CHECK LIST FOR STATUTORY AUDIT OF COMPANIES

CHECK LIST FOR STATUTORY AUDIT OF COMPANIES

Statutory audits play a crucial role in ensuring accountability and transparency in financial reporting for companies worldwide. Required by law, these audits play a crucial role in verifying the precision and impartiality of a company's financial statements, providing confidence to stakeholders and regulators. Statutory audits play a crucial role in safeguarding the accuracy and reliability of financial information provided by companies, allowing for a true reflection of their financial position and performance.

Successfully managing a statutory audit necessitates a methodical approach and unwavering focus on the finer points. The statutory audit checklist is an essential tool that auditors rely on. Crafted to provide a thorough overview of the essential aspects to be evaluated during an audit, the checklist acts as a valuable tool, guiding auditors through the complex landscape of financial scrutiny.

The statutory audit checklist serves multiple purposes at its core. This tool helps auditors conduct a thorough examination of a company's financial operations and ensures compliance with regulatory requirements and accounting standards. By outlining precise procedures and documentation requirements, the checklist helps to ensure a comprehensive and standardised audit process, which ultimately improves the trustworthiness and credibility of audit findings.

In this article, we explore the importance of statutory audits and highlight the crucial role of the statutory audit checklist in strengthening the reliability of financial reporting. By thoroughly examining the various components of the checklist and considering its impact on auditors and companies, we seek to emphasise the significance of this essential tool in the world of corporate governance and regulatory compliance.

SIGNIFICANCE OF STATUTORY AUDITS:

Statutory audits play a crucial role in maintaining the trustworthiness and reliability of a company's financial statements. These audits are crucial in guaranteeing that a company's financial information is an accurate representation of its financial status, performance, and cash flows. Statutory audits play a crucial role in instilling confidence in investors, creditors, regulators, and other stakeholders by thoroughly scrutinising financial statements and ensuring the accuracy and openness of the disclosed financial information.

Benefits of statutory Audits-

Ensuring Accuracy and Fairness:

1. The core purpose of statutory audits is to ensure that a company's financial statements are accurate and fair.
2. By carefully examining accounting records, transactions, and internal controls, auditors evaluate whether the financial statements adhere to applicable accounting standards, regulatory requirements, and disclosure norms.
3. This process involves ensuring the accuracy of financial transactions, evaluating the suitability of accounting policies, and detecting any significant errors or inconsistencies.
4. Thorough and independent reviews conducted through statutory audits help to minimise the risk of financial fraud, errors, or misrepresentations. This, in turn, enhances confidence in the reliability of financial reporting.

Boosting Investor Confidence:

1. Statutory audits are essential in building trust among investors as they offer an impartial and unbiased assessment of a company's financial performance and future prospects.
2. Investors heavily depend on audited financial statements to make well-informed investment decisions.
3. These statements provide a solid foundation for assessing a company's financial health, viability, growth potential, and risk profile.
4. Statutory audits play a crucial role in ensuring the accuracy and reliability of financial information.
5. By doing so, they help to build trust and credibility in the financial markets, making it easier for capital to be allocated and investment to flow smoothly.
6. In addition, audited financial statements promote transparency and disclosure, allowing investors to accurately assess the value and risk of their investments.

Ensuring Regulatory Compliance:

1. In today's ever-changing regulatory environment, statutory audits are crucial for maintaining compliance with relevant laws, regulations, and accounting standards.
2. Companies must comply with various regulatory requirements, such as the Companies Act, tax laws, securities regulations, and industry-specific regulations.
3. Statutory audits offer an impartial evaluation of a company's adherence to legal and regulatory frameworks, pinpointing any instances of non-compliance, fraud, or financial irregularities.
4. Statutory audits play a crucial role in ensuring that companies comply with regulatory standards and reporting requirements. By doing so, they help companies minimise legal and reputational risks while protecting the interests of stakeholders.

