A fast-paced business environment combined with the need to be in sync with the global standards has raised the performance bar for companies and brought in high-quality statutory audit requirements in the country.
The demand for accurately audited accounts has put more weight on the shoulders of a statutory auditor, usually a chartered accountant. As a result, in recent times, statutory audit has magnified in terms of complexity.
Statutory: Let’s understand the word Statutory means anything regulated by laws of the state. Statutory audit is the official inspection of a company’s accounts typically by an independent body. More elaborately put, it is the audit of books of accounts of a company, according to the requirements of a statute, to ensure fair and accurate representation of its financial records. There are many types of audits in India prescribed by different regulatory bodies. However, commonly, the term ‘statutory audit’ deals with the requirements of the Companies Act, 2013.
The right approach
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 liabilities and provisions Statutory payments and returns Fixed assets Inventories Investments Current assets: sundry, cash and bank balance, deposit||Sales and other income Purchase and other direct expenses Manufacturing expenses Administrative expenses 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 counselling. A hassle-free audit can be ensured with knowledge of the process, proper organization, and preparedness.
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