Statutory Audit Compliance: Key Requirements and Benefits for Businesses
Introduction
Statutory audit compliance refers to the mandatory examination of a company’s or government entity’s financial statements and records to ensure legal and regulatory adherence. This process involves reviewing financial data, including bank balances, accounting records, and financial transactions, to verify if the organization’s financial position is accurately represented. Most companies are required to produce at least one annual financial statement to provide stakeholders with a reasonable level of assurance regarding their operations. Additional reports may also be necessary to satisfy the requirements of other interested parties. The accounting team plays a key role in ensuring that the organization’s regulatory obligations are met through statutory audit compliance.
This article delves into statutory audit compliance in detail.
Statutory Audit Requirements
Under the Companies Act of 2008, or Rule 28, the following types of private companies are required to have their annual financial statements audited:
- Fiduciary Activities: A private or limited liability company holding assets in a fiduciary capacity for unrelated individuals, where the total value of those assets exceeds Rs. 5 million during the financial year, is considered to be engaged in fiduciary activities and subject to audit.
- Public Interest Score (PIS) of 100 or Higher: A private or limited liability company that prepares its financial statements internally and has a Public Interest Score of 100 or more must have an audit.
- PIS of 350 or Higher with External Accountant: If a private or limited liability company has its financial statements prepared by an external accountant and its Public Interest Score is 350 or higher, it must undergo an audit.
Even if a company is not legally required to have its financial statements audited, it may choose to voluntarily submit audited financials with its annual returns. Companies opting not to provide full financial statements must instead submit a financial accountability supplement.
Additional Information on Statutory Audits
In some states, statutory audit compliance is mandatory for all municipalities, requiring an annual review of accounts and transactions, with the audit findings made public. This ensures that any funds distributed by higher government bodies, such as federal or state governments, are spent in accordance with laws and regulations. International statutory audits are also often required by foreign governments, especially for multinational corporations. In certain instances, European regulations may mandate statutory audits for specific business units.
Importance of Statutory Audit Compliance
- Minimizing Risks: Statutory audit compliance helps reduce the risks of fines, penalties, and potential mistreatment of employees.
- Identifying Improvements: Both internal and external audits can highlight areas where a company’s regulatory compliance procedures need improvement. The recommendations provided can mitigate risks and prevent legal issues or federal fines for noncompliance.
Risk Assessments
- Prioritizing Risks: A risk assessment is integrated into the audit process to prioritize high-risk areas.
- Budget Planning: The company must allocate budget resources to address non-compliant areas and schedule corrective actions.
- Documentation: Digital photos can be taken to document non-compliant items, further educating stakeholders on the issues.
Conclusion
Statutory audit compliance is vital for any organization, as it ensures proper compliance management, supports accurate payroll structures, and minimizes system risks. While internal audits are valuable, conducting external statutory audits is often the better option, as external auditors provide more objective and thorough evaluations. External audits are also more transparent to stakeholders, ensuring all vulnerabilities are identified and addressed.