What is a statutory audit?
A statutory audit is an independent examination of a company’s financial statements to ensure they present a true and fair view of the financial position, and the company is complying with the relevant legal and regulatory requirements.
Who is responsible for the statutory audit of a company?
The statutory audit is conducted by an external auditor (typically a Chartered Accountant), appointed by the shareholders in the Annual General Meeting (AGM).
Why is a statutory audit required?
A statutory audit is required by law to ensure transparency, accuracy, and compliance with accounting standards and tax laws, thereby protecting shareholders and other stakeholders.
How often should a statutory audit be conducted?
The statutory audit is typically conducted annually for all companies, except those exempt under certain conditions.
Who appoints the auditor of a company?
The shareholders appoint the auditor during the Annual General Meeting (AGM). The first auditor is appointed by the board of directors.
What is the role of the auditor during the statutory audit?
The auditor's role is to evaluate the company’s financial records, ensure compliance with accounting standards, and express an opinion on whether the financial statements are free from material misstatements.
What is the difference between statutory and internal audits?
A statutory audit is legally required, focuses on the accuracy of financial statements, and is conducted by external auditors. An internal audit is done to evaluate the company’s internal controls and operations, often conducted by an internal audit team.
What documents do I need to provide for a statutory audit?
The key documents required include financial statements (balance sheet, profit and loss account, and cash flow statement), bank statements, invoices, contracts, tax returns, and other supporting documents.
What is audit evidence?
Audit evidence refers to the documentation and records that the auditor uses to verify the accuracy and completeness of financial statements.
What is an audit trail?
An audit trail refers to the documentation that provides a step-by-step record of financial transactions from initiation to final reporting.
What are the different types of audit opinions?
The four types are:
· Unqualified Opinion (Clean opinion)
· Qualified Opinion
· Adverse Opinion
· Disclaimer of Opinion
What does an unqualified audit opinion mean?
An unqualified opinion means the auditor believes the financial statements provide a true and fair view, and no significant issues were found.
What does a qualified audit opinion mean?
A qualified opinion is issued when there are certain limitations or issues in the financial statements, but they do not materially affect the overall financial position.
What does an adverse audit opinion mean?
An adverse opinion means the auditor believes the financial statements do not present a true and fair view due to material misstatements or non-compliance.
What does a disclaimer of opinion mean?
A disclaimer of opinion occurs when the auditor is unable to form an opinion due to a lack of sufficient evidence or scope limitations.
How is the audit fee determined?
Audit fees are determined based on the complexity of the company’s financials, the scope of the audit, time and resources required, and the risk involved.
Are audit fees negotiable?
Yes, audit fees can be negotiated between the client and the auditor, but they must reflect the work and responsibility involved.
Do I need to pay the audit fee before or after the audit?
Payment terms vary. Typically, a portion of the fee is paid up front, with the balance paid after the completion of the audit.
What happens if the audit fee is not paid?
If the audit fee is not paid, the auditor may withhold the issuance of the audit report or terminate the engagement.
What is the role of internal controls in an audit?
Internal controls are processes designed to ensure the accuracy of financial reporting and prevent fraud. Auditors assess these controls to determine the risk of material misstatement.
What is a risk-based audit approach?
A risk-based audit focuses on identifying and addressing areas where there is a higher risk of material misstatement in the financial statements.
How does the auditor assess internal controls?
The auditor evaluates the design and effectiveness of the company’s internal control systems, including testing controls to ensure they are operating as intended.
What happens if internal controls are weak?
Weak internal controls increase the risk of errors or fraud in financial reporting. The auditor may issue a qualified or adverse opinion if weaknesses affect the financial statements.
Do auditors verify tax returns during the audit?
Yes, auditors typically verify the accuracy of tax returns and ensure that tax provisions are properly reflected in the financial statements.
What is the relationship between statutory audit and tax audit?
A statutory audit focuses on the financial statements, while a tax audit ensures compliance with tax laws. The same auditor may conduct both audits.
Can auditors question the company’s tax planning strategies?
Auditors do not question tax planning strategies unless they result in material misstatements in the financial statements or breach of tax laws.