Promoting Corporate Governance:

1. Strong corporate governance relies on solid internal controls, clear financial reporting, and a commitment to accountability for both shareholders and stakeholders.
2. Statutory audits are essential for promoting corporate governance as they evaluate the effectiveness of internal controls, assess the quality of financial reporting processes, and identify areas for improvement in governance practices.
3. By conducting thorough and unbiased reviews of financial information, auditors play a crucial role in upholding the integrity and transparency of corporate governance practices.
4. Their work helps to build trust and ensure accountability among management, directors, and shareholders. In addition, statutory audits play a crucial role in ensuring oversight and accountability.
5. They allow shareholders and regulators to hold companies and management responsible for their management of corporate resources and adherence to fiduciary duties.
6. Statutory audits play a crucial role in verifying the accuracy and fairness of financial statements, boosting investor confidence, ensuring compliance with regulations, and fostering good corporate governance practices.
7. Statutory audits are crucial in ensuring the reliability and transparency of financial reporting, which in turn safeguards the interests of stakeholders and upholds the integrity of the financial markets.

 SUMMARY OF THE CHECKLIST:

• A comprehensive statutory audit checklist is a valuable tool that helps auditors conduct thorough examinations of a company's financial statements and operations.
• It covers various important areas related to financial reporting, regulatory compliance, and corporate governance, making sure that auditors address all necessary aspects of the audit process.
• The checklist is carefully organised to cover a wide range of financial aspects, including share capital, loans, tax compliance, inventory management, and employee-related expenses.
• It aims to address the essential components of a company's financial operations. The checklist is designed to ensure that auditors have clear guidance and instructions for each aspect of the audit.
•  It breaks down the process into specific sections, with detailed procedures and documentation requirements to be followed.
• As a valuable tool, the checklist acts as a reliable roadmap for auditors, enabling them to navigate the intricacies of the audit process with clear direction and accuracy.
• It provides a clear and systematic guide for reviewing financial data, conducting assessments, and ensuring compliance with regulatory requirements.
• By adhering to the checklist, auditors can guarantee that no crucial areas are missed and that the audit is carried out in a methodical and comprehensive manner.
•  The checklist helps ensure that the audit process is consistent and standardised by offering auditors a set of uniform guidelines to adhere to.
•  It assists auditors in maintaining a disciplined approach to auditing, guaranteeing that all pertinent aspects of a company's financial operations are thoroughly reviewed with precision and meticulousness.
• The statutory audit checklist is an essential tool for auditors, enabling them to conduct audits efficiently and effectively while ensuring compliance with legal and regulatory requirements.
• By providing a structured guide, the checklist allows auditors to methodically assess different aspects of a company's financial operations, ultimately enhancing the trustworthiness and credibility of the audit process.

KEY AREAS TO FOCUS UPON DURING STATUTORY AUDIT

1.Elements of the balance sheet

• It is important to ensure that any changes in shareholder patterns and capital structure are appropriately authorised and documented.
• Ensuring adherence to legal requirements and regulatory filings pertaining to share capital and loans is crucial for maintaining financial transparency and regulatory compliance.

2.Ensuring Tax Compliance:

• Ensuring tax compliance is a vital part of financial operations, with this section dedicated to verifying adherence to tax laws and regulations.
• Auditors meticulously examine tax deduction at source (TDS) filings, returns, and payments to guarantee precision and punctuality.
• Ensuring compliance with Goods and Services Tax (GST) regulations and accurately reconciling input tax credit are crucial for avoiding penalties and upholding financial integrity.
• Managing your inventory efficiently is crucial for the success of your business. By implementing effective inventory management strategies, you can ensure that you always have the right products in stock, avoid overstocking or understocking, and meet customer demands in a timely manner. With proper inventory management, you can streamline your operations
• Efficient inventory management is crucial for maintaining accurate reporting of assets and liabilities on the balance sheet.
• When auditors review inventory valuation methods, they carefully assess if they align with accounting standards. This includes evaluating concepts like net realisable value and FIFO (first in, first out).
• Recognising slow-moving or obsolete inventory is crucial for maintaining accurate financial reporting and preventing any overstatement of assets.

