What is Statutory Audit & for whom is it Applicable?

What is Statutory Audit & for whom is it Applicable?
Statutory Audit Meaning


Statutory audit, also known as financial audit, is one of the main types of audit which is to be done as per the statutes applicable to the entity and its primary purpose is to gather all relevant information so that the auditor can give his opinion on the true and fair view of the company’s financial position as on the balance sheet date.
The purpose of the statutory audit is to Auditor has to give his view independently without being influenced in any manner. He will check the financial records and will give his opinion thereon in the audit report. It helps the stakeholders to rely on financial statements. Stakeholders other than shareholders also get benefited from this audit as they can take their call based on the accounts as they are audited and authentic.

The Process to Conduct a Statutory Audit

Statutory Audit of Banks

The Statutory Auditors should ensure that the audit report issued by them complies with the requirements of Revised SA 700 – Forming an Opinion and reporting on financial statements, SA 705 – Modifications to the opinion in the Independent Auditor’s Report & SA 706 – Emphasis of matter paragraphs and other matter paragraphs in the Independent Auditor’s Report.
Nowadays, all statutory auditors are given a time frame in which they have to undertake the audit of the branches that are allotted to them. An auditor should immediately accept the appointment send a formal communication to the branch management and all other information that he would require in his audit.
The auditor will have to ensure that their report should include the quantification of advances, deposits, interest income and interest expenses. The important elements to check in the statutory audit of banks are:
A. Cash Verification Procedure
B. Tax-Related Items
C. Verification of Loan Accounts
A. Cash Verification Procedure

The auditors have to verify the cash balance at the branch at the end of 31st March. An auditor should follow the below-mentioned checklist for cash verification:

i. Whether branch is getting opened at the time as per the guidelines and the branch manager is present at the time of the opening of the branch

ii. Whether the cash vault/cash safe are being opened by the Joint Custodians

iii. Whether any unrecorded security items or documents are kept in the cash vault/cash safe

iv. The Branch should maintain the records for the acceptance of currency from the public. This also includes the records of the mutilated notes

v. Proper working of the burglary alarm system

vi. Whether all the other doors are locked at the time of the opening of the cash room

vii. The Gun should remain outside the cash room at the time of opening and closing of the cash room

viii. The cash should be carried out in a locker box from the cash room to the counter and vice versa

ix. The cash counting machine and UV lamps should be in a working condition


B. Tax-Related Items

An auditor will also have to check all the tax-related items and compliances that are applicable to the bank like TDS, 15H & 15H etc. The important elements to check an compliance are mentioned below:

i. The tax should be deducted at an appropriate rate on the monthly/quarterly/yearly payments made by the bank towards interest on deposits, rent, payment to contractors/professionals etc

ii. All the tax payments should be on time and all the challans are there in respect of each payment

iii. All the tax returns are filed on time

iv. TDS Certificate should be issued on time and Form 15G/15H are collected and sent on time

v. Comment on the quality of compliance if the bank is under concurrent audit

vi. Check if any RBI has been audited in the past. If yes, then whether the same is closed and comment on the quality of compliance is to be seen

vii. The branch should have the copy of the Insurance Policy obtained by the corporate office

viii. The branch should have the lease document with them

ix. The branch should take balance confirmation from other banks in which it is maintaining the account

x. Explanation of the outstanding entry in the system suspense account, if any


C. Verification of Loan Accounts

Loan accounts form a major part of the assets for banks. A statutory auditor should check the loan accounts very cautiously.

The verification of Loan Accounts is divided into three parts:

A. Preliminary Check

B. Disbursement

C. Post Disbursement Inspection

A. Preliminary Check

The banks should do a preliminary check of all the accounts before considering the project for evaluation. An auditor should look at the following documents for checking the bank preliminary process:

i. Loan Application

ii. Prescribed Application form

iii. KYC Compliance

iv. Project Report, Projected P&L, Balance Sheet & Cash Flow Statement

v. Latest Audited Financial Statements

vi. Board Resolution for Availing the Credit Facilities

vii. All Government Departments Registration

 viii. Technical Review

B. Disbursement

An auditor should check that the disbursement should happen only if all the terms and conditions of the sanction letter have been fulfilled and an acceptance letter for the same have been acquired.

C. Post Disbursement Inspection

The bank should have a proper check on the active accounts. The important elements that a statutory auditor can check are as follows:

i. There should be an acceptance letter duly acknowledged by the borrowers for all the loan accounts

ii. Execution of the loan documents should be as per the terms and conditions of the sanction letter

iii. All the original documents are held in the safe custody in fire resistance safe

iv. Confidential Report and NOC from the existing bankers

v. CIBIL Report and score. The bank should check for any adverse comments

vi. Valuation of Securities

vii. External & Internal Credit Rating

viii. Due Diligence Certificate

ix. Verify the drawing power of the accounts is calculated properly and a margin is maintained as per the sanction letter

x. Verify any adverse comment on the stock audit report or the audited balance sheet

xi. Verify the payment schedule as per the sanction letter is implemented. If any, check the approval document for the same

The auditor should check for any Non-Performing Asset (NPA). All accounts which are overdue or stops generating income for the banks continuously for 90 days, then it has to be treated as NPA.

