In this article/blog, An audit refers to an examination of the financial statements of a company it’s provide confidence to investors and other stakeholders that company’s financial reports are accurate. It is mandatory for all the companies registered in India to maintain books of accounts and get it audited by chartered accountant in practice after the closing of each financial year. Companies needs to submit audited report along with financial statements and annual return is required to be filed with the registrar of companies (ROC)
There are two types of audits conducted in companies
Internal Audit: Internal audit is conducted to analyze the health of the company. The scope of work is company’s finances and other operational area of the company. Internal audit is beneficial to know all the finances of the internal management and it will help company management to take any decision to increase the operational efficiency. Internal audit can be done by any independent party or by the company own internal staff. There is no need to hire qualified auditor to performed internal audits. There are no hard-set rules to perfomed internal auditing of the organization also Internal audit reports are not provided to the public but are provided to a company’s executives and audit committee to provide an overview of the organization’s performance across different areas like risk management, internal controls, and compliance.
Statutory Audit: statutory audit is conducted to know the actual economic status of company and it can be done only by qualified auditors who are working as external & independent parties as well. The audit report of statutory audit of private limited company is made in the form prescribed by the government agency only which help Indian government to know the state of company’s finances and accounts.
There is a two types of statutory audit for private limited companies in India one is Tax Audit and another one is company audit.
Tax audit: Every business whose turnover exceeds 1cr must have their accounts audited by independent chartered account. Tax audits provisions is applicable to every person i: e individual, partnership firm, company or any other entity and late & Non-compliance with the tax audit provisions may attract a heavy penalty. If the company’s turnover exceeds 1cr limit in any financial year then tax audit report is to be obtained by September 30 after the financial year ends. Therefore tax audit is an important component of the audit of the private limited companies
Company audit: Companies Act 1956 contained the provisions for audit of private limited companies the companies irrespective their nature of business or turnover must have their annual accounts audited each financial year for audit of a company the company and directors of company have to appoint auditor at the outset. An auditor is appointed in annual general meeting (AGM) only by the shareholders of the company. The board of directors of a company Private will require to appoint an Auditor after the incorporation of a company in the first Annual General Meeting within 30 days of incorporation.
The auditor will typically hold the term until the conclusion of the 6th AGM or the 5 years. The directors can also appoint an auditor for a period of 1 year and renewable at each annual general meeting. Only an independent chartered accountant or company of chartered accountant can be appointed as the auditor of the company. Any officer or an employee of company, and any related party are disqualified from becoming an auditor as per the companies act. In a full audit engagement with auditor, the auditor conducts a complete investigation of the financial statements, including verifications of all the income sources and operating expenses. After completion of the said engagement, the auditor provides an opinion on the accuracy of the financial statements which provides investors, regulators, and other stakeholder’s confidence in a corporation’s financial position.
The other type of engagement is a review engagement with auditor, In which an auditor only conducts limited examinations to ensure the plausibility of the financial statements. In contrast with an audit, the review engagement only assures that the financial statements are fairly stated, and no further examinations are conducted to verify the accuracy of the statements. Therefore, as compare to full audit engagement a review engagement does not provide the same level of confidence in the accuracy of the financial reporting relative to an audit.
Some of the important and beneficial functions of auditing are:
- Audit Helps Company to Review and evaluate the risk management so that changes are made accordingly.
- Internal audit Evaluate the relevance, reliability of management, financial information, and internal control systems.
- Audit is result in providing recommendations on the operational and management procedures of the company.