What are the Practical Steps in a Statutory Audit?

The Statutory audits are mandatory for public companies that is incorporated by the Constitution. Audits verify that related financial statements meet relevant statutory rules and regulations. Therefore, let us know about the practical steps in a statutory audit.

About Statutory Audit

• Under the Companies Act (2013), Section 2(40), it is required by law under sections of the Act to assure the board and the public that the balance sheet and income statements, disclosing profit or loss for a particular period, fairly represent the entity's financial position.
• Analysis of these records is undergone with inspections to ascertain the current economic status of a business and its running performance, be it either presenting profit or loss for a given period.

Types of Statutory Audit

It includes the remedial processes under different laws under the Companies (Audit and Auditors) Rules of 2014. The types of statutory audits are as follows:

• Cost Audit: It is required under Section 148 of the Companies Act (2013).
• Financial Audit: This is mandated under Section 139 of the Companies Act (2013).
• Tax Audit: It is mandated under Section 44AB of the Income Tax Act, 1961.
• Secretarial Audit: It is mandatory under Section 208 of the Companies Act of 2013.
• GST Audit: Under Chapter 35 of the GST Act of 2017.
• NHM (National Health Mission): As a result, internal or concurrent audits are required.
• Metering and Billing Audit: It is recommended by TRAI in utilisation of audit involving metering and billing. 
• Performance Audit: Under the Cooperative Societies Act, a cooperative society is subject to performance audit.

Practical Steps in a Statutory Audit

• Appointment of Auditor: The selection of an independent auditor approved by ICAI, with no direct financial interest in the business, is the first step to statutory audit. The auditor appointed shall be reappointed in each Annual General Meetings (FY).He is appointed for a 5 years term period. Nevertheless, the notice of appointment should be sent to the ROC in 15 days from the date of appointment.
• Audit Planning: It is planned where the auditor presents the audit's purpose and its scope. It involves identifying risks, creating an audit plan, and crucial company information.
• Performing a Risk Assessment: During the risk assessment, the auditor specifically looks for areas of the internal control structure that requires attention that have errors. It improves the higher risks and gives a more emphasis towards them.
• Audit Testing: Analytical evaluation and verification of account balances, transactions, and supporting documentation are the crucial operations that are part of the audit testing stage. These processes aid in getting audit evidence to back up representations made in the financial statements.
• Assessment of Regulatory and Compliance: It checks how an organization comply with the laws and regulations. The verification of compliance with the tax laws, regulations of the companies, and rules of the industrial sector-an auditor checks additional compliance with these laws in respect of the companies regulated by special regulatory bodies such as the Reserve Bank of India, Securities and Exchange Board of India, or those listed on the stock exchange.
• Checking of Internal Control: This is checking to find out whether the internal controls exercised within the organization are functioning as intended.The auditor examines the internal control's functionality and design. This reduces the likelihood of fraud and errors, identifies issues, and suggests solutions.
• Audit Findings and Reporting: Following the process, the auditor generates a report outlining findings such control, non-compliance detection, and material concerns. Following that, a test report detailing these findings is given to the board of directors, shareholders, and firm management. The auditors may occasionally suggest methods for improving the company's risk management, compliance, and accounting process, etc. Any issues like tax obligations or non-compliance with regulations, must be directly discussed by the auditor with management.
• Follow-up Actions: Following the release of the audit report, management is in charge of the action plan and the next step, which is the actual execution of the auditor's recommendations or any right measures the auditor is required.
• Final Audit Report and Submission: In accordance with section 143 of the Companies Act of 2013, the final report of this statutory audit is issued, and submission denotes the audit's conclusion. The auditor's opinion for the support of the production of financial statements is summarized in the audit report. The report may either be clean (unqualified), qualified, adversary, or disclaimer of opinion.The auditors are expected to present the audit report at the AGM and file a copy with the MCA. The report needs to get forward to the ROC within one month of the AGM.
• Continuous Improvement: The audits help in promoting the business financial performance and accountability. The results of an audits helps in improving the financial reporting system. Organizations must learn from past audits and use those lessons to the financial reporting preparation process.

Importance of Statutory Audit

• All private and public limited companies are mandatory to perform statutory audit under the Companies Act (2013) and the Companies (Audit and Auditors) Rules (2014).
• The requirement may not be deemed to discriminate against the type of business of any private or public limited company or impose a ceiling on an upper limit above which no audit is to be undertaken.
• Statutory Audit will be needed for those LLPs who are above the limited turnover of ₹40 lakh in a financial year or whose capital contribution from their partners exceeds ₹25 lakh in a financial year.
• If there is a breach of the provisions of statutory audits, it shall attract a penalty of fine ranging from ₹25,000 to ₹5,00,000, and, imprisonment extending up to one year with a fine of ₹10,000 to ₹1,00,000, for the guilty officer.

Conclusion

Statutory audit involves a complex process and thus requires right scheduling, a detailed insight into the relevant regulations, and highly organized execution. If auditors follow these steps, they can report with the compliance, accuracy, and transparency. This makes the practice of statutory audits important, as businesses continue to proliferate and regulations evolve. Indeed, in the economic ecosystem, this becomes itself more and more crucial in building trust and accountability into that ecosystem.