Accuracy – Checking the accuracy of calculations, including posting, balancing, and casting in the books of accounts.
- Classification of Transactions – Ensuring a proper distinction between capital and revenue transactions.
- Validation of Transactions – Verifying the authenticity and legitimacy of financial transactions.
- Asset & Liability Confirmation – Checking the valuation and existence of assets and liabilities.
- Fair Presentation of Financial Statements – Ensuring that the income statement (Profit & Loss Account) and balance sheet give a true and fair view of the company’s financial position.
- Proper Fund Allocation – Confirming that funds are used appropriately and not misallocated.
Subsidiary Objectives of Statutory Audit
Apart from the primary objectives, a Statutory Audit also serves subsidiary objectives, which include:
- Detection and Deterrence of Errors – Identifying and preventing unintentional mistakes in financial records.
- Detection and Deterrence of Frauds – Uncovering and preventing deliberate financial misstatements or fraudulent activities.
Tests under Statutory Audit Procedure
To conduct a Statutory Audit in compliance with government regulations, an auditor follows a structured process, which includes:
1. Evaluation of Operating Environment
- Assessing whether internal practices align with industry guidelines and regulatory standards.
- Ensuring that business operations are conducted ethically.
2. Evaluation of Operating Controls
- Examining the effectiveness of internal controls by consulting industry experts, employees, and previous audit reports.
- Identifying any gaps or weaknesses in operational controls.
3. Evaluation of Controls
- Ensuring the company has measures in place to prevent fraud or errors.
- Checking whether controls meet industry standards and regulatory guidelines.
4. Examination of Account Balances
- Verifying financial report accuracy and compliance with statutory principles.
- Ensuring that account balances reflect true financial performance.
Process of Statutory Audit
The Statutory Audit process follows a structured approach, divided into the following steps:
1. Review
- The auditor gains a deep understanding of the company’s internal and external environment.
- Examines the business operations, financial statements, and books of accounts.
- Evaluates the internal controls implemented by the business.
2. Statutory Audit
- The auditor conducts a sample-based verification of financial statements.
- Ensures that the financial statements comply with applicable accounting standards.
- Examines material transactions, revenue recognition, expenses, and liabilities.
3. Reporting
- The auditor analyzes the collected audit evidence and prepares a report.
- Expresses an opinion on whether the financial statements are free from material misstatements.
Types of Audit Opinions
Modified Audit Opinion – Indicates that the financial statements are materially misstated. It can be further classified as:
- Qualified Opinion – Financial statements do not fully comply with GAAP but are not significantly misstated.
- Adverse Opinion – The worst audit report, stating that the financial statements are misleading and do not present a true and fair view.
- Disclaimer of Opinion – The auditor cannot express an opinion due to insufficient audit evidence.
Unmodified Audit Opinion – A clean report, confirming that the financial statements are accurate and free from material misstatements.
Who Can Be Appointed as a Statutory Auditor?
- As per Section 141 of the Companies Act, 2013, a Statutory Auditor must be a practicing Chartered Accountant (CA) in India.
- If the auditor is a firm, all partners must be Chartered Accountants practicing in India.