In the accounting realm, there are two primary types of audits: internal audits and statutory audits. Both audits are essential for reviewing an organization’s financial records, but they differ significantly in their objectives, scope, and target audience.
While we all know about Internal and Statutory audit, understanding the difference between internal audit and statutory audit is important because they serve different purposes and are crucial for businesses aiming to enhance their financial transparency and compliance. Internal audit is a form of assurance to the board and management of a company that the company’s processes, systems, operations, and financials are in compliance with the company’s policies and procedures. Statutory audit, on the other hand, is conducted to ensure that the company’s financial statements are true and fair, and comply with the relevant statutes and regulations.
Internal Audit: Key Features and Importance
An internal audit involves a thorough examination of an organization’s financial records and internal controls by an independent entity, typically an internal audit department. The primary aim of an internal audit is to provide an unbiased evaluation of an organization’s operations, helping management pinpoint areas for improvement. Here’s a closer look at the key features of internal audits:
Objectives of Internal Audits
The main goal of an internal audit is to ensure that an organization’s internal controls and risk management processes are operating effectively. These audits assess the efficiency, effectiveness, and economy of an organization’s operations, offering valuable insights into potential enhancements.
Scope of Internal Audits
The scope of an internal audit is defined by the organization’s internal audit department and can encompass all aspects of operations, including financial, operational, and compliance areas. This comprehensive approach ensures that all relevant risks and controls are evaluated.
Frequency of Internal Audits
Internal audits are generally conducted on a regular schedule, such as quarterly, semi-annually, or annually. This consistent oversight helps organizations maintain robust internal controls and adapt to changing risks.
Reporting of Internal Audits
After the audit is completed, reports are generated for management, outlining findings and recommendations. These insights are crucial for driving improvements in the organization’s operations, ensuring ongoing compliance and operational excellence.
By understanding the significance of internal audits, organizations can better leverage these evaluations to enhance their financial integrity and operational efficiency.
Statutory Audits: Key Features and Importance
A statutory audit is a mandatory examination of an organization’s financial records conducted by an independent auditor appointed by a government or regulatory body. The primary goal of a statutory audit is to provide assurance that an organization’s financial statements present a true and fair view. Here’s an overview of the key features of statutory audits:
Objectives of Statutory Audits
The main objective of a statutory audit is to deliver an independent opinion on the organization’s financial statements. This opinion assures stakeholders—including shareholders, investors, and lenders—that the financial statements are accurate and reliable.
Scope of Statutory Audits
The scope of a statutory audit is defined by the relevant regulatory body or government agency that mandates the audit. Typically, it encompasses a thorough review of the financial statements and accompanying notes, ensuring comprehensive scrutiny of the organization’s financial health.
Frequency of Statutory Audits
Statutory audits are generally conducted annually, although the frequency can vary based on specific regulatory requirements or the nature of the organization’s operations.
Reporting of Statutory Audits
After the audit is complete, the auditor prepares a report intended for stakeholders such as shareholders, investors, and lenders. The auditor’s opinion is included in the organization’s annual report, which is made publicly available, enhancing transparency and accountability.
By understanding the importance of statutory audits, organizations can ensure compliance with regulatory standards and build trust with their stakeholders.
This guide provides an overview of the differences between the two types of audits, including the scope and objectives of each.
Internal Audit vs. Statutory Audit: Comparative Table
| Sr No. | Particulars | Internal Audit | Statutory Audit |
| 1 | Meaning | Internal Audit is carried out by people within the Company or even external Chartered Accounts (CAs) or CA firms or other professionals to evaluate the internal controls, processes, management, corporate governance, etc. these audits also provide management with the tools necessary to attain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit | Statutory Audit is carried out annually by Practising Chartered Accountants (CAs) or CA Firms who are independent of the Company being audited. A statutory audit is a legally required review of the accuracy of a company’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 |
| 2 | Qualification | An Internal Auditor need not necessarily be a Chartered Accountant. It can be conducted by both CAs as well as non-CAs. | Statutory Audits can be conducted only by Practising Chartered Accountants and CA Firms. |
| 3 | Appointment | Internal Auditors are appointed by the management of the Company. Form MGT-14 is to be filed with ROC | Statutory Auditors appointed by the Shareholders of the Company in its Annual General Meeting. Form ADT-1 is to be filed with ROC. |
| 4 | Purpose | Internal Audit is majorly conducted to review the internal controls, risk management, governance, and operations of the Company and to try and prevent or detect errors and frauds. | Statutory Audit is conducted annually to form an opinion on the financial statements of the Company i.e whether they give an accurate and fair view of the financial position and financial affairs of the Company. |
| 5 | Reporting Responsibilities | Reports are submitted to the management of the Company being audited. | Reports are submitted to the shareholders of the Company being audited. |
| 6 | Frequency of Audit | Conducted as per the requirements of the management. | Conducted annually as per the statute. |
| 7 | Independence | An internal auditor may or may not be independent of the entity being audited. | A statutory auditor must always be independent. |
| 8 | Removal of auditor | Internal auditors can be removed by the management | Statutory Auditors can be removed by shareholders in an AGM only. |
| 9 | Regulatory requirements | Internal audit is not a regulatory requirement for all private limited companies. The requirements for internal audits are prescribed in Section 138 of the Companies Act, 2013. | All Companies registered under the Companies Act are required to get Statutory audits done annually. |
Key Difference Between Internal Audit And Statutory Audit
Similarities Between Internal Audit And Statutory Audit
Having discussed the differences between internal audit and statutory audit, let’s now take a look at the similarities between the two.
