What is Auditing?
Auditing refers to audit of financial statements or an objective examination and evaluation of a company’s financial statements.
Audits of company’s accounts have been compulsory in India since the passing of the first Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a statutory body established under the Chartered Accountants Act, 1949, has regulated the practice of Chartered Accountants in India and ensured the maintenance of India’s accounting standards. All chartered accountants are members of the Institute of Chartered Accountants of India (ICAI), and must comply with the standards stipulated by the ICAI and the Audit and Assurance Standards Board (AASB) while providing professional consultation.
Importance of Auditing:
Auditing is an ongoing process, as the results of the same can be used for many purposes:
Helping investors know the financial health of the company
Assuring the government that the company is properly discharging its legal duties
Helping lenders evaluate the credibility of the company
Informing management about any shortcomings in the company’s business operations
Helping management improve business efficiency
The three primary financial statements are:
Cash flow Statement
Notes to Account
These statements are prepared following relevant accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), and are used to provide useful information to the stakeholders of the company, such as:
Audit ensures that the company represents their financial situation fairly and accurately, and are in accordance with accounting standards.
Types of Audit:
Audits in India are generally classified into 2 types:
1. Internal Audits Internal audits are performed by employees of a company or organization. They are prepared for the use of management and other internal stakeholders.
Internal audits are used for improving decision-making of a company by providing top level management with ways to improve internal controls. They also ensure compliance with laws and regulations and maintains timely, fair, and accurate financial reporting.
2. External Audits: These are performed by external organizations and parties; external audits provide an unbiased opinion that internal auditors might not be able to give. External financial audits are utilized to determine whether there is any material mis-statements or errors in a company’s financial statements.
The main difference between an external auditor and an internal auditor is that an external auditor is completely independent. It means that they present a more unbiased opinion rather than an internal auditor who may be biased with respect to the organization of which he/she is a part.
Type of External Audit:
In India, statutory audits are conducted for each financial year (April 1 to March 31) and not the calendar year. The two types of statutory audits in India are:
A. Tax Audits
Tax audits are to be done under Section 44AB of Income Tax Act 1961. This section mandates that those whose business turnover exceeds INR 10 million, and those working in a profession with gross receipts exceeding INR 5 million, must have their accounts audited by an independent chartered accountant. The provision of tax audits is applicable to everyone, individual, a partnership firm, a company, or any other entity. The tax audit report is to be completed by September 30 after the end of the previous financial year. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or INR 150, 000, whichever is lower.
B. Company Audits
The Company audits in India are done as per the provisions under Companies Act 1956 and Companies Act 2013 as applicable. Every company is required to have its annual accounts audited each financial year and only an independent chartered accountant or a partnership firm of chartered accountants shall be appointed as the Auditor of the company. The auditor shall prepare the audit report in accordance with the Company Auditor’s Report Order (CARO) 2003.
Government audits are performed by entities that relate to ensuring that financial statements have been prepared accurately in order not to misrepresent the amount of taxable income of a company.
A government audit may result in any one of the following conclusions:
No change in the tax return
A change that is accepted by the taxpayer
A change that is not accepted by the taxpayer
If a tax payer ends up not accepting a change, the issue will go through a legal process of mediation or appeal.