Auditing has a very important role in every company. Because a company is owned by shareholders and run by their representatives (Board of Directors), an audit sets a base for the shareholders to rely upon the company’s financials. This audit can be of many types. An audit that is mandated by law is called a statutory audit. For example, for a company, financial audit and cost audit (for manufacturing company) are statutory whereas management audit, internal audit, and operational audit are not mandatory in nature. In this blog, two such important audits namely statutory audit and tax audit are discussed.
The Companies Act, 2013 contains detailed provisions on statutory audit. The Act prescribes details on compulsory statutory audit of companies, the appointment of auditors, qualifications & disqualifications of auditors, the appointment of cost auditors, government audit, special audit, etc.
The primary goal of a statutory audit is to form an opinion on an organization’s financial statements. The auditor must state whether or not the financial statements present a true and fair picture of the organization’s affairs. There are four types of opinions that an auditor may give: clean, qualified, adverse, or a disclaimer. In case of a clean report, a company whose accounts have been statutorily audited gives an assurance to its investors, creditors, and other interested parties that the accounts have been prepared in compliance with generally accepted accounting principles and that all applicable legal requirements and accounting standards have been followed.
Sections 139 – 147 of Chapter X of the Companies Act of 2013 deal with the provisions of statutory audit. According to Section-139, at the first annual general meeting, each company must appoint an individual or firm as its auditor, who will serve office from the conclusion of that meeting until the end of the sixth annual general meeting. Further, Section 143 of the Act, which deals with the powers and duties of auditors, states that the statutory auditor must make a report to the company’s members on the accounts and financial statements he examines. In case of any qualifications or reservations in the audit report, the reason for the same should be stated in the report. If the auditor suspects any fraud, he should immediately report the same to the Central Government.
Following are the features of statutory audit:
- An external or statutory audit is compulsory for all companies. Every entity registered under the Companies Act, whether as a Private Limited or a Public Limited company, is required to have its books of accounts audited once a year.
- The Companies Act of 2013 specifies the qualifications of the statutory auditor. In the case of a corporation, only a practicing Chartered Accountant or a firm of practicing chartered accountants can be appointed as a statutory auditor. However, a statutory audit has to be conducted only by external agencies. He cannot be an employee of the company of whose accounts he examines.
- The Companies Act of 2013 specifies the scope of the statutory audit. It cannot be changed by a mutual agreement between the auditor and the management of the auditee’s business unit.
- A statutory auditor is appointed by owners or shareholders of a company at each AGM. The appointment is done for a period of 5 years after which re-appointment may be made for another 5 years subject to Rule 5 of Companies (Audit and Auditors) Rules, 2014 on the rotation of auditors. Moreover, the first statutory auditors of a company are appointed by its Board of Directors within 30 days from the date of the registration of the company. He holds office till the conclusion of the first AGM.
- A statutory auditor presents his report to the company’s shareholders at its annual general meeting.
- A company must hold the Annual General Meeting (AGM) within 6 months of the end of the fiscal year, and notice of the AGM must be given to all members at least 21 days before the AGM. Shareholders should be given a copy of the Directors’ Report and Audited Financial Statements, as well as the auditors’ report, along with the notice of the AGM.
- Statutory auditors should have access to the company’s books of accounts and vouchers at all times and they can seek any information from officers of the company as may be deemed necessary.
- The procedure for removing a statutory auditor before his tenure is very complicated. The statutory auditor can only be removed by the company in a general meeting. It must also obtain the permission of the central government.
- As per the Companies Act 2013, an auditor cannot accept the statutory audit of more than 20 companies in one financial year. The Ministry of Corporate Affairs, however, has exempted a dormant company and one-person company from this ceiling limit. In addition, this limit does not apply to small businesses or private limited corporations with less than 100 crores in paid-up capital.
