When a company’s performance impacts on all spheres of society, it becomes pertinent that the company’s affairs be regulated in accordance with law, so that not only shareholders get affected by it, but also the society at large. “Audit” is one such weapon which keeps a check on company’s affairs and does not let it go astray.
Audit is a systematic examination and evaluation of the firm’s financial statements to ensure that records are a fair and accurate representation of the transactions they claim to represent. Different types of audits have been prescribed under our legal system and statutory audit is one of them.
The audit of the accounts of any organisation, like for example; companies, public trusts, banks, insurance companies, co-operate societies, etc., which is mandatory under certain legal provisions of Indian statutes, is known as statutory audit.
These statutes contain the provisions relating to the appointment, rights, duties, responsibilities, scope of work and dismissal of the auditor. These can be further enhanced on the basis of the auditing contract, but they cannot be reduced under any circumstances. Such an audit is also referred to as compulsory audit.
Under the Companies Act, 2013, the term audit is equated with statutory audit. Statutory audit is usually performed by a Chartered Accountant which is appointed by the company in its annual general meeting.
The primary objective of ‘Statutory Audit’ is “to ensure that the financial statements i.e. the Balance Sheet, Income & Expenditure Account and Receipt & Payment Account, give a true and fair view, and are free from any material misstatements”
Statutory Audit of the financial statements should provide reasonable assurance that-
- the accounts are free of any material misstatements, errors and discrepancies.
- accounting standards are being duly complied with,
- other statutes are complied,
- Companies Act is complied,
- the accounts have been prepared in accordance with the Generally Accepted Accounting Principles (GAAP), and
- International Financial Reporting Standards (IFRS) compliances.
Statutory Audit is usually performed once every year by the Chartered Accountant so appointed. It is mandatory for some types of companies, such as Private Limited Company, One Person Company and Limited Liability Partnership (If turnover > 40 lakh or contribution > 25 lakh), to get their ‘Statutory Audit’ done. It is done only after the final accounts have been prepared.
The Statutory auditor is an independent professional on whom the company has no control. It is needed that the statutory auditor be independent so as to give a fair and true view of the company’s account.
The statutory auditor can resign before completion of his term or can be removed by the shareholders through a resolution at an annual general meeting. However, on due completion of the statutory audit, the auditor issues a report to the shareholders. This report contains his findings.
It is to be noted that the statutory auditor depends upon the internal auditor as they both perform similar task. It is up to the statutory auditor to what extent he relies upon the work of an internal auditor as the latter is not an independent professional like the former. Thus, the statutory auditor needs to keep it in mind before taking any stride that the internal auditor’s work may be biased and contain certain discrepancies as he works as per the directions of the management.
It is generally advisable not to rely completely on the work of an internal auditor as statutory auditor is a company watchdog. Also the statutory auditor has legal liability which is punishable by law, so he must act cautiously.
Companies often see the statutory audit in a bad light but there is a need to comprehend that it is a measure for collective welfare. They should integrate the statutory audit regime in their companies to become more efficient and successful.