Different types of auditing exist in Indian Financial System as per the current industry practices. Audits are usually classified into two types:
- Statutory audits
- Internal audits
Statutory audits take place to report the current state of a company’s finances and account to the Indian government. These audits are mandated by the law to ensure the fair practice of accounts management. Statutory audits are performed by knowledgeable and qualified Chartered Accountants who work as external and independent parties. The internal audit is usually conducted at the request of the internal management so that they can get a proper idea of all the financial functioning and efficiency. These audits can be done by an independent party or by the internal staff of the company.
According to India’s Company Act 2013, the below-mentioned companies should compulsorily have an internal auditing system:
- All the companies whose shares are registered on the stock exchange
- Every Unlisted Public Company whose shares are not listed on the stock exchange but are considered in the below-mentioned criteria:
- Paid-up share capital of Rs. 50 crore rupees during the previous financial year.
- Financial turnover of Rs. 200 crores or more during the previous financial year.
- An outstanding loan or borrowed amount from the public financial institutions or banks with an amount exceeding Rs. 100 crore or more at any instance during the previous financial year.
- An outstanding deposit of Rs. 250 crore or more at any instance during the previous financial year.
3. Every private company which is considered in the below-mentioned criteria:
- A turnover of Rs 200 crore or more during the previous financial year.
- An outstanding borrowing or loan from public financial institutions or banks of Rs. 100 crore or more at any instance during the previous financial year.
The internal auditor may or may not be an employee of the company.
Statutory audits in India
Statutory audits are carried out every fiscal year from April 1 to March 31. As per the Companies Act, 2013 it is mandatory for every company to have their books audited irrespective of the sales turnover or capital. There are two important statutory audits in India:
- Tax audits
- Company audits
According to Section 44B of India’s Income Tax Act, 1961 tax audits are mandatory. It ensures that every individual whose business turnover exceeds Rs 10 million in any preceding year and every individual working in a profession with gross receipts of more than Rs. 5 million should have their financial accounts audited by an independent chartered accountant.
Please note that the provision of tax audits is applicable to everyone, be it an individual, a business organization, a partnership firm or any other entity. A non-compliance with the tax audit provisions could attract a penalty of 0.5% of the turnover of Rs. 100,000, whichever is lower.
As of now, there are no specific guidelines regarding the appointment or removal of a tax auditor.
As per the Companies Act, 2013 it is essential to conduct to a company audit. All companies regardless of its type of business or turnover should have their annual accounts audited each financial year. This process can be successfully executed when the company directors appoint an auditor for the audit. Furthermore, at every annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will maintain the position from one AGM to the conclusion of the next AGM.
It is possible for an independent chartered accountant or firm to be appointed as the auditor of a company.
Below is the list of individuals who cannot be an auditor as per the Companies Act:
- A body corporate
- An officer or employee of the company
- A person who is a partner with an employee of the company
- Any person who is indebted to a company for a sum exceeding Rs 1,000 or who have guaranteed to the company on behalf of another person a sum greater than Rs. 1,000.
- A person who has held any securities in the company after one year from the date of start of the Companies (Amendment) Act, 2000.
The auditor is expected to prepare the audit report in accord with the Company Auditor’s Report Order (CARO), 2016. According to CARO, an auditor is expected to report the various details of the company, such as inventories, internal controls, assets, internal audit standards, statutory dues along with the other financial details.
Connect with our team of highly professional experts who work on the proximal edge to provide legal solutions.
Here is the list of Other Types of Audits and Level of Assurance:
1) External Audit:
The external audit refers to the audit firms that offer certain auditing services, including Assurance Service, Consultant Service, Tax Consultant Service, Legal Service, Financial Advisory, and Risk Management Advisory.
The best example of external auditing services is the services provided by these big four audit firms, including KPMG, PWC, EY, and Deloitte.
External auditors are normally referring to audit staff who are working in audit firms. The positions are ranking from audit associate, senior auditors to audit partners, and managing partners.
These kinds of firms are sometimes called CPA firms as they are required by law to hold a CPA qualification/certificate to run an audit firm and issue the audit reports.
