How does a Statutory Audit functions?
The term statutory signifies that statutory auditing is necessary. A statute is a regulation or law enacted by the associated government of the organization's legislative branch. Multilevel laws may be passed by the Centre or State. In a company, a regulation also applies to any law set by the management team or board of directors of the organisation.
An audit is an examination of records held by an agency, company, government department, or individual. This usually involves analysing different financial records or other areas. During a financial audit, reports of a company with respect to revenue or benefits, returns on investment, expenditures, and other things can be included in the audit process. Often, a variety of these elements are used when determining a cumulative ratio.
The objective of a financial audit is often to assess whether funds have been properly handled and that all records and filings required are accurate. Undergoing a statutory audit is not an implicit indication of misconduct. Instead, it is also a formality intended to help discourage crimes, such as misappropriating funds by ensuring a professional third party routinely scrutinizes various documents. The same applies to other audit forms too.
How to conduct a Statutory Audit?
For this purpose, every company and its directors must first appoint an auditor within 30 days from the date of registration of the company.
At each Annual General Meeting (AGM), the shareholders of the company must appoint an auditor who holds the position from one AGM to the conclusion of the next AGM. The Companies (Amendment) Act, 2017 maintains that the auditors can only be appointed for a maximum term of five consecutive AGMs. However, in individual and partnership firms, auditors cannot be appointed for more than one or two terms, respectively.
Who can conduct a Statutory Audit?
As per the law, only an independent chartered accountant, or a chartered accountant firm, or limited liability partnership firm (LLP) with majority of partners practicing in India are qualified for appointment as an auditor of a company.
The Companies Act, 2013 specifically disqualifies the following individuals or firms from becoming an auditor:
- A corporate body other than the LLP registered under the Limited Liability Partnership Act, 2008;
- An officer or employee of the company;
- A person who is a partner with an employee of the company or employee of a company employee;
- Any person who is indebted to a company for a sum exceeding INR 1,000 (US$14) or who have guaranteed to the company on behalf of another person a sum exceeding INR 1,000 (US$14);
- Any person who has held any securities in the company after one year from the date of commencement of the Companies (Amendment) Act, 2000; or
- Any person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction.
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What does the Audit Report include?
The Company Auditor's Report Order (CARO), 2016 requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit standards, internal controls, statutory dues, among others. The auditor must follow the auditing standards as recommended by the Institute of Chartered Accountants of India (ICAI). In case the auditor uncovers any fraud during the audit must report it to the government immediately. After the audit is completed, the auditor should submit the audit report to the members and shareholders of the company.
