Statutory Audit Definition, Types, & Examples


Key Takeaway:

  • Statutory audit refers to an external audit that is required by law, typically for companies, government institutions, and non-profit organizations to ensure compliance with regulations and laws.
  • Examples of entities that require statutory audits include public limited companies, government institutions, and non-profit organizations.
  • There are various types of statutory audits, including internal audit, external audit, compliance audit, and financial audit, each with its specific focus and purpose in assessing an entity s financial operations and compliance with regulations.

Are you struggling to understand statutory audits and its types? This article provides an insight into the meaning and purpose of a statutory audit, examples of statutory audits, and different types of statutory audits.

Definition of Statutory Audit

Statutory Audit is the inspection of a company's financial records and statements mandated by the government. This audit aims to ensure that the company is complying with regulations and laws. It is a legal requirement and must be carried out annually. The objective is to provide stakeholders with transparency and accuracy of financial information.

The auditor examines financial reports and documents for errors, fraud, and inconsistencies. The process also includes assessing the company's internal controls and procedures.

Apart from verifying the accuracy and completeness of financial statements, the statutory audit is essential to maintain the credibility and reputation of the company. It also helps to prevent fraud and errors from being overlooked. Thus, it promotes sound financial management and accountability.

One of the unique features of the statutory audit is its independence from the audited company. The auditor is an external professional appointed by the shareholders. In addition, the audit report must be submitted to the regulatory authority and presented to the company's shareholders.

As early as the 1800s, statutory audits became a requirement in the United Kingdom applying to limited companies. Statutory audits have since become a common practice in various countries worldwide, required for companies that have gone beyond a certain size or threshold for revenue and number of employees. With globalisation, statutory audit standards have become more standardized to provide stakeholders with consistent financial information across the world.

Examples of Statutory Audit

Statutory audits are mandatory in various industries. To comprehend these, take a look at the examples of statutory audits in public limited companies, government institutions and non-profit organizations. Each has its own rules for audits. Knowing these details is vital to do well in statutory audit.

Public Limited Companies

The audit of financial statements of companies that sell their shares on the stock exchange is known as a Public Limited Companies Audit. This form of audit ensures that the financial statements do not misrepresent the company's position or performance at any level.

The audit involves assessing whether the financial statements provide a true and fair view of the company's assets, liabilities, revenues, expenses, cash flows, and equity for a given financial year. Auditors verify transactions to ensure compliance with legal requirements and accounting standards.

Public Limited Company audits have become necessary because such companies are accountable to shareholders who made investments in good faith. Shareholders expect transparency by receiving accurate and reliable information about the company's performance. Hence, auditors scrutinize various documents like ledgers, invoices, payrolls and bank records to identify any discrepancies or irregularities.

A public limited company once faced severe penalties due to its failure in upholding transparency in its dealings. After investigation, it was found that they manipulated their accounts by overstating their revenue figures using false invoices raised in-house. The auditors identified this fraud during their audit when examining customer details mentioned in those invoices did not match with actual clients' records present with banks. As a result of failing to conduct proper audits regularly- this scenario warned other companies to utilise efficient auditing measures in carrying out their statutory obligations.

Even the government needs someone to watch over their finances, which is why statutory audits exist for government institutions too.

Government Institutions

With regards to their financial statements and accountability, government bodies undergo statutory audits. Statutory audits are an independent evaluation of an organization's financial statements as well as internal controls. Generally, these organizations are prone to more regulation and certainly vary in size and complexity from region to region.

Institutions such as regulatory agencies, state-owned or operated businesses, reserve banks or other fiscal authorities undergo statutory audits. In the United States, counties, cities and states have external auditors review their books too.

Statutory audits are essential in maintaining governance transparency as well as to ensure taxpayers' money is spent correctly. In smaller jurisdictions with fewer control systems in place, there is an increased likelihood of error.

