Project Report on Companies Statutory Audit In India

INTRODUCTION

A statutory audit is a legally required review of the accuracy of a company’s financial statements
and records. It is also known as External Audit. The purpose of a statutory audit is the same as
the purpose of any other type of audit: to determine whether an organization is providing a fair
and accurate representation of its financial position by examining information such as bank
balances, bookkeeping records and financial transactions.

Statutory Audit is a type of audit which is mandated by a Law to ensure true and fair view of the
book of accounts of a Business is presented to the Regulators and the Public. Unlike internal
audit, Statutory Audits are not optional and must be performed if a business satisfies certain
criteria’s. Statutory audits must be completed by qualified Chartered Accountants who are
independent of the Business. Further, the report prepared by the Auditor on his/her findings must
be presented in the format prescribed by the Regulator.
Statutory audits in India

Statutory audit refers to the audit based on the laws applicable on the entity for the time being in
force. It is governed by the Indian Accounting Standards (Ind-AS) issued by Institute of Charted
Accountant of India from time to time. A Charted Accountant holding a certificate of practice in
India is qualified to be a Statutory Auditor of an entity. It is mandatory for a company in India to
get the Statutory Audit of its financial statements done according to the provisions of Companies
Act 2013.

As per Section 139 of the Companies Act, 2013 deals with the appointment of Auditors.

In India, every company whose shares are registered on the stock exchange must have an internal
auditing system in place. For a company whose shares are not listed on the stock exchange, but
whose average turnover during the previous three years exceeds INR5 crore, or whose share
capital and reserves at the beginning of the financial year exceeds INR50 lakh, must have an
internal auditing system in place. The statutory auditor of the company must report on the
internal auditing system of the company in the audit report.

In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the
calendar year.
Company Audit-

The provisions for a company audit are contained in the Companies Act, 1956. Every company,
irrespective of its nature of business or turnover, must have its annual accounts audited each
financial year. For this purpose, the company and its directors have to first appoint an auditor at
the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the
shareholders of the company who will hold the position from one AGM to the conclusion of the
next AGM.

The Companies Bill 2012 provides that an auditor shall be appointed for a term of five
consecutive AGMs. Individuals and partnership firms, auditors cannot be appointed for more
than one or two terms, respectively. After the completion of the term, the auditor must be
changed.

Only an independent chartered accountant or a partnership firm of chartered accountants can be

appointed as the auditor of a company. The following persons are specifically disqualified from
becoming an auditor per the Companies Act:

• A body corporate;

• An officer or employee of the company;

• A person who is partner with an employee of the company or employee of an employee

of the company;

• Any person who is indebted to a company for a sum exceeding INR1,000 or who have
guaranteed to the company on behalf of another person a sum exceeding INR1,000; or,

• A person who has held any securities in the company after one year from the date of
commencement of the Companies (Amendment) Act, 2000.
OBJECTIES OF STUDY

• To study the Concept and significance of Statutory Audit.

• To study different Standards of Auditing which has to be applied by every auditor.

• To study different laws laid by the Indian government to inspection of a Company Audit.
RESEARCH METHODOLOGY

 This Research is Descriptive in nature.

 The Study is based on both primary and secondary data.

Primary data is collected from Certified Charted Accountant and students who are doing CA
Articleship by Interview method & Observation method.

Secondary data is collected from Books, Internet Articles, Internet Websites &Newspapers.
Need & Scope of the project

This project helps to know the Importance of the external audit in every company. It also helps to
know the basic Rules & Regulations to be followed while doing external audit. By doing external
audit company will get know their current financial position and they can take right decisions for
further Improvement in their policies & financial decisions.
LIMITATIONS OF THE STUDY

 The time period of the study is only for two month which is not sufficient to study deeper
about the topic.
 The study is done only on the statutory audit of company.
2. Literature Review

