Statutory audit and its significance in today’s world

Statutory audit and its significance in today’s world April 8, 2020

Statutory audit is at the receiving end of lots of doubts as to its effectiveness with a growing number of corporate governance-related issues and financial irregularities. The law prescribes a statutory audit,

and accordingly, the statutory auditor makes his report on the accounts examined by him and opines if the financial statements of the company represent a true & fair view of its state of affairs and

profitability. The statutory audit is also known as external audit as external and independent auditors take part in it.

Expectation v/s reality

In today’s world, everyone wants a full-proof assurance of one sort or another. People look at financial information for the purpose it serves them. There are expectation gaps between the users of audited financial statements and the kind of assurance that statutory auditors provide.

Statutory provisions ask auditors to check if the companies have fulfilled legal requirements or not.

Auditors put their efforts into finding out whether the legal requirements are met, and financial statements are reliable.

However, stakeholders need assurance in the areas of internal controls and fraud. They also need

assurance from the auditor that the company is a going concern, and it is not going to shut down in the near future. The auditor’s report does not contain any specific assurance to that aspect.

Further, stakeholders also want auditors to express their opinion on the performance of the

management of the company. There are expectations from stakeholders that auditors should also

perform value for money audits as a part of their statutory audit, and they should publish their audit queries along with the management responses for the stakeholders to have a look.

In a statutory audit, an external auditor who has no links with the company is appointed and examines the information present in the books of accounts, transaction details, bookkeeping records, etc. On the basis of examination, the audit report is generated.

A Statutory Auditor ensures that financial statements are free from material misstatements and conform to statutory requirements. The statutory auditor’s opinion provides credibility to the accounting records maintained by the company and financial reports. It is one of the best and highly important trust

inducer. It is published openly for the stakeholders and potential shareholders to know about the

financial position of the company. As it is attached to the reputation of the company, it holds tremendous significance in today’s world.

Further, a statutory audit also detects errors and frauds and provides a check on such errors and frauds as the statutory auditor is expected to visit the client regularly.

With a growing number of corporate governance issues, people doubt the relevance of the statutory

auditing. With every new financial fraud, be it a scandal in India like Satyam or a scandal in the US like Enron, the stakeholder confidence hits a new low.

However, such instances are far off, and, by and large, statutory audits have always proven to be a

confidence booster for investors and other stakeholders. With new and advanced techniques of auditing,

AI-enabled audit methodologies, advancements in the field of forensic accounting, statutory auditing is taking a modern shape.

Independent external auditors with necessary skills are providing a reasonable amount of assurance to

stakeholders as to the importance of statutory auditing. Statutory audit is an important control designed

to highlight the fact that the company is following the legal requirements, and its internal control system is adequate to carry out its day to day activities without causing harm to the interest of the stakeholders.

As there are different industries, statutory audit requirements may vary. Therefore, a company must look for external auditors who have worked with various industries and have the requisite domain knowledge.

Significance of Statutory Audit Statutory audit is a necessary audit which company needs to conduct to present the financial picture of the company in front of the legal authorities.

Validation of the Finances

The external auditor validates the accounting records which are prepared by the company staff. The auditor ascertains that the financial records are accurate, and they are free from material

misstatements. The statutory audit provides an independent opinion on the true and fair view of the financial position and profitability of the company.

This supports the company’s financial standing and also aids in securing more investment necessary for sustainability and growth.

Earn Credibility

Credibility plays a vital role in the growth of the company. When the company is credible, it will surely attract more individuals to invest in the company. It also helps to win the trust of government

authorities who now know that the organization is reliable in the market. It creates a positive brand image in the eyes of the customers, and that fuels the growth of the company.

Rectifying the Errors

While the external auditor conducts auditing, he goes through all the books of accounts and detects

errors and omissions. Such errors and omissions can be rectified, and accurate financial records can be maintained.

