Roles & Responsibilities of a Statutory Auditor

Overview

Running a start-up is not easy anyway. Apart from the focus on key business development activities, it also demands constant investment in terms of time & effort for managing all the applicable statutory compliance and regulations. Start-ups in India are subject to various compliances under several laws & regulations. These include the periodic filing of returns, holding board & shareholders meetings, maintaining books and accounts, preparation of financial statements & reports, etc, and many more.

Businesses need to have a deeper knowledge and strict adherence to managing legal & regulatory compliances that govern every business activity and transaction. On the other hand, failure to manage compliance following the laws, rules, and regulations could adversely affect the value & goodwill of the business organization. For instance, the state of risk governance and compliance management in an organization could be double-checked through Audit processes.

Speaking of audits, there are various types of audit processes conducted by start-up companies & other business organizations to ensure that they are on the right side of the law. While the internal audit is conducted by internal employees of a company, there are other audits such as statutory audits and GST audits conducted by external auditors such as practicing Chartered Accountants. The major difference between an internal audit and an external audit is the fact that in the case of an internal audit, the reports and the findings are shared only with the company’s management. Whereas, in the case of external audits like the statutory audit, the report is shared with shareholders and with Government Authorities.

What is a Statutory Audit?

A statutory audit is an independent examination of the company’s books & financial records by engaging an external auditor as regulated by any other statute or law administering an organization’s principles and ethics. The purpose of a statutory audit is to determine whether an organization is representing a fair & true position of its financial position through a thorough evaluation of its books & records, bank balances, and the regular financial transactions that have taken place over time. It could also involve other business-related documents such as invoices, purchase orders, bills, challans, and more.

The statutory audit report so prepared is considered to be the final statement of the company that analyzes the profit and loss and the balance sheet. It could be of utmost importance for the shareholders of the business who do not participate in the day-to-day activities of an organization but need reassurance that the organization’s accounts are being maintained fairly and the reports so published are genuine to finally help in making better business decisions.

Applicability of Statutory Audit

Section 139 to147 of the Companies Act 2013 & Companies (Audit and Auditors) Rules, 2014, prescribe the following classes of eligible companies that should mandatorily conduct a statutory audit at least once every year-

Further, in case the eligible business organization fails to conduct a statutory audit or breaches any other provision related to statutory audit, such business organization shall be liable for a minimum fine of Rs.25, 000 that could go up to Rs 5, 00, 000/-

Whereas for every officer in default a monetary fine up to Rs. 1 Lakh with a maximum sentence of one year or both shall be applicable.

Who is authorized to undertake a Statutory Audit?

Now, the question comes who will conduct the statutory Audit? It is conducted by a statutory auditor who is an independent external party to the organization who undertakes an audit to verify the correctness of the accounting records of the company. Section 139 of the Companies Act 2013 provides that such statutory auditor shall be a practicing Chartered Accountant (CA) by qualification & profession. Although, a firm of Chartered Accountant professionals, where the majority of the partners are practicing Chartered Accountants in India. Could also be appointed as statutory auditors.

Additionally, a Limited Liability Partnership (LLP) could also be appointed as a statutory Auditor subject to the fulfillment of the condition that all its partners should be engaged in full-time practice as CAs.

Which persons are disqualified to be appointed as a Statutory Auditor?

Section 141(3) provides for the list of persons or entities that will be disqualified from being appointed as the auditor of a company-

i. A body corporate excluding an LLP.

ii. Any officer or employee of the company/business organization.

iii. Any partner or employee of the company.

iv. A person whose relative is in the full-time employment of the company either as a director or as key managerial personnel.

v. A person who has been convicted by a court of an offense involving fraud and a total period of ten years has not elapsed from the date of such conviction.

vi. A person who is either through himself or through his partner holds any security or interest in the company, or its holding, subsidiary, or associate company.

vii. A person either who himself or through his relative or partner is indebted to the company or its subsidiary, holding or associate company, or a subsidiary of such holding company, over an amount of Rs. Five Lakhs.

viii. A person either who himself or his relative or partner has provided a guarantee of has

ix. Offered security concerning the indebtedness of any third person with the company or its subsidiary.

x. A person who is a full-time employee of any other company or a person or partner of a firm having been appointed as an auditor in a company is also due for appointment or reappointment as auditor of more than twenty Companies altogether.

xi. Any person whose company is either directly or indirectly engaged in offering and providing consulting and specialized services under Section 144.

xii. A person who either himself or his relative holds security or interest in the company of the face value exceeding Rs. One Lakh. In case of an increase of limit beyond Rs. One lakh, the auditor must take corrective action to maintain the limit within 60 days of such acquisition, or interest.

Restricted Services for Statutory Auditor

A statutory auditor could only provide services that have been approved & authorized by the Board of Directors of the Company or the Audit Committee. However, such statutory auditor is prohibited from either offering or providing the services mentioned below to any eligible company or its holding or subsidiary company-

i. Accounting or book-keeping services

ii. Performing internal audit functions;

iii. Designing and implementing any Financial Information System;

iv. Actuarial services;

v. Any Investment advisory related services;

vi. Investment banking services;

vii. Outsourcing of financial services;

viii. Any Management services;

ix. Services aimed to offer tax-planning procedures to the directors or key managerial personnel of the company;

x. Cost Accounting or Management Consultancy Services.