Researchers from India & Abroad have contributed their thoughtful research on the related fields
of statutory audit of financial statement in the forms of books, research papers, research projects,
etc. in order to address those questions, a survey of literature related to audit quality has been
thoroughly conducted:

Akpom and Dimpkah (2013) in their research paper empirically analyzed perception of auditors
and non-auditor executives on the provisions of non-audit service, audit size and audit market
capitalization. The result shows that both group agreed on the general factors that enhance
statutory auditor’s independence. However degree of agreement differed.
THERIOTICAL BAGROUND-

UNDERSTANDING THE IMPORTANCE OF STATUTORY AUDITS

Due to the increases in the audit exemption thresholds over the years, many companies may not
have had a
statutory audit for some time, if ever. However, it may be worth considering whether an audit
would be of
benefit to your business.

The process can provide valuable feedback on the effectiveness of your company’s internal
controls and processes, and can also offer a useful external perspective of the business. Audited
financial statements can enhance confidence in your business if you intend looking for finance or
new investors in the future.

If your company is appointing an auditor for the first time, here are some pointers that company
directors should consider

• Define your needs-

Consider why the company is appointing an auditor. Is there a legal requirement to have an audit
(many companies are audit-exempt, so do not legally require an audit) or have the shareholders
requested an audit?

• Research the market-

Many large companies will put their audit out to tender. Such a formal process may not suit
smaller firms, so it may be more appropriate to meet a number of prospective auditors to discuss
your company’s requirements. Meeting with prospective auditors is a useful way to gauge their
working and communication style.
• Appoint the auditor-

The directors usually appoint the first auditor; they are then appointed or reappointed at each
AGM. The Companies Registration Office maintains a register of all those individuals and firms
that are appropriately qualified to provide statutory audit services.

• Preparing for the audit-

To ensure that the audit process is as efficient and effective as possible, you should engage as
early as possible with the auditor to agree a timeline and prepare the relevant records. The
auditor may be able to assist you with these final preparations, although there are limits, due to
independence rules, as to what the auditor can do.

The auditor will generally arrange a planning meeting. An engagement letter will issue, which
sets out the respective responsibilities of the auditor and the director. This should be reviewed
carefully. Ask the auditor to explain any terminology that you are not familiar with.

• Final report-

A final statutory audit report setting out the auditor’s opinion will issue to the members of the
company. The key findings and shortcomings noted in the company’s internal controls and
processes will be outlined, providing you with insight into the business and a deeper
understanding of the potential risks you may be exposed to.
Types of audit conducted by External Auditor-

Major types of audits conducted by external auditors include the financial statements audit, the
operational audit, and the compliance audit.

1. Financial Statement Audit-

A financial statement audit is the examination of an entity's financial statements and accompanying
disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting
to the fairness of presentation of the financial statements and related disclosures. The auditor's report must
accompany the financial statements when they are issued to the intended recipients.

The purpose of a financial statement audit is to add credibility to the reported financial position and
performance of a business. The Securities and Exchange Commission requires that all entities that
are publicly held must file annual reports with it that are audited. Similarly, lenders typically require an
audit of the financial statements of any entity to which they lend funds. Suppliers may also require
audited financial statements before they will be willing to extend trade credit.

2. Compliance Audit

While carrying out compliance audit, auditors look for that particular piece of compliance requirement
that is required from the respective regulatory authority for that industry. These compliance audit
procedures could vary from one kind of organization to another, depending on the kind of data it handles,
and on the kind of organization it is: whether it is a public company or a private enterprise.

Depending on the subject, each audit can be performed by different entities. However, all of them will be
third parties to ensure objectiveness. For example, a compliance audit could be issued to determine a
textile mill is following the EPA (or Environmental Protection Act) guidelines for disposing waste. The
EPA could send someone from their business, or they could hire a third party to assess the mill and send
in the results.
Auditing Standards

The Standards on Auditing issued by the Institute of Chartered Accountants of India clearly list
downs the steps to be followed for purpose of conducting an audit. Let us discuss some of the
essential standards for the purpose of conducting an audit.

