Types Of Audits In India And Their Importance

How To Become An Auditor In India

Brief details on the importance and the types of audits in India. Auditing is a very important part of doing business. This is when you officially inspect the accounts of your organization, to know where there are loopholes through which money is flowing out of your business. As a matter of fact, not doing this can have serious consequences for the financial health of any organization. 

In this post we want to look at India, and see how things are done in this country as per auditing of company accounts. Of course Indian nationals must be very familiar with the system, but for any foreign executive operating in India, it is a good idea to have a basic understanding of audit procedures in the country. So for their benefit we present the types of audit in India.

Types Of Audits In India

Audits are usually broken down into two types:

  • Statutory audits
  • Internal audits

Importance Of The Types Of Audits In India

  • Statutory Audits 

Statutory audits are conducted by the direction of the state authorities in order to report the condition of a company’s finances and accounts to the Indian government. Such audits are generally performed by qualified auditors who are working as external and independent parties.

Importance:

 They are usually done in order to clarify tax matters. The audit report of a statutory audit is made in the form prescribed by the government department.

  • Internal Audits

Internal audits are done at the request of internal management of the said organization in order to check the state of a company’s finances and study the operational efficiency of the organization, as well as prevent misappropriation of funds. Internal audits may be performed by an independent party contracted by the management, or by the company’s own internal staff.

Importance: 

Internal audits check the state of a company’s finances and study the operational efficiency of the organization, as well as prevent misappropriation of funds. 

Types Of Audits In India
Types Of Audits In India

Statutory Audit Reporting In India

In India, statutory audits are done by every company for each fiscal year (April 1 to March 31) and not the calendar year. Many people commonly make the mistake of thinking it is done at the beginning of the calendar year. The two most common types of statutory audits in India are:

    Tax audits; and Company audits.

  • Tax Audits

Tax audits are a matter of law, required under Section 44AB of India’s Income Tax Act 1961. This section states that every person whose company or business turnover is money Rs 10 million (US$ 134,508) in any particular year, and every person working in a profession whose gross earning exceeds Rs 5 million (US$ 67,254) must have their accounts audited or inspected by an independent chartered accountant.

It is important to note that tax audits are mandatory to everyone, be it an individual, a partnership firm, a company or any other entity as long as they meet the financial target. Non-compliance with the tax audit provisions may attract a fine of 0.5 percent of the company turnover or Rs 100,000 (US$1,345).

  • Company Audits

Every company in India, irrespective of its nature of business or the amount of money recorded as turnover, must have its annual accounts audited each financial year. This is a matter of law, and the provisions for this law are contained in the Companies Act, 2013. For this purpose, the company and its directors have to first appoint or contract an auditor at the outset.

After this, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company in order to make the state of the company’s finances clear.

The Companies (Amendment) Act, 2017 states that auditors can be appointed for a term of five years, and that their appointment need not be ratified in each year’s AGM. This can help lessen the burden of companies finding and contracting a new auditor every year.

Only an independent chartered accountant or firm consisting of chartered accountants can be appointed as the auditor of a company.    

Audit Reporting

Audits are conducted to express a true verified view or statement of a company’s financial statements. Therefore, the auditor’s findings as stated in the ultimate report are based on the information reviewed and analyzed during the checking of financial statements. After completing the report, the auditor may express one of the following four opinions:

Unqualified opinion

When an independent auditor’s findings show that the financial records and statements of a company are in order –meaning that they are presented fairly and appropriately, in accordance with the financial reporting framework, the judgment is termed an unqualified opinion.

An unqualified opinion is important because it indicates the following factors:

  •     Generally accepted accounting principles are consistently followed in the creation of financial statements;
  •     Financial statements adhere to all the relevant legal requirements and regulations;
  •     There is adequate disclosure of all factors that are relevant to the proper presentation of financial information; 

Qualified opinion

A qualified opinion is when an auditor expresses what to him or her are the financial statements of the company  as a whole, not free from material misstatements, and the misstatements but not pervasive in nature.

Importance

The information is a misstatement when such misstatement can affect the decisions of the users of the financial statements. This kind of audit is therefore important because it is used to establish cases in which the financial reports involve misstatements. The effect of misstatement is said to be pervasive when such misstatement is not confined to one part of the statement, account or item of the financial statement and reflects the widespread effect of misstatement of information.

Disclaimer of opinion

A disclaimer of opinion is such that is expressed when the possible effect of a limitation on scope is material and pervasive when it occurs that the auditor is unable to obtain sufficient appropriate audit evidence.

Importance:

This kind of auditing is important because it is used in cases where the auditor is unable to express a definite opinion on the financial statements. Never the less, he states that there are misappropriations; just that he cannot prove them to a definite degree. 

Adverse opinion

 

An adverse opinion is produced when there are limitations on the scope or the extent of the auditor’s work.

It also occurs when there is disagreement with management of the company as to the acceptability of the accounting policies chosen, the style of their application, or the adequacy of the financial statement disclosure.

Importance: 

Sometimes an auditor produces an adverse opinion, because it is not necessary to implicate the management of the company. This is true particularly in cases where a new management has recently taken over the reins of the company, and a different auditing system was used previously. However, a clear description of all the substantive reasons is included in the audit report statement.

As stated earlier in this article, the provision of audited financial statements is a matter of law. However, the law recognizes the fact that contracting an auditor can involve significant financial implications, not to talk about the work load, and man power requirements. For this reason, smaller companies are excluded from this requirement, meaning that the law ensures that big companies with significant value in stock holding, and in turn over are the main targets for the auditing requirements, as stipulated in the India’s Companies Act, 2013. So what companies are called big companies in the context of Indian law?

India’s Companies Act, 2013 states that the following companies must have an internal auditing system.

  1. Every company whose shares are traded on the stock exchange.
  2. Companies whose shares are not listed on the stock exchange, but who have the following:
    •     A registered capital of Rs 500 million (US$6.7 million) or more during the preceding financial year;
    •     A Turnover recorded to be exactly or above Rs 2 billion (US$26.9 million) or more during the preceding financial year;
    •     Outstanding loans or credit facilities from banks or public financial institutions exceeding Rs 1 billion (US$13.4 million) or more at in the present year, or any point in time during the preceding financial year; or
    •     Cash deposits of Rs 250 million (US$3.3 million) or more at any point in time in any of the financial institutions during the preceding financial year. 
  1. Every private company with: 
    •     Every company with turnover of Rs 2 billion (US$26.9 million) or more during the preceding financial year; or
    •     Outstanding loans or credit facilities from banks or public financial institutions exceeding Rs 1 billion (US$13.4 million) at the present, or at any point in time during the preceding financial year.

The statutory auditor of the company must make a statement on the internal auditing system of the company in the yearly audit report.

That’s all about the types of audit in India and Audit reporting.

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