Just as the statutory audit is governed by company law provisions, income tax law also mandates an audit that is called “tax audit”. This audit examines the accounts of a taxpayer’s business or profession from an income tax viewpoint. Tax audit ensures that the computation of income tax made by a taxpayer in his return is correct and that he has complied with the rules of income tax law.
The provisions of a tax audit are contained in Section 44AB of the Income Tax Act, 1961. According to Section 44AB, the audit of certain income tax assessees is compulsory whose turnover or gross receipts exceed the specified limits. This audit is conducted to provide assistance to income tax authorities in making correct tax-assessment of the assessee concerned. The tax auditor reports on certain transactions that have an effect on the income tax liability of the concerned assessee and this, in turn, helps tax authorities in completing their assessment procedures.
Section 44AB states that every person, whose turnover or gross receipts from carrying on of business or profession exceeds Rs. 1 crore (or Rs. 50 lacs in case of profession) in the previous financial year, is required to get his accounts audited under Income Tax Act.
The threshold cap for a person carrying on business has been raised from Rs. 1 crore to Rs. 10 crores in situations where cash receipts and cash payments made throughout the year do not exceed 5% of total receipts or payments, as the case may be. It means that more than 95 percent of business transactions should be conducted through banking facilities.
The features of a tax audit are as follows:
- A tax audit has to be carried out by a certified chartered accountant or a firm of chartered accountants. In the case of the latter, the tax audit report must be signed by a partner on behalf of the firm.
- The due date for filing a tax audit report is 30th September of the relevant assessment year. Thus, if a taxpayer has to get a tax audit done under Section 44AB, he shall be needed to submit his income tax return before 30th September along with a tax audit report. For example, a tax audit report for the fiscal year 2021-22, which corresponds to the assessment year 2022-23, must be obtained by September 30, 2022.
- Tax audits may also be performed by statutory auditors of a company.
- There is a ceiling limit on the number of tax audits that can be performed by a chartered accountant. This is restricted to 60 audits in a financial year. In the case of a firm, this limit will be applicable individually for each of the partners.
- The management of a company has the authority to remove a tax auditor if the auditor has delayed the submission of his report to the point where it is no longer possible to upload the audit report before the stipulated due date.
- The Board of Directors (BOD) is responsible for appointing tax auditors in a corporation. This authority may be delegated by the Board to any other officer, such as the CEO or CFO. Further, a partner, proprietor, or a person authorized by the assessee can appoint auditors in a partnership or sole proprietorship firm.
Is it mandatory for a person to get a tax audit done if his accounts are already audited under any other law?
Companies and cooperative societies, for instance, are required by their respective laws to have the financial statements audited. Section 44AB states that if a person is compelled to have his accounts audited by or under any other legislation, he is not obligated to have his accounts audited again to comply with Section 44AB’s requirements. In such a case, it will suffice if the person has the accounts of his or her business or profession audited under such law and obtains the audit report as required under such other law, as well as a report from a chartered accountant in the form prescribed under Section 44AB, i.e., Form No. 3CA and Form 3CD.
Thus, if a statutory audit is already conducted, it is not mandatory to get a tax audit done.
|Statutory Audit||Tax Audit|
|Governed by Companies Act, 2013 or any other legislation applicable to an entity||Governed by Income Tax Act, 1961|
|Applies to all companies||Applies to taxpayers if specific thresholds of turnover or gross receipts are met|
|Maximum 20 company audits in a year||Maximum 60 tax audits in a year|
|Appointed by shareholders of a company||Appointed by Board of Directors|
|The report is presented to the shareholders||The report is furnished to the income tax department|
|Section 139-147 for company audit, Section 148 for cost audit, etc.||Section 44AB|
|Audit of all books of accounts and vouchers||Audit of tax-related matters|
|Ensures that financial statements reflect a true and fair view of the company’s operations and all applicable laws are abided by||Ensures that the assessee’s books truly reflect his or her taxable income and claims for deductions have been correctly made|
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