What are the requirements for a private limited company to undergo a statutory audit?
A private company must undergo an audit if its annual turnover exceeds a specified threshold or if the company’s shareholders request one.
Do small companies require a statutory audit?
Small companies are exempt from statutory audits if their turnover is below a certain threshold as per the Companies Act.
What are the penalties for non-compliance with statutory audit requirements?
Failure to comply with statutory audit requirements can result in penalties, fines, or disqualification of directors, as well as potential legal action. Penalties vary depending on the nature of the non-compliance.
Do I need to maintain a statutory register of members, directors, and shareholders?
Yes, under the Companies Act, a company must maintain statutory registers such as the register of members, directors, and shareholders and keep them updated.
What is the deadline for filing financial statements with the Registrar of Companies (Rock)?
Financial statements must be filed with the Rock within 30 days from the date of the AGM.
Are there any compliance requirements for maintaining a board of directors?
Yes, every company must have at least two directors (for private companies) and three directors (for public companies), and a majority of them must be Indian residents.
Who is required to undergo a statutory audit?
All companies, regardless of size, are required to undergo a statutory audit under the Companies Act, 2013. However, small companies and certain other entities may be exempt based on specific criteria like turnover and paid-up capital.
Are there any exemptions for small businesses from statutory audits?
Yes, small companies (with annual turnover of less than ₹1crore and paid-up capital of less than ₹25 laky) and certain other entities like one-person companies (OPCs) may be exempt from the statutory audit, as per the Companies Act. (T/o as per Pl does not exceed 40cr and paid up sc does not exceed 4cr)
What is the threshold for mandatory statutory audit for a company?
A company must conduct a statutory audit if its annual turnover exceeds ₹1 core or its paid-up share capital exceeds ₹25 laky.
How long does a statutory audit take to complete?
The duration depends on the size and complexity of the company’s financials. It typically takes a few weeks to a few months to complete, depending on the scope of the audit.
How is the audit report delivered?
The audit report is usually delivered to the company’s management and board of directors. A copy may also be filed with regulatory authorities, such as the Registrar of Companies (Rock), if required.
Can an audit report be delayed?
The audit report may be delayed if there are issues with the financial records, discrepancies, or if the company is uncooperative in providing necessary documents. However, auditors strive to complete the audit within the stipulated timelines.
What happens if there are discrepancies found in the audit?
If discrepancies are found, the auditor will communicate them with the management. The company may need to correct the discrepancies, and the auditor may modify the audit opinion accordingly.
What is the significance of the auditor's report on internal controls?
The auditor’s report on internal controls provides insight into the effectiveness of the company’s internal processes in safeguarding assets, preventing fraud, and ensuring compliance with accounting standards.
What happens if the company does not cooperate during the audit?
If the company fails to cooperate or provide necessary documentation, the auditor may issue a disclaimer of opinion or qualified opinion, and the company could face regulatory penalties.
Can the auditor report fraudulent activities detected during the audit?
Yes, if the auditor detects fraud or illegal activities, they are obligated to report it to the appropriate authorities, such as the management, board, and regulators, depending on the severity of the issue.
What happens if the company’s financial records are incomplete or inaccurate?
Incomplete or inaccurate records could lead to a qualified or adverse opinion from the auditor, affecting the credibility of the financial statements.
What is the impact of non-compliance with accounting standards on the audit?
Non-compliance with accounting standards can result in a qualified or adverse opinion from the auditor, highlighting discrepancies or issues with the financial statements.
What should a company do after the statutory audit is completed?
After the audit, the company should review the auditor's report, implement any suggested improvements, and file the audited financial statements with regulatory authorities.
Is it mandatory for a company to publish the audit report?
Companies listed on stock exchanges must publish their audit reports along with their financial statements. For private companies, publication may not be mandatory, but filing with regulatory authorities like the Rock is required.
What are the implications if the auditor's report is not accepted by the shareholders?
If shareholders disagree with the auditor's report, they can raise concerns in the AGM, but ultimately, the report stands unless there are valid reasons for legal action or re-audit.
Who is eligible to be appointed as an auditor of a company?
