Statutory Audit

A statutory audit is a mandatory audit that is bounded by law. In this article, we will find the meaning of a statutory audit, understand it with some examples, and see specific considerations regarding an audit’s viability, including why and who should undergo it.

What is a statutory audit?

It is a legally bound assessment of a firm or government agency’s financial documents and the associated records. The documents which form part of this assessment are generally a balance sheet, income statement, statement of cash flow, etc. 

First, it determines the accuracy of what the company has put forward to the public. Secondly, it audits the fairness and legal correctness in terms of the processes used and the financial transactions undertaken by the company. Thus, it certifies the legally accurate financial representation of the firm or the private / government organization subjected to statutory audit.

Understanding statutory audits

A statutory audit is a legal requirement. Regardless of region or location, every country must conduct these audits for its public and private sector companies, government departments, and organizations. Though the terms and conditions in consideration might vary based on the minimum size of the firm, the duration to be considered, the level of conduct of the audit, the financial and legal penalties for irregularities, etc.

But what is a statute? It is the law, rule, or regulation framed by the government’s legislative body under which a particular organization or a firm comes. These regulations are multi-tiered and start from the highest echelon of the government, which is the federal, then the state, and lastly, the municipal bodies. However, all businesses generally create internal statutes, which are decided by their Board of Directors managing the leadership and its actual functioning.

Now, let us see what is done or held under the gambit of an audit. The financial records of a company, public or private organization, government agency, or even an individual come under this term. We shall talk about only the financial audit, which is a statutory audit. Every financial document of an organization is audited for its fairness and correctness, which includes profit and loss statements, ledgers, bank statements, sale and purchase deeds, receipts of sales and purchases, expenditures, returns, etc.

It brings us to the purpose of a statutory audit. This audit determines the legal correctness, the accuracy of checks and balances, procedures being followed, and the financial accuracy and maintenance of records of these documents about a firm or an organization. 

Statutory audit procedure

The procedure is gruesome in terms of man hours involved in it. The following steps are followed in this process:

• Step 1

Nomination of the auditing firm (third party) by an external agency or government as per the law of the land. The auditor’s task is to examine and ascertain the industrial standards and regulations being followed. Questionnaires, checklists, surveys, and formal notifications are part of this audit system.

• Step 2

The auditing team specifies the date and time for the audit.

• Step 3

The list of documents required by the audit team is issued to the firm, organization, or government body subjected to statutory audit. The idea is to check the operational effectiveness and financial health.

• Step 4

At the appointed date and time, the firm or organization submits all necessary and related financial documents at the initial request of the engagement team.

• Step 5

The audit result is forwarded to the audit ordering agency or government department. In case of discrepancy, legal action as per the law is instituted, and penalties or punishments are levied on the defaulters. 

A statuary audit is done periodically to prevent and detect any malpractices regarding financial misappropriation and procedural failures. These are as per the law conducted by an external agency rendered as the third party in technical terms.

Special considerations

All companies are not mandated to undergo statutory audits. Generally, all public sector enterprises, investment organizations, brokerage organizations, banks, and insurance companies are subject to a statutory audit. Even certain non-profit organizations and charitable trusts are also subjected to undergo an audit. 

The parameters for exclusion in terms of size, number of employees, and activity are regulated by the government and are passed in the legislation. You must check the law of the particular country to ascertain the validity and conditions of statutory audits.

Examples of statutory audits

All municipalities get themselves audited every year as the state law. These audits are made available to the public. The aim is to check the legitimacy of the procedure followed and has been done under requisite approvals of competent authority. This ensures that the taxpayers’ money has been utilized judiciously and that the funds issued by the central or state government are not misappropriated.

Charitable trusts and even some NGOs are made to undergo a statutory audit, especially when funded by the government. The idea is to ensure that the institutions carry out the mandated tasks per the rules and regulations and that the social cause for which they are funded is optimally and effectively achieved.

Today in this global age of business, companies operate in different countries. Thus, the government of the country where the firm operates is empowered to conduct a statutory audit.

Is a statutory audit compulsory?

A statutory audit is an audit that is mandated by a statute or law. It is to ensure fairness and follow the laid down norms. Unlike an internal audit, statutory audits are not optional and must be performed if a business meets the given criteria per a particular country’s government regulations.

What type of audit is a statutory audit?

A statutory audit is an independent review of the financial documents of a company or an institution carried out by a third party. The goal of an audit is to check whether the financial statements issued by an organization are ‘correct and legal’.

Who is required to get a statutory audit?

All public and private companies, government agencies at the federal, state, and local level, and organizations working in the public interest must undergo a statutory audit every year. The disclosure of these audits to the public, exemptions of undergoing a statutory audit, and degree of audit may vary depending on the rigid government rules as per the law of that country.

The bottom line

A company or an institution is legally bounded to follow the procedures laid down in statutory audits. The aim is to assess the fairness of the entity’s operations. They must provide all the financial documents asked for by the audit team. An assessment by a group of chartered accountants increases the trustworthiness of the financial statements.

A statutory audit not only helps the external agency or public know about the firm’s health and operational effectiveness, but it also gives the organization itself to know if someone inside is involved in any misappropriation or fraudulent activities. There may be questions about spending money on these audits, but the primary purpose is to ensure that no fraudulent activity occurs in the organization.