What are the powers of a statutory auditor?

i. Right to access books of accounts-

The Statutory Auditor has the right to inspect the books of accounts, returns & records of the company whether kept at the head office or branch office or elsewhere for the fulfillment of his duties in pursuance of the Act.

ii. Right to obtain information and explanation from Officers-

The statutory auditor has the right to obtain information & explanation from the employees & the officers of the company whatever he may think necessary to carry out the audit procedure. If he doesn’t receive any adequate information or cooperation from his staff, he may mention this in his report.

iii. Right to attend General Meeting-

It is the right of the statutory auditor to attend the general meeting of the company or important board meetings such as the Audit committee, etc. He shall be entitled to receive all the important board notices and the right to be heard at any general meeting of the company. The auditor shall always attend the meeting to bring any matter to the notice of the shareholders that have come into his knowledge during the process of audit.

Key Roles & Responsibilities of Statutory Auditor

The primary responsibility of a statutory auditor is to examine & assess the financial position of the company against the regulatory authorities and the stakeholders. Other than this, the following are the roles & responsibilities of the Statutory Auditor-

i. Giving an Impartial and independent Opinion

The statutory auditor goes through the financial records and statements of the company based on which he examines the financial health of the start-up. Being the external auditor, he is expected to represent the true & fair state of affairs of the business organization about the functioning of the company and help them take remedial direction, and form an honest opinion to assure the shareholders that the company management is taking due care in the overall functioning of the company.

ii. Verification of Financial Records & Finances

The external auditor examines, verifies, and approves the financial records prepared and maintained by the company. He assures himself that the records & documents are accurate and are free from any deliberate misstatement. Further, the statutory audit report so prepared provides an independent opinion on the true and fair view of the financial position and profitability of the company.

iii. Detection of Frauds & Embezzlement

Unless a company doesn’t conduct a statutory audit from an external auditor, there are possibilities of fraud, business mismanagement, and embezzlement due to poor internal controls causing loss of money and business clients along with the goodwill of the business. However, a statutory audit is conducted annually every year the statutory auditor is expected to make frequent visits during the year, making the employees think twice before committing any fraud.

iv. Evaluation of Performance of Company

A statutory audit provides the information necessary to be disclosed by the legal statutes for the benefit of stakeholders of the company to help them to measure the performance of the company. An external audit also ensures that the financial statements so prepared by the organization conform to all the statutory requirements and sufficiently include all the disclosures required by the law.

v. Examination of Internal control framework

Statutory auditors assess the client’s internal control frameworks and risk management tools to find out about the adequacy of the internal controls and whether all accounting policies are strictly followed and complied with and finally match the records with the financial statements.

vi. Review & Comparison of financial statements

Statutory auditors also ensure that financial statements of the immediately preceding periods and with those of similar business organizations in terms of their format and content. If any events have occurred after the date of preparation of the balance sheet, the statutory auditor must enquire whether the remaining information and any unusual transactions have been adequately disclosed. Auditors could also identify any deviation from the generally accepted accounting policies and ensure their disclosure in the statutory audit report.

vii. Strengthening of the internal audit functions

A statutory audit helps to strengthen the internal audit function of an organization by evaluating the effectiveness of internal controls and suggesting any improvements if required.

Duties of the Auditor

i. The statutory auditor should inquire about the position of loans & advances made by the company and the security kept for such loans or any deposits including their terms and conditions that should not be prejudicial to the interests of the company or organization.

ii. The statutory auditor shall examine whether or not it is an investment company, or if the assets of the company comprise the assets consisting of shares & debentures of the company.

iii. The statutory auditor verifies whether the personal expenses have been charged to the revenue account.

iv. He should verify in the books of accounts whether any shares have been allotted for cash and whether any cash has been received in respect of such allotment.

v. He shall plan the audit procedure in accordance with the scope and complexity of the focus area in an independent manner.

vi. The auditor shall accept all the responsibility and accountability for the audit work performed on assigned projects.

vii. The auditor shall ensure that the audit or review is conducted with the least amount of disruption to the audited area as possible.

viii. The auditor shall finalize the audit file(s), and ensure that all supporting documentation is properly retained.

ix. A statutory auditor has the power to go through and analyze all of the sensitive data of the company, such as financial books, records, and information. The auditor also has the right to seek any further information that he thinks is necessary for the fulfillment of his duties.

x. It is his responsibility to prepare the audit report that should include the findings from the audit and give a true and fair description of their financial status and affairs.

xi. If the statutory auditor is of the opinion that his findings indicate a fraud he must report the matter to the Central Government stating reasons for him believing in such.

xii. raises a quality issue, such as the statements are not true and fair, he must clearly state

xiii. During the audit process and while presenting the Audit Report, he must adhere to the auditing standards as prescribed by ICAI.

Conclusion

Unlike an internal audit, External auditors provide impartial and valuable insights into the information that exists within an organization. The external audit process gives confidence & reassurance to the business stakeholders that the business organization has adequate internal control systems with no risk of fraud or mismanagement and causing no harm to the interest of the stakeholders.

As each business industry has requirements that are different from the other, the requirements of statutory audit may also vary with each industry. Thus, it is recommended for a company to look for external auditors who have worked with various industries and have the requisite domain knowledge.