A statutory audit is a required examination that examines the accuracy of a corporation’s or governmental entity’s financial accounts and paperwork. The primary goal of this audit is to discover whether a company shows a true and exact picture of its financial standing, achieved through the study of details such as bank funds, accounting records, and financial deals.

We must understand why a statutory audit is necessary. For a corporation, the shareholders form the company’s ownership. Nevertheless, they do not run or conduct the daily operations of the company. The management through the board of the directors does this.

Statutory audit also known as financial audit entails going through the final financial statements such as profit and loss account and balance sheet. This audit aims to ensure that these accounts reflect the true picture of the company’s current financial state as of the balance sheet date.

The objectives of an audit, particularly in financial statement audits like statutory audits, involve auditors scrutinizing financial statements prepared by a company’s management.

The key objectives to achieve include:

• ✓ Identifying and Preventing Errors
• ✓ Identifying and Preventing Errors
• ✓ Identifying and Preventing Fraud
• ✓ Addressing Clerical Errors
• ✓ Managing Compensating Errors
• ✓ Resolving Errors of Principles

There are two primary categories of statutory audits:

• Tax Audit: This involves a thorough examination of the tax return by the Internal Revenue Service (IRS) to verify the accuracy of reported income and deductions. The IRS conducts a tax audit when a closer inspection of the tax return is deemed necessary to ensure precision in income and deduction reporting.
• Company Audit: According to section 183(3) of the Company Act 1994, a company audit entails the examination of a company’s balance sheet, profit and loss account (or income and expenditure account), or cash flow statement by the company’s appointed auditor.

The steps in the statutory audit procedure include:

• ✓ Understanding the Operating Environment
• ✓ Understanding Controls
• ✓ Testing Controls
• ✓ Testing Account Balances
• ✓ Testing Account Details

• ✓ Statutory audits contribute to the credibility of financial reports by ensuring thorough verification of statements.
• ✓ The audit process aids in enhancing management efficiency.
• ✓ Organizations benefit from an improved reputation as their financial reports are validated, free from errors, fraud, misrepresentation, and inaccuracies.
• ✓ Statutory audits help minimize the risk of fraud within an organization.
• ✓ Trust is built among shareholders, banks, and the government due to the reliable nature of audited financial reports.
• ✓ Auditors assess and comment on the organization’s internal controls, identifying strengths and weaknesses and advising on areas needing improvement.
• ✓ Even though not mandatory for some small companies, opting for an audit strengthens their systems, facilitating easier access to bank loans and other facilities.