Reduce the chances of fraud When a company doesn’t conduct external auditing, there will be no independent check of the financial

records of the company. Employees may start conducting scams that may remain undiscovered, causing loss of money and reputation. Statutory auditing is generally a yearly affair, and hence auditor is expected to visit the client several times in a year, and that makes employees think twice before conducting a fraud.

Get an objective and independent opinion The external auditor goes through all the company’s financial details and knows the best about the

financial condition of the company. From an external auditor, you can get an unbiased opinion about the functioning of the company. This can help to take the business in a correct direction. A statutory audit

provides the required confidence to the shareholders that the company management is taking due care in the overall functioning of the company.

Fulfillment of statutory requirements

A statutory audit provides the information required by the law, which in turn enables stakeholders to

evaluate the performance of the company. Since auditors are objective and independent, stakeholders have trust in them. They rely on their statutory audit report and make economic decisions based on

that. An external audit also ensures that financial statements conform to the statutory requirements, and necessary disclosures required by the law are adequately made.

Validation of Internal control framework

Statutory auditors evaluate the client’s internal control framework and accounting methods and check if the controls are adequate and operating, accounting policies are consistently followed, and the financial records match with the financial statements. A statutory audit helps in improving the efficiency and

honesty of the employees. Employees know that their financial records are subject to an independent examination by external auditors, and hence they stay away from wrongdoings.

Comparable financial statements

Statutory auditors also ensure that financial statements are comparable with the prior periods and with similar organizations in terms of their format and content. If any events have occurred after the balance

sheet date, then they are appropriately disclosed, all unusual transactions are disclosed, and that makes financial statements free from material misstatements. Auditors also identify any material deviation

from generally accepted accounting policies and disclose them suitably in their statutory audit report.

Strengthening of the internal audit department

A statutory audit helps organizations strengthen their internal audit function as it evaluates the effectiveness of internal controls and internal audit processes.

Statutory Audit : FAQs 1. What is the purpose of a statutory audit?

The purpose of a statutory audit is the expression of an opinion as to the true and fair view of the financial statements of a company.

2. What if a company doesn’t conduct the statutory audit?

According to the Commercial Companies Law of UAE, the statutory audit report is mandatory for all the companies functioning in the mainland.

3. What are internal controls, and what are their types?

Internal Controls is a control mechanism set by the management to ensure: – Safeguarding of company assets

– Prevention and detection of frauds and errors

– Accuracy and completeness of the accounting records – Timely preparation of financial information

There are two types of internal controls. They are:

– Preventive – Preventive controls aim to prevent undesired events from occurring. They are proactive in nature.

– Detective – Detective controls aim to detect the undesired acts.

4. What types of evidence statutory auditors examine to verify the accuracy of financial information?

Statutory auditors inspect documents, inquire people, observe the way of working of employees, obtain third-party confirmations, and test sample transactions, and apply other procedures they deem fit to verify the accuracy of financial information.

5. How should I prepare for a statutory audit?

You should keep your financial records accurate and up-to-date. You should verify that you have

documentary evidence for all the transactions. You should reconcile your accounts to identify and

resolve items well before the statutory auditors arrive. You should insist on your auditors to provide a checklist of items you should be ready with before he comes for statutory auditing.

You should also identify a place where your auditors have easy access to your staff and the required information. Further, you will be better off if you identify key people from each department to

coordinate the audit. Finally, set an audit date that is mutually convenient to you and the auditor.

6. How much time will it take to conduct the external audit?

The time required for auditing depends upon the size of the company, its structure, and its complexities in the transactions.

Our Statutory Audit Services N R Doshi and Partners has a team of highly qualified and experienced auditors who have served across

the UAE. These auditors have dealt with various clients from different industries, and they know how to customize their audit methodologies depending upon the statutory audit services requirement and client environment.

Our firm has earned an excellent reputation due to our unbiased opinion and extreme dedication. We are objective and independent in our approach, and we provide significant value to our audit and assurance clients.

Besides carrying out statutory auditing of companies, we also provide other audit services, which are

internal audit service, financial audit service, IT audit service, and agreed-upon procedure audit service.

Contact us now and have the assurance you want!