Basic audits in India are generally classified into two main types: • Statutory Audits • Internal Audits
By on 12-11-2018
AUDITING IN INDIA
Basic audits in India are generally classified into two main types:
- Statutory Audits
- Internal Audits
Statutory audits are conducted to report the current state of a company’s finances and accounts to the Indian government and shareholders. Such audits are performed by qualified auditors working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government agency.
Internal audits are conducted at the behest of internal management in order to check the health of a company’s finances, and analyze the organization’s operational efficiency. Internal audits may be performed by an independent party or by the company’s own internal staff.
In India, every company whose shares are registered on the stock exchange must have an internal auditing system in place. A company whose shares are not listed on the stock exchange, but whose average turnover during the previous three years exceeds INR50 million, or whose share capital and reserves at the beginning of the financial year exceeds INR5 million, must also have an internal auditing system in place. The statutory auditor of the company must additionally report on the company’s internal auditing system of the company in the final report.
In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:
- Tax Audits
- Company Audits
TAX AUDITS:Tax audits are required under Section 44AB of India’s Income Tax Act 1961. The tax audit report is to be completed by September 30 after the end of the previous fiscal year. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or INR100, 000, whichever is lower. There are no specific rules regarding the appointment or removal of a tax auditor.
COMPANY AUDITS:The provisions for company audits are contained in the Companies Act 1956 and Companies Act 2013 as applicable. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors must first appoint an auditor at the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM. After the completion of the term, the auditor must be changed.
Only an independent chartered accountant or a partnership firm of chartered accountants can be appointed as the auditor of a company. The following persons are specifically disqualified from becoming an auditor per the Companies Act:
- A body corporate
- An officer or employee of the company
- A person who is partnered with an employee of the company, or employee of an employee of the company
- Any person who is indebted to a company for a sum exceeding INR1,000 or who has guaranteed to the company on behalf of another person a sum exceeding INR1,000
- A person who has held any securities in the company after one year from the date of commencement of the Companies (Amendment) Act, 2000
The auditor is required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO) 2003. CARO requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit systems, internal controls, and statutory duties, among others. The audit report must be obtained before holding the AGM, which itself should be held within six months from the end of the financial year.
As discussed earlier, audits are conducted to ensure a company’s financial statements present a true and fair view of its financial affairs. Therefore, the auditor’s opinion expressed in the ultimate report is based on the information gathered during the audit and the verification of financial statements. Upon completing the report, the auditor may express one of the following four opinions:
- Unqualified Opinion
- Qualified Opinion
- Disclaimer of Opinion
- Adverse Opinion
UNQUALIFIED OPINION:An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. It confirms that:
- Generally accepted accounting principles are consistently applied in the preparation of financial statements
- Financial statements comply with the relevant statutory requirements and regulations
- There is adequate disclosure of all material matters relevant to the proper presentation of financial information (subject to statutory requirements)
QUALIFIED OPINION:A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed, but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion, or the limitation of scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being “subject to’” or “except for” the effects of the matter to which the qualification relates.
DISCLAIMER OF OPINION:A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient and appropriate audit evidence and is, therefore, unable to express an opinion on the financial statements
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