Audit Report

After conducting the through audit, an auditor has to give an audit report for the same. An auditor is required to make a report as mentioned in the engagement letter in which he has to state the following:
i. Whether the balance sheet is showing true and fair view containing all the necessary particulars to exhibit a true and fair view of the affairs of the banks
ii. Whether the profit and loss account shows a true balance for the period covered by such account
iii. Whether any transaction has been carried by the branch which was not within the powers of the branch
iv. Any other matter which the auditor considers to be brought to the notice of the Statutory Central Auditor
The Content of Audit Report
Heading
 Brief of contents
The title
 Should mention that it is an ‘Independent Auditor’s Report’.
Addressee
 Should mention clearly as to whom the report is being given to.
For example Members of the company, Board of Directors
Management’s Responsibility for Financial Statements
 Mentions that it is the Management’s responsibility to Prepare the Financial Statements.
Auditor’s Responsibility
 Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report.
Opinion
 Should mention the overall impression obtained from the audit of financial statements.
For example Modified Opinion, Unmodified Opinion
The basis of the Opinion
 States the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned.
Other Reporting Responsibility
 If any other reporting responsibility exists, the same should be mentioned.
For example Report on Legal or Regulatory requirements
Signature of the Auditor
 The engagement partner (auditor) shall sign the audit report.
Place of Signature
 The city in which audit report is signed.
Date of Audit Report
 Date on which the audit report is signed.
Example of Statutory Audit
State law has given instructions to all the municipalities that they should submit their annual accounts duly audited by an auditor. Moreover, they are also instructed to make the audited statement and report available to the common public. The purpose behind this audit is to check that all the spending is genuine, backed with proper sanction and approval. This makes the local government accountable for the appropriation of money. At the same time, it is also cross-checked that the disbursed amount at the federal or state level reaches the lower level and taxpayers’ money is not misappropriated. So, the municipalities are liable for the statutory audit.

Advantages of Statutory Audit
  1. It increases the authenticity and credibility of financial statements as the financial statements of the company are being verified by an independent party i.e., the auditor.
  2. It confirms that management has taken due care while delivering their responsibilities.
  3. It also states regarding the compliance with the non-statutory requirements like corporate governance etc.
  4. The auditor also comments upon the strength of internal control within the organization along with internal checks among the departments or segments. He also suggests the area where internal control is weak and prone to risk. It helps the company to mitigate the risk and results in improvement of the performance of the company.
  5. The financial statement of the small company for whom audit might not be applicable get more values if it is audited one because with the help of the audited financial statements it becomes easier for the companies to get banking loan and other types of facilities on producing of financial statements which are audited by an independent auditor as the audited statements are more reliable and authentic.
Disadvantages/Limitations
  1. The cost associated with an audit can be very high. But if any audit firm is already engaged for looking after the day to day work including accounts preparation etc then it will charge relatively very less amount to conduct the audit as compared with the firm which is not engaged for doing the same.
  2. The employees might get disrupted for performing their normal work in order to answer the day to day query of auditor or while providing the auditor any reports or data required to them. This might result in stretching the work of the employees beyond office hours and may sometimes cause distress among the employees.
  3. The financial statements include judgemental as well as subjective matter. Judgemental issues may vary with persons. Sometimes personal business is also included.
  4. There are inherent limitations of audits like it has to be done in due time, internal control within the organization, limited power of auditor, etc. One has to understand that auditors are watchdogs and not the bloodhounds. There reporting is based on the sample data and not the total data. Moreover, as frauds are the planned one so it will be more difficult to find the same.
  5. There are many areas in which auditors are left with no other option than to take representation from management. This is a danger if management itself is involved in frauds as in that case they will give the manipulated representation.
  6. The auditor does not assess and review the 100 % transactions. Auditor merely expresses his opinion on the financial statements and data provided to him and at no point gives total assurance.
  7. An auditor comment upon the going concern of the organization but nowhere assures for its future viability. Stakeholders should not vest their money only seeing that the organization’s data are being audited.
Important Points
  1. Applicability of audit to any organization doesn’t state that it is an inherent sign of doing wrong acts. Rather it is the way that helps in preventing such activities like misappropriation of funds by ensuring that data are being continuously examined which may be in the scope of other types of audits.
  2. A statutory auditor can ask for the company’s any financial books, records or information in relation to that. It is his right and he cannot be denied by the management for the same.
  3. After doing the entire verification and gathering information auditor is supposed to conclude by writing is an audit report based on the various evidence and information on the true and fair view of the financial statements provided to him.
Conclusion

Statutory audit is one of the main types of audit which is required legally in order to review the accuracy of a company or of government’s financial accounts. It is conducted with the purpose is to gather different information so that the auditor can give his opinion on the true and fair view of the company’s financial position as on the balance sheet date.

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