Statutory Audit
A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. An audit is an examination of records held by an organization, business, government entity, or individual, which involves the analysis of financial records or other areas. The purpose of a financial audit is often to determine if funds were handled properly and that all required records and filings are accurate. Firms that are subject to audits include public companies, banks, brokerage and investment firms, and insurance companies.
It is a very comprehensive exercise and requires expert knowledge and experience of Chartered Accountants and Certified Public Accountants to conduct a statutory audit professionally.
How Statutory Audits Work
The term statutory denotes that the audit is required by statute. A statute is a law or regulation enacted by the legislative branch of the organization’s associated government. Statutes can be enacted at multiple levels including federal, state, or municipal. In business, a statute also refers to any rule set by the organization’s leadership team or board of directors.
An audit is an examination of records held by an organization, business, government entity, or individual. This generally involves the analysis of various financial records or other areas. During a financial audit, an organization’s records regarding income or profit, investment returns, expenses, and other items may be included as part of the audit process. Several of these items are also used when calculating a combined ratio.
The purpose of a financial audit is often to determine if funds were handled properly and that all required records and filings are accurate. At the beginning of an audit, the auditing entity makes known what records will be required as part of the examination. The information is gathered and supplied as requested, allowing the auditors to perform their analysis. If inaccuracies are found, appropriate consequences may apply.
Being subject to a statutory audit is not an inherent sign of wrongdoing. Instead, it is often a formality designed to help prevent activities such as the misappropriation of funds by ensuring regular examination of various records by a competent third party. The same also applies to other types of audits.
Basic Procedures for a Statutory Audit
Generally, four key phases are outlined for financial audit process. These phases include planning the audit, determining the working of internal control, testing significant assertions about the data and evaluating compliance, and reporting the evaluations.
These phases are explained below for your reference:
♦ Planning
The process of financial audit begins with a plan that involves the method of collecting data to form an opinion about the organization or company’s financial status. A way is planned to collect a sample reflecting a point in time in the life of the company or organization. The financial transactions and documents are then looked at. It is noteworthy that the sample should show compliance with GAAP.
♦ Internal controls
The next step involves giving a look at the internal controls. The auditor demands info, looks closely at the records, and watches financial procedures in action. Without these steps, the auditor cannot give a statement about the financial status of the organization.
♦ Testing
Testing implies checking whether the internal controls are working or not. An auditor requests more info, returns to the company for more inspections, and watches how financial procedures are being performed. If the evidence demonstrates GAAP compliance, the auditor determines that the company successfully detects and prevents the errors.
♦ Reporting
The final step in financial audit involves giving a conclusion on how the company adheres to accounting standards. The audit from a CPA gives the organization an unqualified approval, a qualified approval, a disclaimer, or an adverse finding. The unqualified approval is considered as the best result and the adverse finding is considered to be the worst result.
Advantages of Statutory Audit:
► It increases the authenticity of the financial reports as the statements are properly verified by the auditor.
► Improves the credibility of the organization because when the audits have been conducted the financial reports are free from error, fraud and misrepresentation, and inaccuracies.
► It helps to improve the management to perform their job efficiently.
► Improves the efficacy of the internal system because the auditors analyze, study, and interpret business function and compare with policies and come up with suggestions and recommendations to improve the business.
► Minimize the risk of fraud in an organization
► Helps to gain the trust of shareholders, banks, and government.
Following are the objectives to be realized:
► Detection and prevention of errors
► Detection and prevention of frauds
► Clerical Errors
► Compensating Errors
► Errors of Principles
STATUTORY AUDIT CHECKLIST
Although there cannot be any fixed checklist of verification under statutory audit, we are providing a checklist of statutory audits for the only reference purpose.
Balance Sheet
► Share Capital
► Share Application Money
► Secured Loans
► Unsecured Loans
► Trade Payable
► Creditors against expenses
► Other current Liabilities
► Provision
► Deferred Tax Assets / Liabilities
► Investments
► Sundry debtors
► Loans and advances
► Security
► Advance to Employee
► Balance with the revenue authority
► TDS Receivable
► Prepaid Expenses
► Cash
► Bank
► Inventory
► Fixed Assets
► Duties & Taxes:
♦ TDS
♦ PF/ESI
♦ Bonus Act/ Gratuity Act
♦ GST
Profit and Loss Account
► Revenue from Operations
► FD Interest Income
► Dividend Income
► Profit/{Loss} on sale of fixed assets
► Discount Received
► Foreign currency fluctuation
► Purchase
► Salary
► ESI/PF/Bonus /Contribution Funds
► Legal Cases
► Gratuity/Leave Encashment/ Other Benefits long term
► Full & Final settlement
► Actuarial Certificate
► Finance Cost
► Expenses