This type of audit required maintaining the professional code of ethics and strictly following International Standards on Auditing and/or local standards as required by local law.
The firms are working independently from auditing clients that they are auditing. If a conflict of interest has occurred, proper procedures must be taken to minimize the conflicts.
2) Forensic Audit:
The forensic audit is normally performed by a forensic accountant who has the skill in both accounting and investigation.
Forensic Accounting is the type of engagement undertaking the financial investigation in response to a particular subject matter. The findings of the investigation normally are used as evidence in court or conflict resolution among the shareholders.
The investigation covers several areas: fraud investigation, crime investigation, insurance claims, and disputes among shareholders.
A forensic audit is also needed to have a proper plan, procedure, and report like other audit engagements.
3) Financial Audit:
Financial audit refers to the audit of the entity’s financial statements by an independent auditor where audit opinion will be provided on those financial statements after auditing works are done.
A financial audit normally performs by an external audit firm that holds a CPA, and it is normally performed annually and at the end of the accounting period. This type of audit is also known as financial statements auditing.
But, sometimes, as required by management, bank, security exchange, regulation, or else, the financial audit is also performing quarterly.
Most of the entity prepares its financial statements based on IFRS, and some entities ‘ financial statements are prepared based on local GAAP.
For example, the entity registered in the US, their financial statements are prepared based on US GAAP. If the financial statements are prepared based on IFRS, the financial audit needs to be audit against IFRS.
4) Information System Audit or Information Technology Audit (IT Audit)
An information system audit is sometimes called an IT audit. This type of audit assesses and checks the reliability of the security system, information security structure, and integrity of the system so that the output that the system produces is reliable.
Sometimes, financial auditing also requires to has IT auditing as now technology is increasing and most of the client’s financial reports are recording by complex accounting software.
The audit approach also changed due to the changing of management’s approach in recording and reporting their entity’s financial information.
Normally, before relying on information systems (software) that use for producing financial statements, auditors are required to have IT, audit teams, test and review that information system first.
Especially, when an entity uses an ERP system where the operational reportings are also integrated with the accounting system. For example, a banking system normally links operational reporting with the accounting system.
5) Compliance Audit
A compliance audit is a type of audit that checks against internal policies and procedures of the entity as well as laws and regulations where the entity operates. Law and regulation here is referring to the government’s law where the business is operating.
For example, in the banking sector, there are many kinds of regulation required bankers to follow and comply with.
6) Value For Money Audit
Value for money audit refers to audit activities that perform in assessing and evaluating three main difference factors: Economy, Efficiency, and Effectiveness.
Economy, auditor assess and evaluate whether the resources that entity purchases are at the low cost with acceptable quality where efficiency audit, auditor check whether resources that entity use have better conversion ratio.
7) Review Financial Statements
Review financial statements is a type of negative engagement where auditors are engaged to review the financial statements of the entity.
At the end of the review, the audit is not going to express whether financial statements are the true and fair view and free from material.
But, the auditor will issue the opinion to say that there is nothing come to their attention that financial statements are not prepared true and fair view and free from material.
8) Agreed Upon Procedures (AUP)
The agreed-upon procedure is the type of negative engagement where auditors perform their review on the procedures that are agreed with the client. This type of engagement is called limited assurance.
Even though the client’s procedures are set, auditors will also need to make sure that the firm has enough resources to perform the job and the fee is not low-balling.
9) Integrated Audit
Integrate audit is happen when there are two different areas of audit requirements. For example, there is a financial audit and a social audit, or there are some areas that need to be confirmed with the financial audit.
For example, the NGO requires their financial statements to be audited and the technical areas that those NGOs are spending the money for need to be audited by the specialist auditor.
For example, NGOs are working on public health and most of the money spent is related to public health.
10) Special Audit
A special audit is a type of audit assignment that is normally done by the internal auditor.
This had happened when a problem/case occurred in the organization, like fraud, business case, or other special cases.
11) Operational audit
Operational audit is the type of audit service that mainly focuses on the key processes, procedures, systems, and internal control. The main objective is to improve productivity and efficiency, and effectiveness of the operation.
Operation audit has also targeted the leak of key control and processes that cause waste of resources and then recommend improvement.