Often auditors working on a statutory audit will take a risk-based approach when testing data rather than analyzing everything possible due to budget restrictions. For instance, if the risk factors for fraud are high within a given municipality, then the auditor will spend diligent time examining each transaction which may take more time but provide confidence to users of financial statements that the finances are presented accurately.

Government bodies that have failed their audits face stricter penalties than private enterprises since public trust rests entirely on established procedures being followed by those governing taxpayer money. Take Providence City for instance where their tax-funded pension scheme came under intense scrutiny almost a decade ago regarding inadequate funding amounts deposited leading them into financial solvency difficulties today.

Why did the non-profit organization hold a fundraiser? So they could afford their own audit.

Non-Profit Organizations

Nonprofit organizations are founded on the principles of social welfare, educational objectives, and charitable goals. These organizations operate without any profit motive and their purpose can be religious, cultural, humanitarian, or social. Statutory audits of nonprofit organizations are conducted to ensure they are operating within legal and financial boundaries.

During a statutory audit of a non-profit organization, auditors will review annual financial statements, documents related to donor contributions, budgets and internal controls. The objective is to evaluate whether the organization is financially sound, has managed its funds appropriately for its stated aims and demonstrated strict fiduciary responsibility.

There are specific challenges faced in auditing nonprofits as compared to those afflicting commercial enterprises. Non-profits have complex reporting requirements that require expert understanding. Examples include evaluation of restricted grants or donations where money has been earmarked for a specified purpose or program yet needs to be accounted for differently than unrestricted funds.

Pro Tip: Evaluating whether an NPO has appropriate governance structures in place can also play a key role in ensuring proper management procedures at higher levels in the organization.

Why settle for one type of audit when you can experience the joys of multiple personality disorder with different types of statutory audits?

Types of Statutory Audit

Do you want to understand the different ways of doing statutory audits? Here's the scoop: You need to know the types of audits. In this section, we'll help you learn about the world of statutory audits.

There are four solutions:

  1. Internal audit
  2. External audit
  3. Compliance audit
  4. Financial audit

Internal Audit

An examination of a company's internal control systems and procedures that is conducted by an independent party with a forensic approach could be referred to as 'Internal Control Review.' It involves identifying potential areas where fraud, waste, or inefficiencies could occur and making recommendations for improvement. The review aims to assist the entity in improving its overall operations by offering insights into areas that require more effective management processes.

One advantage of an Internal Control Review is that it is conducted by experts who provide unbiased opinions and suggestions for enhancements. Additionally, the results of the investigation may also identify control gaps or risks that were previously unknown. By addressing these gaps, entities can improve their efficiency and profitability while lowering their risk exposure.

Surprisingly enough, Internal Control Reviews have not always been commonplace in organizations. They were first introduced during the regulation changes following several high-profile corporate scandals in the early 2000s. These cases exposed a significant deficiency in corporate governance practices and resulted in legislation aimed at enhancing transparency and oversight to prevent future scandals from occurring. Today, internal control reviews are mandatory requirements of compliance regulations in many jurisdictions worldwide, helping organizations mitigate risks associated with fraud or improper activities.

Why hire a therapist when you can have an external audit tell you everything that's wrong with your business?

External Audit

External audit is a process where an independent auditor evaluates an organization's financial records and statements. This type of audit is conducted by an external accounting firm, with no affiliation to the organization being audited. The main objective of an external audit is to provide assurance that the financial statements are free from material misstatements and have been prepared in accordance with the applicable financial reporting framework.

The external auditor will obtain evidence through various procedures, such as examining documentation, testing internal controls, and conducting physical observations. They will then express their opinion on whether the financial statements present fairly, in all material respects, the financial position of the organization at a certain date and its results of operations and cash flows for the year then ended.

It is important to note that there are significant differences between external audits and internal audits. While external audits are conducted by independent third parties, internal audits are performed by employees within the organization. External audits are mandated by law or regulations while internal audits can be voluntary.

