Audits are generally classified into two types:
Statutory audits are conducted in order to report the state of a company’s finances and accounts to the Indian government. Such audits are performed by qualified auditors who are working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government department.
Internal audits are conducted at the bequest of internal management in order to check the health of a company’s finances and analyze the operational efficiency of the organization. Internal audits may be performed by an independent party or by the company’s own internal staff. Statutory audits in India
In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:
Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that every person whose business turnover exceeds Rs 1 Crore in any previous year, and every person working in a profession with gross receipts exceeding Rs 50 lakhs must have their accounts audited by an independent chartered accountant.
It should be noted that the provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company or any other entity. The tax audit report is to be obtained by September 30 after the end of the previous fiscal year.
The provisions for a company audit are contained in the Companies Act, 2013. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors have to first appoint an auditor at the outset.
Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the other.
The Companies (Amendment) Act, 2017provides that auditors can be appointed for a term of five consecutive AGMs and their appointment need not be ratified in each of the AGMs. Individuals and partnership firms, auditors cannot be appointed for more than one or two terms, respectively. After the completion of the term, the auditor must be changed.
Only an independent chartered accountant or a partnership firm of chartered accountants can be appointed as the auditor of a company.
The auditor is required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO), 2016. CARO requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit standards, internal controls, statutory dues, among others.
The audit report must be obtained before holding the AGM, which itself should be held within six months from the end of the financial year.