3.Expenses related to employees:

• This section emphasises the importance of adhering to labour laws and accurately accounting for expenses related to employees.
• Ensuring the accuracy of payroll records, benefits, and statutory deductions, such as provident fund (PF) and employee state insurance (ESI), is crucial for both legal compliance and the well-being of employees.
• Ensuring precise documentation of expenses tied to salaries, bonuses, and gratuities is crucial for maintaining transparency in financial reporting and adhering to accounting standards.

4.Legal Cases and Contingent Liabilities:

• Reviewing pending legal cases and contingent liabilities is an important task for auditors as it helps them evaluate potential financial risks and ensure accurate disclosures in financial statements.
• Recognising and revealing legal obligations is essential in order to give stakeholders a complete understanding of a company's financial well-being.
• Ensuring adequate provision for potential liabilities is crucial for mitigating financial risks and maintaining compliance with accounting standards.
• Fixed Assets:
• Accurate recording and valuation of fixed assets play a crucial role in determining the actual financial standing of a company.
• Auditors thoroughly examine additions, disposals, and depreciation methods to ensure strict adherence to accounting standards and regulatory requirements.
• Conducting a thorough physical verification of fixed assets is crucial in order to avoid any potential errors in asset valuation and to guarantee precise financial reporting.
• Every part of the checklist is crucial for guaranteeing the precision, openness, and adherence to regulations of a company's financial activities.
• Through a comprehensive analysis of these crucial aspects, auditors can instil stakeholders with a sense of assurance regarding the accuracy of the company's financial statements and its compliance with regulatory standards.

 LEGAL REQUIREMENTS:

The statutory audit checklist is focused on ensuring compliance with various legal requirements, including the Companies Act, tax laws, and accounting standards. Adhering to legal frameworks is crucial for maintaining financial integrity, transparency, and regulatory compliance.

1.Ensuring compliance with the Companies Act:

• The Companies Act provides the legal framework that governs corporate entities, covering important areas such as corporate governance, financial reporting, and shareholder rights.
• The checklist helps auditors confirm compliance with legal requirements related to share capital, loans, board resolutions, and other corporate matters.
• It is crucial to comply with the Companies Act in order to preserve legal status, protect shareholder interests, and maintain high standards of corporate governance.

2.Ensuring adherence to tax laws:

• Ensuring tax compliance is crucial for smooth financial operations, as any failure to adhere to tax laws can result in penalties, fines, and legal consequences.
• The checklist ensures that calculations, deductions, and tax payments, including TDS and GST, are accurate and made on time.
• Failure to comply with tax laws can result in serious repercussions, such as legal action, additional fees, and harm to one's reputation.

3.Ensuring Compliance with Accounting Standards:

• Adhering to accounting standards guarantees that financial reporting is consistent, transparent, and comparable, which helps stakeholders make well-informed decisions.
• The checklist helps auditors confirm compliance with established accounting principles, valuation methods, and disclosure requirements.
• Not adhering to accounting standards can seriously damage the trustworthiness of financial statements, shake investor faith, and attract regulatory attention.

4.Significance of Legal Compliance:

1. Ensuring compliance with legal requirements is crucial for companies to protect their interests and maintain a positive reputation. It goes beyond just a regulatory obligation and becomes a strategic imperative.
2. Failure to comply with regulations can have serious consequences for companies, including penalties, fines, legal action, and regulatory sanctions. These outcomes can lead to financial losses and harm a company's reputation.
3. Complying with legal requirements is crucial for building trust, promoting transparency, and ensuring accountability. This, in turn, boosts investor confidence and fosters trust among stakeholders in the company's governance and financial reporting.
4. Adhering to legal frameworks showcases a company's dedication to ethical behaviour, honesty, and being a responsible corporate citizen, which enhances its reputation among investors, customers, and regulators.
5. The statutory audit checklist highlights the crucial significance of adhering to legal obligations, such as the Companies Act, tax laws, and accounting standards. By following these regulations, companies can minimise legal risks, maintain financial integrity, and boost stakeholder confidence in their operations and governance practices.

