Statutory Audit In Companies Act

Statutory Audit Under Companies Act, 2013: Complete Guide

Introduction

A Statutory Audit is a legally mandated audit conducted to examine the financial records of a company and ensure compliance with the provisions of the Companies Act, 2013. It is an essential process for maintaining transparency, ensuring accuracy in financial reporting, and preventing fraudulent activities.

In this guide, we will cover the applicability, process, schedules, balance sheet preparation, penalties, and FAQs related to Statutory Audits under Indian law.

Applicability of Statutory Audit

Under the Companies Act, 2013, a statutory audit is mandatory for all companies, including:

Private Limited Companies
Public Limited Companies
One Person Companies (OPCs)
Limited Liability Partnerships (LLPs) (if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh)

Exemptions

There are no exemptions for statutory audits based on turnover or profits. All registered companies must conduct an audit annually.

Appointment of Statutory Auditor

As per Section 139 of the Companies Act, 2013:

The first auditor must be appointed by the Board of Directors within 30 days of incorporation.
Subsequent auditors are appointed in the Annual General Meeting (AGM) for a term of up to 5 years.
Only a Chartered Accountant (CA) or a firm of CAs can conduct a statutory audit.
Rotation of auditors is mandatory for listed companies and large unlisted companies after 5 or 10 years (depending on the type of firm).

Schedules Applicable for Statutory Audit

The Companies Act, 2013 prescribes various schedules and requirements for financial statements:

1. Schedule III: Format of Financial Statements

Part I: Balance Sheet – Specifies the format and classification of assets and liabilities.
Part II: Statement of Profit and Loss – Provides guidelines for revenue and expenditure recognition.
Notes to Accounts – Includes significant accounting policies and disclosures.

2. Schedule II: Depreciation Calculation

Specifies the rates and useful life of assets for depreciation under the Straight Line Method (SLM) and Written Down Value Method (WDV).

Statutory Audit Process

Step 1: Planning & Risk Assessment

Understanding the company’s operations and financial statements.
Identifying key risk areas and compliance issues.

Step 2: Execution of Audit Procedures

Verification of financial transactions, ledgers, and books of accounts.
Ensuring compliance with Accounting Standards (Ind AS) and Generally Accepted Accounting Principles (GAAP).
Checking tax compliance (GST, TDS, Income Tax, etc.).

Step 3: Preparation of Financial Statements

Balance Sheet preparation as per Schedule III.
Profit and Loss account verification.
Cash Flow Statement reconciliation.

Step 4: Auditor’s Report Preparation

Issuing Audit Report in Form 3CA/3CB & Form 3CD.
Commenting on Internal Controls, Fraud Risks, and Compliance.

Balance Sheet Preparation for Statutory Audit

A company’s balance sheet must comply with Schedule III of the Companies Act, 2013. Key elements include:

1. Assets

Current Assets – Cash, bank balance, receivables, inventory.
Non-Current Assets – Fixed assets, investments, deferred tax assets.

2. Liabilities

Current Liabilities – Short-term borrowings, trade payables, provisions.
Non-Current Liabilities – Long-term loans, deferred tax liabilities.

3. Shareholders’ Equity

Issued and paid-up capital.
Reserves and surplus.

Auditors must ensure accuracy and compliance in balance sheet reporting, making necessary disclosures as per Ind AS and IFRS.

Penalties for Non-Compliance

Failure to conduct a statutory audit can lead to severe penalties under Section 147 of the Companies Act:

Company Fine: ₹25,000 to ₹5,00,000
Officer in Default: Fine or imprisonment up to 1 year
Auditor Penalty: Fine of ₹25,000 to ₹5,00,000, with possible disqualification

Recent Updates & Amendments

1. CARO 2020 (Companies Auditor’s Report Order, 2020)

Additional reporting requirements on loans, related party transactions, CSR compliance, cash losses, internal controls.

2. Budget 2024-2025 Updates

Possible relaxation for small businesses on audit requirements.
Increased digital compliance and AI-based scrutiny for audits.
Further amendments in CARO 2020 to strengthen financial transparency.

FAQs on Statutory Audit

1. Is a statutory audit mandatory for private limited companies?

Yes, all private limited companies must undergo a statutory audit, irrespective of turnover.

2. What is the due date for statutory audit completion?

The audit must be completed before filing the company’s annual financial statements with the Registrar of Companies (ROC) by 30th September of the assessment year.

3. Can an internal auditor be a statutory auditor?

No, an internal auditor cannot be appointed as a statutory auditor due to independence requirements.

4. What happens if a company does not appoint an auditor?

If a company fails to appoint an auditor, the ROC has the authority to appoint an auditor and impose penalties.

5. How long should audit records be maintained?

Companies must retain audit records for a minimum of 8 years as per statutory requirements.

Conclusion

A Statutory Audit is essential for corporate governance, ensuring financial accuracy, legal compliance, and investor confidence. Companies must follow the audit process, adhere to reporting schedules, and comply with statutory requirements to avoid penalties and ensure transparency.

For expert assistance in statutory audits, consult a Chartered Accountant (CA) to ensure proper compliance with the latest legal requirements.

Statutory Audit