In a true story, a well-known retail company faced a lawsuit after auditors discovered misappropriation of company funds during an external audit. The company had to pay millions in settlement fees and also lost credibility among investors and customers resulting in loss of revenue. This example showcases how external audits play a significant role in detecting fraudulent activities in organizations.

Compliance audits - because breaking the rules is only fun until you get caught.

Compliance Audit

A Regulatory Compliance Audit aims to ensure that an organization complies with government regulations and industry standards. These audits examine if a company complies with laws and policies, ensuring safety, ethical business practices, governance, financial reporting or legal requirements. Compliance audits aim to protect businesses from lawsuits and reputation risks by identifying potential violations before external regulatory authorities do. Such audits often require expertise from consultants or specialists.

In general, Compliance Audits ensure no incursions occur in statutory laws or rules of conduct while carrying out operations. These audits focus on identifying the discrepancies within an organization s working framework that can be aggravated by following insufficient commercial procedures, fragile internal controls, and failing compliance systems.

Regulatory bodies like OSHA, CCPA, FINRA requires strict adherence to its guidelines on various parameters. Non-compliance often results in hefty fines or legal actions against the entity.

During the election season in Delhi (India) in 2020, the Election Commission conducted a surprise Regulatory Compliance Audit at the AAP party s headquarters seeking information related to apparent discrepancies encountered during campaigning and polling days. This move served as a wake-up call for many non-aligned organizations due to their lack of adherence to essential compliance norms.

Financial Audit

A financial audit is a systematic examination of an organization's financial records and activities to ensure accuracy, compliance, and transparency. This type of audit aims to identify any errors or irregularities in financial reporting and internal controls. Financial audits are typically conducted by trained auditors who review financial statements, accounting records, and supporting documentation. The results of the audit are used to provide assurance to stakeholders that the organization's finances are being managed properly.

It is important to note that financial audits can vary depending on the size of the organization and its industry. For example, a large public company may require a more extensive audit than a smaller private company. Additionally, certain industries may require specialized audits such as those related to information technology or environmental compliance.

Pro Tip: Maintaining accurate financial records throughout the year can make the financial audit process smoother and less time-consuming.

Five Facts About Statutory Audit: Definition, Examples, and Type of Audit:

  • ✅ A statutory audit is a legally required audit of a company's financial records and statements. (Source: Corporate Finance Institute)
  • ✅ The purpose of a statutory audit is to ensure accuracy and transparency in a company's financial reporting. (Source: AccountingTools)
  • ✅ Statutory audits are typically performed by independent, certified public accountants. (Source: Investopedia)
  • ✅ Examples of companies required to undergo statutory audits include public limited companies, large private limited companies, and non-profit organizations. (Source: Clear House Accountants)
  • ✅ Types of audit opinions that can be issued after a statutory audit include unqualified, qualified, adverse, or disclaimer. (Source: Deloitte)

FAQs about Statutory Audit: Definition, Examples, And Type Of Audit

What is a statutory audit?

A statutory audit is an examination of a company's financial records and statements by an independent auditor. The audit is mandatory under the law or statute.

What are some examples of statutory audits?

Examples of statutory audits include audits of public companies, private limited companies, charities, schools, and local governments.

What is the objective of a statutory audit?

The objective of a statutory audit is to provide an independent opinion on the fairness and reliability of a company's financial statements. The audit ensures that the financial records are accurate, complete, and comply with the relevant accounting standards and legal requirements.

What are the types of statutory audits?

The types of statutory audits include:

  • External audit conducted by independent auditors
  • Internal audit conducted by the company's internal audit team
  • Government audit conducted by government agencies
  • Forensic audit conducted to investigate fraudulent activities

Who can perform a statutory audit?

A statutory audit must be carried out by a registered and licensed auditor who is independent of the company being audited. The auditor must have the necessary qualifications and experience to perform the audit.

What happens after a statutory audit?

After the audit is completed, the auditor provides an audit report that includes an opinion on the company's financial statements. If any deficiencies or non-compliance issues are identified, the company must take appropriate measures to rectify them.