  5.Documentation and Conciliation:

Proper documentation, authorization, and reconciliation are essential components of the audit process, ensuring the integrity and reliability of financial reporting. Comprehensive documentation plays a crucial role in maintaining transparency, accuracy, and accountability. It enables auditors to have a well-defined trail of evidence to support their findings and conclusions.

6.Documentation:

• Documentation plays a crucial role in the audit process by capturing a comprehensive account of the company's financial transactions, decisions, and actions.
• Documentation such as financial statements, invoices, agreements, board resolutions, and regulatory filings play a crucial role for auditors in ensuring the accuracy and completeness of financial information.
• Thorough documentation promotes transparency as it allows auditors to easily track transactions, comprehend the reasoning behind accounting methods, and evaluate the accuracy of reported information.
• Documentation plays a crucial role in promoting clear communication and collaboration among members of the audit team, management, and stakeholders. This helps to establish a common understanding of the audit findings and recommendations.

7.Permission:

• Authorization mechanisms, such as board resolutions and management approvals, are essential for maintaining the integrity and credibility of financial transactions and decisions.
• Auditors ensure that transactions are properly authorised by authorised personnel, in line with established policies, procedures, and delegation of authority.
• Authorization controls play a crucial role in ensuring the security and integrity of company assets and interests by preventing unauthorised transactions, errors, and fraudulent activities.
• Through a thorough analysis of authorization documentation, auditors evaluate the effectiveness of internal controls, adherence to corporate governance standards, and compliance with legal and regulatory obligations.

8.Finding common ground:

• Reconciliation is the process of comparing and aligning various financial records, accounts, or data sources to guarantee that they are consistent, accurate, and complete.
• As part of their duties, auditors meticulously compare financial statements with supporting documentation, bank statements, ledger accounts, and regulatory filings in order to detect any discrepancies or errors that may be present.
• Reconciliation is a valuable tool for identifying irregularities, such as transactions that are missing, entries that have been duplicated, and imbalances in account totals. This allows auditors to promptly address and resolve any issues that arise.
• Thorough reconciliation is crucial for ensuring the accuracy of financial information, making informed decisions, and minimising the potential for financial misstatement or fraud.

THE SIGNIFICANCE OF PROPER DOCUMENTATION AND RECONCILIATION:

• Ensuring accuracy, transparency, and accountability in financial reporting requires proper documentation and reconciliation.
• Thorough documentation instills auditors, regulators, and stakeholders with a sense of assurance regarding the dependability and trustworthiness of financial information.
• Reconciliation is crucial in ensuring that the financial statements accurately portray the company's financial position, performance, and cash flows.
• Through the meticulous documentation and careful reconciliation of financial data, companies showcase their unwavering dedication to upholding strong governance, maintaining internal control, and adhering to regulatory requirements.
• Having strong documentation and reconciliation processes helps build trust, instill confidence in stakeholders, and enhance the credibility of financial reporting. This creates a culture of transparency and accountability within the organisation.

DETAILED CHECKLISTS

Share Capital:

• Verify any change in Shareholder’s pattern.
• Obtain certified copies of relevant resolutions.
• Ensure compliance with authorized and paid-up share capital limits.
• Obtain and verify forms filed with MCA and RBI for share capital changes.

Share Application Money:

• Obtain copies of Share Application Forms.
• Verify whether share application money was received in cash or through the bank.

Secured Loans:

• Obtain list of outstanding secured loans.
• Verify resolution for loan in Board/General meetings.
• Ensure compliance with Companies Act for new secured loans.
• Check for loan repayment violations.
• Verify proper utilization of term loans.
• Confirm TDS deductions on interest payments for loans from NBFCs or other institutions.

Unsecured Loans:

• Obtain list of outstanding unsecured loans.
• Verify existence of debentures and necessary documentation.
• Check for compliance with Companies Act for loans granted.

