Statutory Audit

What is a statutory audit?

A statutory audit is the independent examination of a company's financial statements by a Chartered Accountant, required every year under the Companies Act, 2013. The auditor checks whether the statements give a true and fair view, following the Standards on Auditing, and issues a report that's filed with the ROC along with the accounts.

Every company needs one, whatever its size or activity. LLPs need an audit only above ₹40 lakh turnover or ₹25 lakh contribution.

The key terms

A few terms come up in every audit:

True and fair view

The auditor's core opinion: whether the financial statements fairly present the company's position and results under the applicable framework.

Standards on Auditing

The ICAI's standards that govern how an audit is planned, performed, and reported.

Types of opinion

Unmodified (clean), qualified (except for specific issues), adverse (materially misstated), or a disclaimer (unable to form an opinion).

CARO 2020

An order requiring auditors to report on specific matters like fixed assets, inventory, loans, and statutory dues. Small companies, OPCs, and smaller private companies are exempt.

Internal financial controls

The auditor also reports on the company's internal financial controls over reporting, though small companies and smaller private companies are exempt.

Audit trail reporting

The auditor reports whether the company's accounting software kept an audit trail throughout the year.

UDIN

A Unique Document Identification Number that the auditor generates for every audit report, so it can be verified.

Why it matters

The audit report is read by more people than the founders often expect:

It's mandatory

Every company must have its accounts audited each year. The accounts can't be filed with the ROC without the auditor's report.

Credibility

Banks, investors, customers, and tenders rely on audited accounts. A qualified or adverse opinion raises questions immediately.

Tax returns

The company's income-tax return is based on its audited accounts.

Finding problems early

Auditors often spot control weaknesses and errors that management hasn't.

Statutory dues

Auditors report on undisputed statutory dues outstanding, like GST, TDS, PF, and ESI, under CARO where it applies.

Fraud reporting

Auditors must report certain frauds they come across to the Central Government or the board.

Public record

The audit report is filed with the financial statements and is available on the MCA portal.

Who is this for?

Our statutory auditors are independent of any bookkeeping or accounting services we provide. The statutory auditor can't keep the books of the company it audits.

Statutory audit vs. other audits

Businesses often face several kinds of audit:

What we'll need from you

Financial statements

Draft financial statements for the year, with the trial balance and ledgers.

Bank records

Bank statements and reconciliations for every account.

Supporting documents

Invoices, contracts, and vouchers for significant transactions.

Statutory records

GST, TDS, PF, and ESI returns and payments.

Company records

Minutes, registers, and details of loans, investments, and related parties.

Confirmations

Balance confirmations from major customers, suppliers, and lenders.

The audit fee depends on the size and complexity of the company, and on how ready the books are.

How the audit works

A typical statutory audit runs through these stages:

1. 1

   Engagement and planning

   We agree terms, understand the business, and identify the main risks of misstatement.

2. 2

   Controls review

   We understand how transactions are recorded and approved, and test key controls where relevant.

3. 3

   Testing

   Balances and transactions are tested through documents, confirmations, analysis, and physical checks.

4. 4

   Queries and adjustments

   Issues found are discussed with management and corrected where agreed.

5. 5

   Reporting

   We issue the audit report, CARO report, and IFC report where applicable, with a UDIN.

6. 6

   Management letter

   We share observations on controls and processes that could be improved.

After the audit

The audited accounts move on to approval and filing:

Board approval

The board approves the audited statements and the directors' report, which responds to any qualifications.

AGM

Shareholders adopt the audited accounts at the AGM by 30 September.

AOC-4

The accounts and audit report are filed with the ROC within 30 days of the AGM.

Tax return

The income-tax return is prepared from the audited accounts.

Act on the management letter

Fix the control weaknesses raised, so they don't recur next year.

Plan next year

Agree next year's timetable early, especially for interim work.

Benefits and responsibilities