An individual or a firm of Chartered Accountants (CA) who is a member of the Institute of Chartered Accountants of India (ICAI) can be appointed as an auditor of a company. The individual must hold a valid Certificate of Practice.
What qualifications does an individual need to become an auditor?
An individual must be a Chartered Accountant (CA) registered with the Institute of Chartered Accountants of India (ICAI), possessing a valid Certificate of Practice (COP). Additionally, the auditor must meet the criteria set forth by the Companies Act, 2013, and other relevant regulations.
Can a person with an accounting background but not a CA be an auditor?
No, under the Companies Act, 2013, only a qualified Chartered Accountant (CA) can be appointed as the statutory auditor of a company.
What qualifications must a firm have to act as an auditor for a company?
A firm must consist of Chartered Accountants (CAs) who are members of the ICAI. The firm must be registered with ICAI and possess a valid Certificate of Practice for its partners to act as auditors.
Are there any additional qualifications required to audit certain entities (e.g., listed companies)?
No additional qualifications are mandated for auditing listed companies other than being a qualified Chartered Accountant. However, for certain industries (e.g., banking, insurance), auditors may need additional qualifications or experience in specialized audits as required by the relevant regulators.
Can a person who has been convicted of an offense involving moral turpitude become an auditor?
No, any person who has been convicted of an offense involving moral turpitude or has been convicted by a court of law for a criminal offense is disqualified from being appointed as an auditor.
Can an auditor be disqualified if they have a conflict of interest?
Yes, if an auditor has any relationship or interest that could create a conflict of interest or affect their independence, they are disqualified from serving as an auditor for the company.
Can an auditor who is already auditing another company’s accounts for the same period be appointed as the auditor for my company?
An auditor cannot be appointed if they are already auditing the financial statements of the same company or the same group of companies during the same period, as it could lead to a conflict of interest or overextension.
Who is disqualified from being appointed as an auditor of a company?
The following individuals or entities are disqualified from being appointed as auditors under Section 141 of the Companies Act, 2013:
· A person who is a director or an employee of the company.
· A person who is a partner or employee of any director or employee of the company.
· A person who is a relative of a director or employee of the company.
· A person who holds a security or interest in the company, except in the case of a shareholding of not more than 1% of the paid-up capital of the company.
· A person who is a partner or an employee of the company’s existing auditor.
· A person who is indebted to the company or its subsidiary or holding company or associate company for an amount exceeding ₹5,00,000.
Who is authorized to sign the audit report?
The audit report must be signed by the auditor or auditors who conducted the statutory audit. If it's a firm, it must be signed by the designated partner of the firm. The individual signing the report must be a qualified Chartered Accountant with a valid Certificate of Practice.
Can the audit report be signed by someone other than the auditor?
No, the audit report must be signed only by the auditor responsible for conducting the audit. It cannot be signed by anyone other than the appointed auditor or the partner of the audit firm.
What is the importance of the auditor's signature on the audit report?
The auditor’s signature signifies that they have completed the audit, reviewed the financial statements, and is expressing their opinion on the truth and fairness of the financial records, as per the auditing standards and regulations.
When should the audit report be signed?
The audit report should be signed after the completion of the audit process, which includes reviewing all financial documents, verifying records, and forming an opinion on the financial statements. The report is typically signed before submitting the financial statements to the company's board of directors or filing with regulatory authorities.
Can the audit report be signed before the completion of the audit?
No, the audit report should only be signed after the audit work is completed, and the auditor is satisfied that the financial statements reflect a true and fair view of the company’s financial position.
Is it possible for the audit report to be signed electronically?
Yes, the audit report can be signed electronically using digital signatures. However, the auditor must comply with the regulations laid out by the ICAI (Institute of Chartered Accountants of India) and ensure the digital signature is legally valid.
Can an audit report be signed by more than one auditor?
Yes, if multiple auditors (such as joint auditors) are appointed, each auditor must sign the audit report. In the case of a firm of auditors, the designated partner signs the report.
Do joint auditors have to sign the report together?