• SA 200: Here as an auditor one has to understand the overall objectives of audit to be
conducted. Generally in a statutory audit the statute clearly defines the objectives of
such audit. Ex: Companies Act, 2013 clearly states that the object of the auditor is to
assert that Financial Statements give True and Fair view of the state of affairs of the
company.
• SA 210: The auditor and the management have to mutually agree to the terms of
engagement of the auditor to conduct an audit of the company.
• SA 240 & 250: The auditor has to understand his responsibilities relating to any
deficiency in financial statement and all applicable laws and regulations to the
company.
• SA 260 & 265: Understand the existing internal control system present at the company
and if any deficiencies are found you may have to report to those charged with
governance.
• SA 315: As an auditor you need to understand the company and it’s environment and
key risks to which it is exposed to. According you would be able to decide which are
the key areas which could lead to material misstatement.
• SA 320 & 330: Based upon the assessed risk the auditor would decide the materiality
level which could affect his opinion on audit of financial statements and based upon
the assessment auditor would plan the audit and form his opinion.
• SA 230 & SA 500: As an evidence to performance of the above mentioned steps and
to create a trail of working papers the auditor would complete audit documentation.
• Further, based upon the material statement identified and assessing the risk, the
auditor would perform analytical procedures, compliance procedures, substantive
procedures, sampling procedures, etc.
The auditor is required to prepare the audit report in accordance with the Company Auditor’s
Report Order (CARO) 2003. CARO 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.

The Auditor Report must be obtained before holding the AGM, which itself should be held
within six months from the end of the financial year.
Audit reporting

Audits are conducted to express a true and fair view of a company’s financial statements.
Therefore, the auditor’s opinion expressed in the ultimate report is based on the information
reviewed and analyzed during the verification of financial statements. Upon completing
the report the auditor may express one of the following four opinions:

• Unqualified Opinion;

• Qualified Opinion;

• Disclaimer of Opinion; and,

• Adverse Opinion.

• Unqualified Opinion
An unqualified opinion is expressed when the auditor concludes that the financial statements
give a true and fair view in accordance with the financial reporting framework used for the
preparation and presentation of the financial statements. It indicates that:

• Generally accepted accounting principles are consistently applied in the preparation of

financial statements;

• Financial statements comply with the relevant statutory requirements and regulations;
and,

• There is adequate disclosure of all material matters relevant to the proper presentation of
financial information (subject to statutory requirements).

• Qualified Opinion
An qualified opinion is expressed when the auditor concludes that an unqualified opinion
cannot be expressed, but that the effect of any disagreement with management is not so
material and pervasive as to require an adverse opinion, or the limitation of scope is not so
material and pervasive as to require a disclaimer of opinion. A qualified opinion should be
expressed as being “subject to’” or “except for” the effects of the matter to which the
qualification relates.
• Disclaimer of Opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so
material and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and is, therefore, unable to express an opinion on the financial statements.

• Adverse Opinion
An adverse opinion is expressed when the effect of a disagreement is so material and
pervasive to the financial statements that the auditor concludes that a qualification of the
report is not adequate to disclose the misleading or incomplete nature of the financial
statements.
 DATA ANALYSIS & INTERPRETATION

Steps Followed in Statutory Audit

Even though it happens year after year, the microanalysis and the constant questioning can take a
toll on a company and its employees. No matter what the business is, or how big it is, the audit
process essentially remains the same. Here is a step-by-step guide to help you understand and
prepare for this complex annual routine.

• Step 1 Plan it well: This is the most important part that most people forget. It is important to
understand how well the auditor knows your company and business. A detailed study can help
you deal with potential issues and problems early. The more the auditor understands your
company, the easier it gets for you. So, to help the auditor know you better, you may have to
provide the following details. – The corporate structure including the history, locations, and the
market share of your company. – Operations comprising services, products, marketing, and
processing – Financial statements, accounts, liquidity, stocks and shares, etc.

