A statutory audit is a mandatory audit of a company’s financial records as per legal requirements. Under the Companies Act, 2013, every company registered in India, whether public or private, must undergo a statutory audit to ensure the accuracy of financial statements and compliance with various laws and regulations.In this blog, we will delve into the statutory audit requirements, its purpose, who it applies to, and the process involved under the Companies Act.

What is a Statutory Audit? , Purpose and Applicability of Statutory Audit

What is a Statutory Audit?

A statutory audit refers to an official examination of a company’s financial records, including income statements, balance sheets, and cash flow statements, carried out by an independent auditor. The goal of the audit is to assess whether the financial statements provide a true and fair view of the company’s financial health and are free from material misstatements, either due to fraud or error.

The Companies Act, 2013 makes it compulsory for all companies in India to have their financial statements audited by a qualified Chartered Accountant.

Purpose of Statutory Audit

·         Verification of Financial Statements: Ensures that the financial statements reflect a true and fair view of the company's financial position.

·         Legal Compliance: Ensures that the company is complying with the provisions of the Companies Act and other applicable laws.

·         Fraud Detection: Identifies potential fraud or discrepancies in financial records.

·         Shareholder Protection: Provides assurance to shareholders that the company is financially sound and the management is transparent.

·         Regulatory Submission: Audited financial statements are required for filing with the Registrar of Companies (RoC) and other regulatory bodies.

Applicability of Statutory Audit

·         Private Companies: Regardless of their turnover or profit.

·         Public Companies: All public companies must undergo a statutory audit, irrespective of its financial position or profit.

·         One-Person Companies (OPCs): OPCs are also required to conduct statutory audits, even if they have minimal turnover.

Key Provisions for Statutory Auditors, Statutory Audit Process and Consequences of Non-compliance

Key Provisions for Statutory Auditors :

·         Eligibility: Only a qualified Chartered Accountant (CA) can be appointed as an auditor under the Companies Act.

·         Independence: The auditor must be independent of the company and free from any conflict of interest.

·         Reporting Requirements: The auditor must provide a detailed audit report highlighting any discrepancies, qualifications, or areas of concern.

·         Liability: Auditors are liable for their professional judgment. If found guilty of negligence, they can be penalized under the Companies Act.

Statutory Audit Process :

·         Preliminary Review: The auditor gathers an understanding of the company’s operations, accounting system, and internal controls.

·         Sampling and Testing: The auditor tests a sample of transactions and verifies their accuracy.

·         Verification of Accounts: The auditor examines balance sheets, income statements, and other financial records to confirm their correctness.

·         Internal Controls: The auditor assesses the effectiveness of the company’s internal controls to detect any weaknesses that could lead to errors or fraud.

·         Audit Report: The auditor prepares a report outlining whether the financial statements are true and fair, along with any qualifications or observations.

Consequences of Non-compliance :

Failure to conduct a statutory audit can result in severe penalties for the company and its officers. The Companies Act prescribes both financial penalties and imprisonment for directors and auditors who are found guilty of non-compliance or misconduct.

Conclusion :

A statutory audit under the Companies Act ensures transparency, accountability, and compliance with legal standards in a company’s financial records. It builds trust among shareholders and stakeholders while preventing fraud and enhancing corporate governance. By following audit requirements, companies promote long-term business growth and financial integrity.