Yes, in the case of joint auditors, each auditor must sign the audit report. Each auditor is responsible for their part of the audit, and they will typically issue a joint report, with all auditors’ signatures included.
What happens if one of the joint auditors is unable to sign the audit report?
If one of the joint auditors is unable to sign the audit report due to unforeseen circumstances, the remaining auditors must either perform the audit alone or appoint another qualified auditor. If a substitute is appointed, the new auditor must review the work done by the previous auditor.
How is the remuneration of an auditor determined?
The remuneration of an auditor is typically determined based on factors such as the size and complexity of the company, the volume of work involved in the audit, the time required, and the scope of services to be provided. The remuneration is usually agreed upon between the company and the auditor.
Who decides the remuneration of the auditor?
The remuneration of the auditor is decided by the Board of Directors of the company. However, it must be approved by the shareholders at the Annual General Meeting (AGM). For appointment or reappointment of auditors, shareholders approve the remuneration as well.
Can the auditor’s remuneration be negotiated?
Yes, the auditor’s remuneration can be negotiated between the company’s management and the auditor. However, the agreed amount must be approved by the shareholders at the AGM
Is there any legal limit on the remuneration of an auditor?
The Companies Act, 2013 does not prescribe a specific limit on the remuneration of auditors. However, the remuneration should be reasonable and commensurate with the scope and scale of the audit work. It must be approved by the shareholders, and the amount should align with industry standards.
Is the remuneration of an auditor paid in installments or as a lump sum?
The remuneration can be paid either in installments or as a lump sum, depending on the agreement between the auditor and the company. The terms of payment should be specified in the agreement and approved by the shareholders.
Can the remuneration of an auditor be revised after the appointment?
Yes, the remuneration of the auditor can be revised after the appointment, subject to the approval of the shareholders at the AGM or a special resolution. The revision may be necessary if the scope of work increases or the company faces unique challenges that require additional audit efforts.
When the auditor’s remuneration is typically paid?
The auditor’s remuneration is usually paid after the completion of the audit, although partial or upfront payments may be agreed upon. The terms and conditions of payment should be agreed upon at the time of the appointment and approved by the shareholders.
Can the company pay the auditor’s remuneration in advance?
Yes, it is possible for the company to pay part of the auditor's remuneration in advance or as per a mutually agreed schedule. However, the full remuneration is generally paid after the audit is concluded, based on the completion of the audit report.
Are there any additional charges that an auditor can levy on top of the agreed remuneration?
Yes, the auditor may charge additional fees if the scope of work expands, such as in the case of special reports, forensic audits, or addressing issues not covered under the original agreement. However, any additional charges should be mutually agreed upon by the company and the auditor.
Does the company have to disclose the auditor’s remuneration?
Yes, the company is required to disclose the details of the auditor’s remuneration in the financial statements. Under the Companies Act, the remuneration paid to the statutory auditors must be disclosed in the financial statements, generally under the section "Notes to Accounts."
Is the remuneration of auditors disclosed in the annual report?
Yes, the company must disclose the remuneration of auditors in the Corporate Governance Report or Director’s Report as per the listing regulations for listed companies. This ensures transparency to stakeholders and regulatory bodies.
Is the payment of auditor’s remuneration subject to tax?
Yes, the remuneration paid to an auditor is subject to tax. The company is required to deduct tax at source (TDS) on the auditor’s fees as per the applicable rates under the Income Tax Act, 1961. The auditor will report the income in their own tax returns.
What is the term of appointment of an auditor in a company?
The term of appointment of a statutory auditor is generally one year. The auditor is appointed at the Annual General Meeting (AGM) and holds office until the conclusion of the next AGM. The same auditor can be reappointed year after year, subject to compliance with the provisions of the Companies Act, 2013.
How long can an auditor serve in a company?
The term of service for an individual or firm of auditors is one year at a time, with reappointment at each AGM. However, the Companies Act, 2013 has restrictions on the maximum consecutive term of the auditor. For listed companies or certain other companies, the auditor cannot serve for more than two consecutive terms (i.e., two 5-year terms) unless the auditor is rotated or a new auditor is appointed.
Can an auditor be appointed for a term longer than one year?
