What is a statutory audit? How is it important for listed companies?

We have all heard companies scrambling to complete their books of accounts at the end of the financial year so they can be ready for statutory audit. It is an essential ritual for companies and is to be done with a lot of care and caution. But what exactly is a statutory audit and why is it essential for companies and shareholders? Below are the meaning and details related to a statutory audit that can help answer these questions.

What is a statutory audit and is it mandatory?

A statutory audit is the audit of financial statements at the end of the financial year that is carried out by an external auditor. The findings of this audit are reported to the shareholders and the owners of the company. Under the statutory audit, the auditors are required to assess the books of accounts to provide an opinion if they represent the true and fair picture of the financial statements of the company. 

These financial statements include the balance sheet, profit and loss account, fund flow, cash flow statement, and any explanatory notes provided for any special cases. The company has to adhere to all the relevant provisions of the Companies Act and the accounting standards issued by the ICAI from time to time. 

A company, whether private limited or public limited, registered under the Companies Act, 2013 is liable to conduct a statutory audit mandatorily per the relevant provisions. Such an audit is to be conducted even if the company is incurring losses. A statutory audit is also conducted for LLPs (Limited Liability Partnerships) if the total turnover for the financial year is more than Rs.40,00,000 or the contribution for the year is more than Rs. 25,00,000. 

Who can conduct a statutory audit?

As per the provisions of the Act, a statutory audit can be conducted by an independent chartered accountant or a firm of chartered accountants, limited liability partnerships (having a majority of partners practicing in India) who are qualified to conduct the statutory audit. However, the Companies Act, 2013 has laid down specific regulations that disqualify the following persons from qualifying to be statutory auditors.

1. An officer or an employee of the company
2. A person who is a relative or a partner or an employee of the company’s employee
3. A corporate body other than an LLP that is registered under the Limited Liabilities Partnership Act, 2008
4. A person who owes the company an amount more than Rs.1,000 or has provided a guarantee to the company on behalf of a person that is in debt to the company for an amount more than Rs. 1,000.
5. A person who is convicted of any offense by any court of law and a period of 10 years has not been completed for the same or a person who is of an unsound mind.

What is the scope of the statutory audit?

The scope of a statutory audit is quite extensive and includes a thorough review and analysis of the books of accounts of the company to form an opinion on the same. The report generated from the audit is to be prepared as per the norms of the Company’s Auditor’s Report Order (CARO). 

The statutory auditor is responsible to review and ascertain the adequacy, authenticity, and accuracy of the information provided in the financial statements of the entity and the source for the same. They are also responsible to review the internal auditing controls and the accounting policies followed by the entity to prepare its books of accounts. They are authorized to conduct any inquiry, review, prepare questionnaires, or receive confirmations and representations from the debtors or creditors of the entity to form their opinion.

The final audit report so prepared has to be duly signed and sent to the shareholders or owners of the company along with the management and to be filed with the Ministry of Corporate Affairs for verification.  

What are the advantages and disadvantages of a statutory audit?

A few advantages of the statutory audit are highlighted below.

1. A statutory audit helps in creating more transparency and authenticity of the financial statements of the organization
2. The management of the company is answerable to the shareholders and the owners of the company and a statutory audit ensure that all the relevant provisions of the Companies Act and accounting standards issued by ICAI are adhered to.
3. The financial statements of the company get better authenticity and result in a better reputation for the company which can provide it an upper hand in getting any external finance whenever needed.
4. A regular statutory audit reduces the risk of any errors, fraud, or mismanagement in the company.

Some of the disadvantages of the statutory audit are mentioned below,

1. One of the methods of conducting a statutory audit is sampling. This involves selecting a sample for review and audit. This may lead to questions on the accuracy of the report and errors in reporting.
2. A statutory audit is a time-consuming and costly affair that may not be viable for every auditee.
3. If the auditors may not be able to get sufficient evidence to form an opinion the scope of the audit may not be fulfilled.
4. If the auditor is not experienced enough, the purpose of the audit is not truly and efficiently fulfilled.

What are the consequences of not complying with statutory audit provisions?

A statutory audit is mandatory for all companies and eligible entities. Therefore, there are many severe consequences for not complying with statutory audit requirements. Such consequences include a fine or a penalty as well as jail time or booth in case of severe offenses. This penalty is levied on all the persons involved in the default.

1. The company required to conduct a statutory audit and failing to comply with the same will be liable to face a penalty of rs. 25,000 to Rs. 5,00,000.
2. Every officer of the company that is in default of the mandatory provisions relating to statutory audit is liable to pay a penalty of Rs. 10,000 to Rs. 1,00,000 or jail time up to 1 year or both
3. The auditor failing to comply with the provisions of the statutory audit will be liable to a penalty of Rs. 1,00,000 up to Rs. 25,00,000 and a jail term of up to 1 year. The auditor will also have to refund the remuneration received, if any, and pay for any damages caused to any erroneous or incorrect reporting in the audit report.
4. Furthermore, such an auditor is also liable to face any penal provisions as per the Chartered Accountants Act, 1949 on account of any professional misconduct.

Conclusion

The provisions of the Companies Act, 2013 and Chartered Accountants Act, 1949 ensure a smooth procedure for appointing a statutory auditor and conducting the statutory audit. These provisions ensure that the shareholders’ and owners’ interests are safeguarded and there is no decision or practice by the management that is detrimental to the growth and survival of the company.

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