Statutory Audit | Private Limited Company | Partnership | LLP

What is Statutory Audit

An audit is an examination of records held by an organization, business, government entity, or individual, which involves the analysis of financial records or other areas. A statutory audit is a legally required review of the accuracy of a company’s or government’s financial statements and records.

To determine organization provides a fair, accurate of its financial position by examining information bank balances, bookkeeping records, financial transactions.

What is the applicable limit for mandatory Statutory Audit?

Statutory audit is governed under the Companies Act, 2013, and Companies (Audit and Auditors) Rules, 2014. For Limited Liability Partnerships (LLP), statutory audit is applicable if turnover in any financial year exceeds Rs. 40 Lakhs or its contribution exceeds Rs. 25 Lakhs.For Private Company/ Public Company, statutory audit ismandatory irrespective of Turnover, profits etc. Even if the company is incurring loss even, a Statutory Audit is Required.

Research the control environment of the organisation

The term ‘control environment’ concerns the integrity, system of values, and basic employees’ attitudes on control and management. Every organization control environment either regulatory guidelines, initiatives competitor, economic trends taking place in the country at the international level. These elements show the competitive strategy or the stand of the company in the market. Every statutory auditor has to research these elements to know more about the controlled environment of the business.

Testing of Internal Controls

A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements. Depending on the results of this test, auditors may choose to rely upon a client’s system of controls as part of their auditing activities.

However, if test control weak, the auditors will enhance use of substantive testing, which increases the cost of the audit. The following are general classifications of tests of controls:

Reperformance – Auditors may initiate a new transaction, which controls used by the client and the effectiveness of those controls.
Observation – Auditors may observe a business process in action, and in particular the control elements of the process.
Inspection – Auditors may examine business documents for approval signatures, stamps, or review checkmarks, which indicate that controls have been performed.

The auditor has to rank the control and risks from high to low. It’s done to let the entity know which control measures are effective, providing remedies in order to curb any internal breakdowns.

Statutory Audit of Balance Sheet

A balance sheet audit evaluation of the accuracy of information found in a company’s balance sheet. It involves a number of checks, per the auditor’s balance sheet audit checklist, as auditors conduct this evaluation based on supporting documents. Balance Sheet audit will involve verification of:

Share capital and share application money. After Verification, share capital changes, changes are under resolution.
Secured loans including the latest bank statements, bank reconciliation statements, and sanctioned letters confirming the rate of interest on the loan
Unsecured loans including statements showing acceptance of a loan, rate of the interest confirmation letter, ledger copies from the books of the loan provider
Current liabilities and provisions including confirmation copies of the closing balances, the detailed break-up of the sundry creditors, ledger copies of party’s book, detailed notes on the creditors written-off, list of parties to be written-off, detailed provisions standing in the books
Dues and returns including copies of TDS paid, TCS paid, VAT paid, Sales Tax paid, excise duty paid, provident fund payable, professional tax paid etc., copies of challans.
Fixed assets including copies of invoices showing any addition to the Assets, books showing depreciation working, list of assets not yet accounted in the books
Inventories including statements showing valuation of closing stocks, statement of reconciliation and excise records, details of quantity of production and sales on daily basis, input and output ratio of the raw material
Investments including list of investment, date of investment and amount of investment made in a year, nature of investment, investments sold in the year.
Current assets including list of sundry debtors, cash and bank balance details, details of deposits etc., profit and loss account details etc.

Audit of Profit & Loss Account

Compare year-over-year numbers as well as industry benchmarking
Look at the margins such as gross profit margin, EBITDA margin, operating margin, net profit margin
Conduct Trend analysis to find out whether the metrics improving or deteriorating
Look at the Rates of return such as return on equity (ROE), return on assets (ROA)
Check the individual breakups of sales and purchases.
In the case of direct expenses and indirect expenses concentrate on the agreements like rent, fees, royalty, lease rent, advertisement, other expenses.
In this case, preliminary expenses are check treatments showing capitalization in 5 years
Minutes of the meeting should be verified showing any resolutions for capitalization of expenses, managerial remuneration, loans, approving donations
Any income from investment i.e. interest, the dividend checked with the bank account.
Verify the valuation of closing stock whether a closing stock valuation is as per accounting standard-2

Audit of GST

Cross verify GSTR 3B with GSTR 1 & GSTR 2A
There two important things that will cover under this point
The taxpayer to reconcile GSTR 3B with GSTR 2A and ensure the taxpayer is not claiming excess (ITC), if the taxpayer claims ITC excess as well as needs to pay interest, the penalty may be prescribed.
In case the GST auditor finds a mismatch between the GSTR 3B – GSTR 2A such as case the auditor needs to direct the management to amend the invoices at summary levels.
At auditing, the taxpayer keeps in mind between the invoice date, payment date did not exceed 180 days, to reverse ITC for non-payment.
Reconcile e-Way Bills with invoices to determine if there is a bogus entry in the records by the taxpayer.
Check all GST returns a file, payments within due dates or not

Audit of TDS

The auditor will check all the payments, to See whether it will come under TDS categories or not. Additionally If the company does not pay the TDS of any payment which should be as per the TDS section. He will note this mistake and mention it in his audit report.
Vouchers of TDS-related transactions have to be an audit.
The auditor will verify all the source documents relating to TDS. If the deductor paid through eTDS, the deductor handles all the documents printed, digital to an auditor for its verification.
Reconcile the books with challans and returns.

Some other important checks:

If the company pays dividends to its shareholder then check payment as per as prescribed rate and also ascertain interest paid, if there is any delay.
Check Provident Fund, ESIC, Gratuity, Bonus, Leave encashment payments Such as Ascertain applicability of provisions of the respective acts, if there is any variation, then report in the Audit report.
Check payment /aggregate payments for expenditure by account payee cheque, bank draft, through another electronic mode in excess of Rs. 10,000 or Rs. 35,000 in case of transportation), in a day. If yes, check whether such payments are falling under Rule 6DD
Check Company has not received cash in excess of Rs.2,00,000.00 in violation of section 269ST of Income Tax Act, 1961
Loan / Advances checked with due care, permitted by Companies Act, 2013, income tax Act, 1961Section 185, 186, 73-76

If you want to get start Statutory Audit, reach out to Chartered Accountants from CA in Delhi‘s homepage

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