Under the Companies Act, an auditor cannot be appointed for more than one year at a time. However, the same auditor may be reappointed annually by the shareholders in the AGM for consecutive terms.
Can an auditor be removed before the completion of their term?
Yes, an auditor can be removed before the completion of their term by the company through a special resolution passed at an AGM. The company must also seek approval from the Central Government for the removal of the auditor before the expiry of their term.
What is the due process if an auditor resigns before the term ends?
If an auditor resigns before the term ends, the company must appoint a new auditor at the earliest. The resignation must be reported to the Board of Directors, and the resignation letter must be filed with the Registrar of Companies (Rock). A new auditor should be appointed within 30 days.
Can a company appoint an auditor for a specific term or period?
No, the Companies Act specifies that the auditor must be appointed for one year at a time. The appointment is made annually at the AGM, and the auditor must be reappointed every year unless there are legal requirements for rotation.
What is the concept of auditor rotation?
Auditor rotation refers to the mandatory process of changing the auditor after a specified number of years. It aims to ensure auditor independence, prevent long-term relationships that may compromise objectivity, and introduce fresh perspectives in the audit process.
Why is auditor rotation required?
Auditor rotation is required to promote independence and objectivity of the audit. Long tenure with the same auditor can lead to familiarity, which may impair the auditor's ability to challenge management and ensure unbiased auditing. Rotation ensures transparency and accountability in financial reporting.
Which companies are required to rotate their auditors?
Auditor rotation applies to listed companies, public sector undertakings (PSUs), banks, and certain other public companies as specified by the Companies Act, 2013. It is mandatory for these companies to rotate their auditors after a prescribed number of years.
How long can an individual auditor or audit firm serve in a company?
Under the Companies Act, 2013:
· Individual auditors can serve for a maximum of one term of 5 consecutive years.
· Audit firms can serve for a maximum of two terms of 5 consecutive years (i.e., 10 years).
· After completing the maximum term, the individual or audit firm must be rotated.
When does the rotation of auditor apply?
The provisions for rotation of auditors apply to companies that are listed on the stock exchange and other specified public companies, banks, and insurance companies, as well as certain other entities that fall under the purview of the Companies Act.
Can the same auditor be reappointed after completing the rotation term?
After the completion of the maximum term, the same auditor or audit firm cannot be reappointed for a cooling-off period of 5 years. This ensures a break before reappointment can be considered.
What happens if a company fails to comply with auditor rotation rules?
If a company fails to comply with the rules regarding auditor rotation, it could face penalties under the Companies Act, 2013. The company's management may be held accountable for non-compliance, and the auditor's independence could be questioned
What is the cooling-off period in the auditor rotation process?
After completing the maximum allowable term, the auditor (individual or firm) must observe a cooling-off period of 5 years before they can be reappointed. This period is meant to ensure the auditor does not continue with the same client too frequently and maintains independence.
Why is the cooling-off period important?
The cooling-off period ensures that the auditor maintains independence and objectivity. It prevents long-term familiarity and allows for a fresh perspective from a new auditor or audit firm.
Are there any exemptions to the auditor rotation rules?
Yes, certain private companies or companies not listed on the stock exchange may be exempt from the auditor rotation requirements. The rotation rule primarily applies to listed companies, public sector enterprises, and other large public companies.
Can an auditor be reappointed after serving the maximum consecutive terms in certain circumstances?
No, under the Companies Act, 2013, an auditor (whether individual or firm) cannot be reappointed after completing their maximum consecutive term, regardless of the circumstances, until the cooling-off period of 5 years has passed.
Will the rotation of auditors affect the audit report?
The rotation of auditors may affect the audit approach and the manner in which the audit is conducted. However, the new auditor is expected to perform an audit as per the applicable auditing standards. The audit opinion should remain independent, but the audit procedures might vary.
Do companies need to disclose the change in auditors due to rotation?
Yes, if there is a change in auditors due to rotation, the company is required to disclose the details in the Directors' Report or the Notes to Accounts of the financial statements. The reason for the change (rotation) and the details of the new auditor must be disclosed.