- The primary similarity between internal audit and statutory audit is that they both require an independent area of operation that should, ideally, be free from any sort of managerial interference or organizational control.
- Both internal and statutory audits follow the same procedural path—planning, research, execution, and presentation. These paths may vary slightly from one auditor to another, but they largely stick to the same pattern.
- Be it an internal audit or a statutory audit, both types are dependent on the availability and access of clear, reliable, and accurate data. If an organization offers its resources in a transparent manner, the audit would be fair and just.
- The long-term purpose of internal and statutory audits is to prevent mistakes, maintain clarity, enhance efficiency, and present a precise snapshot of the firm’s financial position.
When should you conduct Statutory Audit?
Statutory audits are essential for ensuring financial transparency and compliance with regulatory standards. Here are the key circumstances under which statutory audits should be conducted:
- Annually: Statutory audits are generally required on an annual basis to verify the accuracy of financial statements and ensure compliance.
- At Year-End: Conduct audits at the end of the financial year to evaluate the organization’s overall financial health and performance.
- Regulatory Mandates: Whenever dictated by government regulations or industry standards, statutory audits must be performed to meet compliance obligations.
- Following Significant Changes: Initiate audits after major organizational changes, such as mergers, acquisitions, or restructuring, to assess financial impacts.
- In Response to Stakeholder Concerns: If shareholders, investors, or lenders express concerns regarding financial accuracy, a statutory audit should be conducted without delay.
- Before Major Financial Transactions: Conduct statutory audits prior to significant financial activities (e.g., IPOs, large loans) to provide assurance to stakeholders.
- When Compliance Issues Arise: If there are signs of non-compliance with laws or regulations, initiate an audit to investigate and address potential issues.
- At the Start of New Financial Periods: Audits can help establish a clear financial baseline when entering a new financial period.
- When Planning for Expansion: Before expanding operations or entering new markets, a statutory audit can assess financial readiness and compliance.
When should you conduct Internal Audit?
Internal audits are vital for evaluating an organization’s internal controls and operational efficiency. While Statutory Audit is compulsorily required to be conducted annually, as an organization you should choose to conduct an Internal Audit if you want to:
- Analyze the fairness of your firm’s internal controls, processes, and operations
- Compare your actual performance with budgets and estimates
- Evaluate policies, strategies, and compliances
- Devise appropriate measures to meet organizational objectives
- Identify risks within the organization, focusing on high-risk areas that require closer examination
- Conduct audits prior to launching new projects or initiatives to ensure that appropriate controls and procedures are in place
- Identify concerns or areas for improvement
- Identify and report errors, frauds, wastage, or embezzlement, if any.
Conclusion
While internal audit helps the management in ensuring operational efficiency, controls, corporate governance etc. are working effectively in their organization , statutory audit ensures that their financial statements give a true and fair view and are compliant with all applicable laws and regulations.
Treelife’s multidisciplinary team has the right domain expertise in the startup ecosystem and can provide you with the necessary insights and guidance to make the right decisions for your business and auditing requirements.
Frequently Asked Questions (FAQs)
1. Can an Internal Auditor and Statutory Auditor be the same?
A statutory auditor of the Company cannot be its internal auditor
2. Can a statutory auditor rely on an internal auditor?
A statutory auditor can use the report of an internal auditor in a meaningful manner to identify key risk areas and key internal controls in place and accordingly plan their statutory audit procedures. The Standards on Auditing applicable in India (SA-610) also prescribes the extent and manner in which a statutory auditor can use the work of an internal auditor.
3. Can the Board of Directors appoint a statutory auditor of the Company?
Only the first statutory auditor of the Company can be appointed by the board of directors within 30 days from the date of incorporation. In the first Annual General Meeting (AGM) of the Company, the shareholders are required to appoint the statutory auditor of the Company and thereafter statutory auditors can only be appointed in the AGM of the Company by shareholders.
4. What is the difference between an internal and external auditor?
An internal auditor is someone who is appointed by the management of the Company and might also be an employee of the Company. An external auditor can never be an employee of the Company and should be independent of the Company/entity they are auditing.
5. Why Are Audits Important for Organizations?
Organizations require audits for various reasons, including compliance with regulatory requirements, attracting investors, securing loans, and enhancing internal controls.
6. Who Conducts Audits?
Audits are typically carried out by certified public accountants (CPAs) or other qualified auditors trained to evaluate financial records and operational processes.
7. What Does the Audit Process Involve?
The audit process generally consists of four main stages: planning, fieldwork, reporting, and follow-up. During planning, auditors define the scope and objectives. In the fieldwork stage, they examine financial records and operations. The reporting phase involves issuing a report with findings and recommendations, while follow-up ensures that any suggested improvements are implemented.
8. What Is the Purpose of an Audit Report?
The primary purpose of an audit report is to provide stakeholders—such as shareholders, investors, and lenders—with assurance that an organization’s financial statements are accurate and complete.
9. What Is an Audit Trail?
An audit trail is a comprehensive record of all transactions and activities within an information system. It serves to track changes, identify errors, and maintain the integrity of the system.
10. What Is a Management Letter?
A management letter is a report issued by an auditor to management, detailing findings and offering recommendations for enhancing internal controls and operational efficiency.
11. How Frequently Should Organizations Conduct Audits?
The frequency of audits varies based on organizational needs and regulatory requirements. Internal audits may be conducted regularly—quarterly, semi-annually, or annually—while statutory audits are usually performed on an annual basis.