• Step 2 Draw up a schedule: Keep a checklist of the tasks and the assignments along with names
of the people who are responsible. Working around a timetable makes it easy to review
paperwork and identify any misses, and decide on actions to be taken. The auditors too, usually,
obtain the management representation letters beforehand.

• Step 3 The Audit: The whole audit process works around four main areas. a) Cash b) Stocks c)
Receivables d) Payables, e) Statutory requirements and records. The audit analysis may be
clubbed under broad subheadings based on statutory requirements and records.

Balance sheet Profit and Loss account

Share capital Secured and unsecured loans Current Sales and other income Purchase and
liabilities and provisions Statutory payments and other direct expenses Manufacturing
returns Fixed assets Inventories Investments Current expenses Administrative expenses
assets: sundry, cash and bank balance, deposit Charges
 A good auditor will compile previous years’ (PY) working papers for reference. The team will
thoroughly examine the company’s accounting systems and financial statements. The depth of
inspection depends on the internal control assessment. If the control report is satisfactory, further
testing is limited and if not, a more in-depth analysis is carried out. In the initial phase, auditors
examine the Previous year’s copy of audited balance sheet, P&L statements, schedules, and the
audit report.

• Step 4 Verification of various registers and files: The auditors will also physically verify the
stock-in trade, if any. The important files to be presented include:- Purchase bill – Sales Register
– VAT payments and returns – Salary and wages – Fixed assets purchased – Trade license –
Property Tax paid challans – E S I paid challan outstanding – Payment of advance tax – TDS
certificates – Investment papers – Bank reconciliation statement. The audit team may put a
company’s controls to test not only to see their effectiveness but also to verify that everything is
actually present and not just on paper. Effectively, every asset and transaction will go through an
audit trail to prove its legitimacy.

• Step 5 Discussion and feedback: Ideally, there is a discussion at the end of each step of the
audit. These informal dialogues offer an opportunity for mutual feedback regarding the analysis
of the controls, the documents, and the areas that require improvement or prompt action.

• Step 6 The Audit report: The final audit report is made after complete analysis and
understanding of the financial statements and after all areas of concern have been satisfactorily
addressed. The audit team then presents its report to the company’s board or audit committee.

The arrival of the annual statutory audit should not serve as a warning signal. It should rather
become a part and parcel of a company’s systematic function. Scientologists use the term
‘auditing’ synonymously with counseling. A hassle-free audit can be ensured with knowledge of
the process, proper organization, and preparedness.
Following Documentary Evidences are require to be verify for A Statutory Audit :-

• First you examine Documentary Evidences regarding appointment/reappointment of an

Auditor.

• Examine Last Year’s copy of Audited Balance sheet, profit & loss account , schedules, notes
on accounts along with 3CA/3CB, 3CD & Audit Report.

• Carefully Examine the internal control system of the company..

• Purchase bill File.

• Sale bill File.

• Quarterly VAT Return According to Vat Input Output Register.

• Bank Reconciliation Statement .

• Salary and wages register.

• Bills of Various Assets Purchased during the Year.

• Telephone bill, Electricity Bill for the relevant year.

• Rent bill( if any ).

• Verify Purchase & Sales bill with GST Invoice

• Verify Vat payment challan .

• Verify CST payment challan.

• Verify P.F paid challan for the last year outstanding.

• Verify E.S.I paid challan for the last year outstanding.

• Verify Employees P.TAX paid challan.

• Verify P.TAX ( FOR COMPANY) paid challan .

• Trade License for the company.

• Payment of Advance Tax challan.

• Verify TDS Certificates with Form 26AS Annual Tax credit statement.

• Verify Investments papers i.e, FD.

• Physical verification of stock-in trade.

• Therefore each and every aspect of accounts are require to be verify with their relevant
documentary evidences by the Auditor himself.