Overview on Statutory Audit
Statutory audit, also known as external audit, is a type of audit that is conducted by a qualified and independent auditor, appointed by the company's shareholders, to provide an independent opinion on the accuracy and reliability of a company's financial statements. The objective of statutory audit is to ensure that the financial statements of a company provide a true and fair view of the company's financial position, performance, and cash flows.
The statutory audit is mandatory for all types of companies, including private limited companies, public limited companies, and listed companies. It is a legal requirement under the Companies Act, 2013, in India, and similar laws in other countries. The audit is conducted annually and covers a review of the company's financial statements, including its balance sheet, profit and loss account, cash flow statement, and notes to the financial statements.
During the statutory audit, the auditor examines the company's financial records, internal controls, and accounting policies to verify that they comply with the applicable accounting standards and legal requirements. The auditor also checks for any irregularities or inconsistencies in the financial statements and reports any material weaknesses in the company's internal financial controls.
The audit report provides an opinion on the accuracy and reliability of the financial statements, highlighting any significant issues identified during the audit. The audit report is presented to the shareholders of the company at the Annual General Meeting (AGM), along with the financial statements.
The statutory audit helps to promote transparency and accountability in the financial reporting of companies, and provides assurance to stakeholders, including investors, creditors, and regulators, that the financial statements are accurate and reliable. It also helps to identify any areas of improvement in the company's financial reporting and internal controls, which can help to mitigate the risk of financial fraud and mismanagement.
Provisions of Statutory Audit under Companies Act, 2013
The Companies Act 2013 has several provisions related to statutory audit, which are as follows:
- Appointment of Auditor: Section 139 of the Companies Act 2013 deals with the appointment of an auditor. It mandates the appointment of a qualified auditor for each financial year of the company. The auditor must be appointed by the shareholders of the company at the Annual General Meeting (AGM) for a term of five years.
- Rotation of Auditor: Section 139(2) of the Companies Act 2013 provides for the rotation of auditors. Companies are required to rotate their auditors after the completion of the maximum term of five years. The rotation of auditors is aimed at ensuring independence and objectivity of the audit process.
- Qualifications and Disqualifications of Auditors: Section 141 of the Companies Act2013 lays down the qualifications and disqualifications of auditors. It specifies the eligibility criteria for appointment as an auditor and also provides for certain disqualifications, such as being an officer or employee of the company, holding a substantial interest in the company, or being a partner or employee of the company's audit firm.
- Powers and Duties of Auditors: Section 143 of the Companies Act 2013 deals with the powers and duties of auditors. It requires the auditor to conduct a comprehensive audit of the company's financial statements, including its balance sheet, profit and loss account, and cash flow statement. The auditor is also required to report on certain specified matters, such as adequacy of internal financial controls and compliance with accounting standards.
- Reporting by Auditors: Section 143(3) of the Companies Act 2013 requires the auditor to provide a report to the shareholders of the company. The auditor's report should contain their opinion on the financial statements and should also include information on any material weaknesses in the company's internal financial controls.
- Punishment for Non-Compliance: Section 147 of the Companies Act 2013 provides for punishment for non-compliance with the provisions related to statutory audit. If a company fails to appoint an auditor, or if the auditor fails to report on any material weaknesses in the company's internal financial controls, the company and its officers may be subject to fines and imprisonment.
Applicability of Statutory Audit under Companies Act, 2013
All Public and Private limited companies have to undergo a statutory audit. Irrespective of the nature of the business or turnover, these companies are mandated to get their annual accounts audited each financial year.
Meanwhile, a Limited Liability Partnership firm (LLP) must undergo a statutory audit only if its turnover in any Financial Year exceeds INR 4 million or its Capital Contribution exceeds INR 2.5 million.
Every company and its directors must first appoint an auditor within 30 days from the date of registration of the company in its first board meeting. 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. Their appointment need not be ratified in each of the 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 firm, or chartered accountant, or limited liability partnership firm having majority of partners practicing in India are qualified for appointment as an auditor of a company.
The Companies Act, 2013 specifically disqualifies the following persons 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 or who have guaranteed to the company on behalf of another person a sum exceeding INR 1,000;
- 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.
The Ministry of Corporate Affairs (MCA) recently announced a new format of statutory audits of companies. The MCA notified the Companies (Auditor’s Report) Order, 2020 on February 25, 2020 (CARO 2020). CARO 2020 replaces the earlier order under the Companies (Auditor’s Report) Order, 2016. CARO 2020 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. It is applicable for all statutory audits commencing on or after April 1, 2020 (corresponding to the financial year 2019-20). The order is applicable to all companies covered by CARO 2016; similarly, companies that were excluded from the purview of CARO 2016, such as one person companies, banking and insurance companies, small companies, etc. will stay excluded from the purview of CARO 2020.
Frequently Asked Questions
How often does a company need to undergo statutory audit?
The frequency of statutory audit depends on the regulations of the country where the company operates, as well as the type and size of the company. In most cases, companies are required to undergo statutory audit on an annual basis.
What is the role of the auditor in a statutory audit?
The role of the auditor in a statutory audit is to express an opinion on whether the company's financial statements present a true and fair view of its financial performance and position, and whether they are in compliance with applicable laws and regulations.
What are the consequences of failing a statutory audit?
Failing a statutory audit can have serious consequences, including reputational damage, financial penalties, legal action, and even the revocation of the company's license to operate. It can also affect the company's ability to raise capital or obtain loans from lenders.
Can a company prepare its own financial statements for a statutory audit?
No, a company cannot prepare its own financial statements for a statutory audit. The financial statements must be prepared by management and reviewed by the auditor to ensure that they are accurate, complete, and in compliance with applicable accounting standards and regulations.