Checklist for Statutory Audit of Companies

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. The purpose of a statutory audit is to determine whether an organization provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and 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, statutory audit is required.

Who can be appointed as a Statutory Auditor?

A practicing Chartered Accountant or a Chartered accountant firm or LLPwith majority of partners practicing in India can be appointed as a statutory auditor of a company.

Given below are theimportant areas of consideration one has to look into while conducting the statutory audit of a company:

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 has control environment either through regulatory guidelines or initiatives of the competitor or economic trends taking place in the country or 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 the test reveals that controls are weak, the auditors will enhance their use of substantive testing, which usually increases the cost of an audit. The following are general classifications of tests of controls:

• Reperformance – Auditors may initiate a new transaction, to see which controls are 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 check marks, which indicate that controls have been performed.

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

Audit of Balance Sheet

A balance sheet audit is an 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. Verify whether the share capital changes are there and whether the changes are authorized under proper resolution.
• Secured loans including latest bank statements, bank reconciliation statements and sanctioned letters confirming the rate of interest on the loan
• Unsecured loans including statements showing acceptance of loan, rate of interest confirmation letter, ledger copies from the books of the loan provider
• Current liabilities and provisions including confirmation copies of the closing balances, 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 the case of preliminary expenses, check the treatment showing whether it iscapitalized within five years
• Minutes of the meeting should be verified showing the any resolutions for capitalization of expenses, managerial remuneration, loans, approving donations
• Any income from investment i.e. interest, dividend should be checked with the bank account.
• Verifythe valuation of closing stock whether 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 get covered under this point
• The taxpayer needs to reconcile the GSTR 3B with GSTR 2A to ensure that the taxpayer is not claiming excess Input Tax Credit (ITC). In case if the taxpayer has claimed any ITC in excess than he or she needs to pay interest and penalty as may be prescribed.
• In case if the GST auditor finds any mismatch between the GSTR 3B and GSTR 2A then in such a case the auditor needs to direct the management to amend the invoices at summary levels.
• At the time of auditing, the taxpayer shall keep the condition in mind that the period between the invoice date and payment date shall not exceed 180 days, to reverse ITC for non-payment:
• Reconcile e-Way Bills with invoices to determine if there is any bogus entry made in the records by the taxpayer.
• Check whether all GST returns are filed and payments are made within the due dates or not

Audit of TDS

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

Some other important checks:

• If the company pays dividend to its shareholder then check payment as per prescribed rate and also ascertain interest paid, if there is any delay.
• Check Provident Fund, ESIC, Gratuity, Bonus and Leave encashment payments. Ascertain the applicability of provisions of the respective acts and if there is any variation, then report the same in the Audit report.
• Check whether there is any payment or aggregate payments for any expenditure to a person by mode otherwise than by account payee cheque or bank draft or through other such 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 whether 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 are to be checked with due care, whether the same are permitted by Companies Act, 2013 and income tax Act, 1961.Section 185, 186 and 73 to 76 of Companies Act, 2013 are necessarily to keep in mind while verifying the Loans and Advances