Companies: Statutory Audit as Mandated by the Companies Act 2013
Table of Contents
Introduction
An audit is a formal examination of a person or companies financial records conducted by professional accountants. Audits can be performed internally by the organization’s employees or externally by an independent Certified Public Accountant (CPA) firm.
Lenders and underwriters often require audits to assess a company’s financial health, while tax authorities conduct audits to verify that income has been accurately reported. The three primary types of audits are external, internal, and Internal Revenue Service (IRS) audits.
What is a Statutory Audit?
One significant type of audit is the statutory audit, which is mandated by state or national laws applicable in the region. In India, statutory audits are governed by the Companies Act, 2013. Here, we’ll delve into the scope and benefits of a statutory audit.
A statutory or financial audit examines a company’s financial statements, including the profit and loss account and the balance sheet. The primary goal of a statutory audit is to ensure that these financial statements accurately and fairly represent the company’s financial position as of the balance sheet date.
Understanding the necessity of a statutory audit is crucial. While shareholders own the company, they do not manage its day-to-day operations—that responsibility falls to the board of directors and the management team.
Therefore, shareholders require assurance that the company’s accounts are authentic and reliable. This assurance is provided through a statutory audit conducted by an independent auditor.
The independent auditor has the authority to thoroughly review the company’s financial records and report their findings in an auditor’s report. This process ensures that shareholders and owners can trust the accuracy and reliability of the financial statements.
Moreover, other stakeholders, such as creditors, employees, and potential investors, also benefit from statutory audits. They rely on the audited financial statements to make informed decisions, knowing these accounts are genuine and dependable.
Who is A Statutory Auditor?
Sections 139 to 147 of the Companies Act 2013 outline the provisions concerning statutory audits and auditors. These sections detail the procedures for appointing auditors, their eligibility criteria, and their duties and responsibilities. Key aspects related to statutory auditors include:
- Access to Records: A statutory auditor has the right to access all of the company’s financial books, records, and information, which must be made available to them at all times. The auditor can also request additional information necessary for the audit.
- Audit Report: The auditor is responsible for preparing an audit report, indicating whether the company’s financial statements provide an accurate and fair view of its financial position and affairs.
- Qualified Report: If the auditor finds that the financial statements do not present an accurate and fair view, they must issue a qualified report and clearly state the reasons for this qualification.
- Reporting Fraud: If the auditor discovers fraud during the audit, they must report it to the central government authorities.
- Compliance with Standards: While conducting the audit and preparing the audit report, the auditor must adhere to the Auditing Standards prescribed by the Institute of Chartered Accountants of India (ICAI).
Statutory Audit of Companies
The directors appoint a third-party auditor as the first step in conducting a statutory audit of companies. Auditors are typically appointed during companies’ annual general meetings (AGMs).
Once appointed, the auditor remains in position until the next AGM. Under the Companies Act 2013, auditors can be appointed for up to five years, although in the case of individual and partnership firms, the appointment term is limited to one or two terms. A chartered accountant or an accounting firm can be appointed as the company’s auditor.
Specific individuals are ineligible to be appointed as the auditor of a company, including:
- An employee of the company.
- A partner of an employee of the company.
- Anyone who owes more than ₹1000 to the company.
- Anyone who holds the company’s securities or shares.
Applicability of Statutory Audit under the Companies Act, 2013
- Limited Liability Partnership (LLP): An LLP must undergo a statutory audit if its annual turnover exceeds ₹40 lakhs or its paid-up capital exceeds ₹25 lakhs.
- Private and Public Companies: Statutory audits are mandatory for private and public companies, irrespective of their profits, losses, or annual turnover.
FAQs
- Does every company need to undergo a statutory audit?
Not all companies are required to undergo a statutory audit. The need for an audit depends on factors such as the company’s size, industry, and local regulations. Smaller businesses may be exempt from this requirement.
- How often is a statutory audit required?
Companies are typically subject to annual audits. However, the frequency may vary depending on the jurisdiction and the type of company.
- What happens if the auditor identifies issues during the audit?
If the auditor discovers any problems or irregularities, they will report these findings in the audit report. The company is then expected to address and rectify the issues identified.
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