Audit & Assurance Services

Statutory audit is required to assess whether the company complies with the applicable laws, rules and regulations and standards and whether the financial statements reflect a true and fair view of the financial position of the company. It applies to all the companies registered in India under the erstwhile Companies Act, 1956 and Companies Act, 2013 and Limited Liability Partnerships (LLPs) having turnover exceeding Rs. 40 Lakhs or contribution Rs. 25 Lakhs.

Section 139(1) of the Companies Act,2013 read with Rule 3 of Companies (Audit & Auditors) Rules, 2014, mentions that every company shall appoint an individual/firm as an auditor.

Section 139(6) of the Act states that the first auditor of the company shall be appointed within 30 days of its date of registration.

Steps generally followed in conducting Statutory Audit:

1. Getting appointment letter & board resolution copy
2. Getting NOC from the previous auditor
3. Filing no disqualification status to the company
4. Filing of Form ADT-1 to ROC
5. Letter of engagement
6. Assessment of internal control
7. Formulation of internal audit program action plan and calendar
8. Conduction audit as per IGAAP, Companies Act, ICAI Accounting Standards and Auditing Standards.         
9. Forming an opinion on the financial statement prepared by the company
10. Reporting to shareholders
11. Attending AGM    

Statutory Audit Requirement

1. Companies (Private, Public, Section 8, etc.)

• Applicability: All companies, including Private Limited, Public Limited, One Person Company, Section 8 (Non-Profit) Company, Nidhi Company, and Producer Company, must conduct a statutory audit.
• Threshold: Mandatory regardless of turnover, profit, or business activity.
• Legal Basis: Companies Act, 2013.
• Purpose: Ensures compliance with corporate governance and provides assurance on financial accuracy.
• Penalty for Non-Compliance: Directors and officers can face fines and legal consequences as specified in the Companies Act.

2. Limited Liability Partnerships (LLPs)

• Applicability: LLPs must conduct a statutory audit if:
  • Annual sales turnover exceeds ₹40 lakhs, or
  • Capital contribution exceeds ₹25 lakhs.
• Legal Basis: LLP Act, 2008.
• Purpose: Ensures compliance with financial disclosure requirements for stakeholders and regulatory bodies.
• Penalty for Non-Compliance: Penalties under the LLP Act, including monetary fines.

3. Proprietorship Firms

• Applicability: Proprietorships must conduct a Tax Audit if:
  • Business turnover exceeds ₹1 crore, or
  • Professional gross receipts exceed ₹25 lakhs.
• Legal Basis: Section 44AB of the Income Tax Act, 1961.
• Purpose: Ensures accurate tax reporting and compliance with tax laws.
• Penalty for Non-Compliance: Penalty of 0.5% of turnover (up to ₹1,50,000) under the Income Tax Act.

4. Partnership Firms

• Applicability: Similar to proprietorship firms:
  • Audit is mandatory under tax laws if turnover or receipts exceed thresholds under Section 44AB.
• Legal Basis: Indian Partnership Act, 1932, and Income Tax Act, 1961.
• Penalty for Non-Compliance: Same as proprietorship firms.

5. Societies and Trusts

• Applicability: Mandatory if registered under Societies Registration Act 1860 or Indian Trusts Act 1882, especially for availing tax benefits under Sections 12A and 80G of the Income Tax Act.
• Purpose: Ensures proper utilization of funds for the intended purpose.
• Penalty for Non-Compliance: Loss of registration benefits or tax exemptions.

6. Cooperative Societies

• Applicability: Statutory audits are mandatory for cooperative societies, irrespective of turnover, as per the respective State Cooperative Societies Act.
• Purpose: Ensures transparency in managing society funds and compliance with cooperative principles.
• Penalty for Non-Compliance: Fines or penalties under the respective State Act.

Some important areas of consideration in a Statutory Audit

1: Testing of Internal Controls

A test of controls is an audit procedure to assess the effectiveness of control used by a client entity to detect and prevent fraud and errors. Depending on the results of this test, auditors may choose to rely upon the client’s system of internal controls as part of their auditing activities. However, if the test reveals that controls are weak, the auditors will enhance their use of substantive testing.

2: Verifying Balance Sheet Items

A Balance Sheet audit involves the evaluation of the accuracy of information found in a company’s Balance Sheet. Auditors conduct this evaluation based on supporting documents such as:

• Secured loans, including the latest bank statements, bank reconciliation statements, and sanctioned letters confirming the interest rate on loan.
• Fixed assets including copies of invoices showing any addition to the assets, books showing depreciation working, list of assets not yet accounted in the books.

3: Verifying Profit & Loss Account Items

Some of the essential considerations while testing Profit & Loss A/C items include the following:

• Comparison of year-over-year numbers as well as industry benchmarking
• Conducting trend analysis to find out whether the metrics are improving or deteriorating
• Checking the individual breakups of sales and purchases.
• In the case of preliminary expenses, checking whether they have been capitalised within five years.
• Verifying if the valuation of closing stock has been done as per AS-2.

4: Testing TDS related compliances

Some of the points to keep in mind while evaluating the TDS compliances are:

• Checking the voucher entries of TDS related transactions.
• Verifying all the source documents relating to TDS.
• Reconciling the books with challans and returns.

5: Some other important checks:

• Checking whether the dividend paid by the company is within the specified limits.
• Checking Provident Fund, ESIC, Gratuity, Bonus and Leave encashment payments with the applicable provisions of the respective acts.
• Checking whether the loan/advances of the company are permitted by the Companies Act, 2013 and Income Tax Act, 1961.