Duties & Taxes:

• Obtain TDS challans and returns.
• Calculate and ensure timely payment of TDS.
• Check for any TDS defaults and compute interest on delayed payments.

PF/ESI:

• Check calculation and applicability of PF/ESI contributions.
• Obtain copies of all challans/returns for PF/ESI.

Bonus Act/Gratuity Act:

• Check calculation and applicability of bonus and gratuity.
• Obtain copies of all return computations.

GST:

• Reconcile GSTR-3B/GST returns with books.
• Confirm timely payments to vendors for ITC.
• Obtain LUT and reconcile input credit with GSTR-2A and sales/service income with GSTR-1.

Trade Payable:

• Obtain list of creditors and analyze balances.
• Discuss old and non-moving balances with client.
• Check for any legal cases filed by creditors.
• Review adjustments of advance to suppliers.

Creditors Against Expenses:

• Ensure provision for expenses due after year-end.
• Confirm provision adequacy.

Other Current Liabilities:

• Verify bifurcation of long-term loans.
• Obtain EMI sheet for long-term loans.
• Ensure proper accounting for unearned income and imprest with employees.

Provision:

• Compute provision for gratuity and verify actuarial valuation.
• Check registration of Gratuity Trust and disclosure in notes.

Deferred Tax Assets/Liabilities:

• Verify working of opening DTA/DTL.
• Compute DTA/DTL for the year.

Fixed Assets:

• Obtain list of additions and invoices.
• Update Fixed Assets Registers.
• Confirm physical verification and reconcile with books.
• Verify depreciation calculation and method.

Investments:

• Obtain list of investments and related documents.
• Verify balance sheets of invested companies.
• Check compliance with Companies Act for related party investments.

Sundry Debtors:

• Obtain list of debtors and agreements.
• Check credit policy and provision for doubtful debts.
• Review balance confirmations and subsequent realizations.

Loans and Advances:

• Verify loans to directors, related parties, and shareholders.
• Check compliance with Companies Act for loans granted.
• Confirm interest and TDS deductions for loans to others.

Security:

• Obtain security agreements.
• Verify security refundability and returns recognition.

Advance to Employee:

• Verify authorization and adjustments of employee advances.
• Obtain balance confirmation from employees.

Balance with Revenue Authority:

• Verify receivable amounts from revenue authorities.
• Check income tax refund status and advance tax paid.

TDS Receivable:

• Reconcile TDS with income and interest.
• Ensure proper treatment of prepaid expenses.

Prepaid Expenses:

• Check for prepaid expenses expensed off during the year.
• Compute and list prepaid expenses.

Cash:

• Maintain denomination-wise details.
• Note restrictions on cash transactions.
• Ensure daily bank deposits and proper closing balances.

Bank:

• Reconcile bank accounts.
• Obtain bank confirmations.
• Investigate aged cheques and unclaimed deposits.

Inventory:

• Conduct physical verification.
• Record variance entries.
• Value inventory at lower of cost or net realizable value.
• Provide for non-moving or slow-moving stock.
• Perform NRV and FIFO tests.
• Consider direct costs in inventory valuation.
• Verify stock transfers and mark-up.

Revenue from Operations:

• Obtain invoice-wise sales register.
• Check GST compliance on advances.
• Review copies of agreements with customers.
• Compute unbilled income.
• Review sales invoices for cut-off transactions.

FD Interest Income:

• Obtain interest certificate.
• Calculate accrued interest on FD.
• Verify TDS receivable booking.

Dividend Income:

• Verify DEMAT account holdings.
• Check beneficiary details.
• Review bank statements for dividend income.

Profit/(Loss) on sale of fixed assets:

• Verify management approval for disposal.
• Review discount policy agreements.
• Confirm proper accounting entries.

Foreign currency fluctuation:

• List outstanding balances.
• Review purchase agreements.

Purchase:

• Obtain major agreements with suppliers.
• Ensure list of suppliers is maintained.
• Confirm purchase orders for all transactions.
• Vouch invoices for selected months.
• Review March purchases for sales accounting.