A statutory audit is a mandatory legal requirement under Section 139 of the Companies Act, 2013 for every incorporated company in India, regardless of its turnover, operational status, or paid-up capital. Conducted under Standards on Auditing (SAs) issued by the Institute of Chartered Accountants of India (ICAI), the statutory audit assures shareholders, lenders, regulatory authorities, and prospective investors that the company’s financial statements present a true and fair view of its financial state.
Core Statutory Framework and Auditor Duties
Under Section 143 of the Companies Act, statutory auditors are required to examine books of accounts, inquire into whether loans and advances made on security are properly secured, evaluate whether transactions represented by book entries are prejudicial to the interests of the company, and form an opinion on compliance with accounting standards notified under Section 133.
CARO 2020: Expanded Reporting Mandates
For companies subject to the Companies (Auditor’s Report) Order, 2020 (CARO 2020), audit preparation requires documented evidence across 21 rigorous clauses, including:
- Property, Plant and Equipment (PPE): Documented records showing full particulars of PPE, physical verification schedules, and specific verification that title deeds of immovable properties are held in the name of the company.
- Working Capital Discrepancies: Reconciliation where working capital limits sanctioned by banks exceed Rs 5 Crores on the basis of security of current assets, requiring comparison between quarterly statements filed with banks and books of accounts.
- Benami Property Proceedings: Explicit confirmation whether any proceedings have been initiated or are pending against the company for holding benami property under the Benami Transactions (Prohibition) Act.
- Undisclosed Income: Disclosure whether any transactions not recorded in the books have been surrendered or disclosed as income in income tax assessments.
Comprehensive Pre-Audit Preparation Checklist
Finance teams should systematically verify the following documentation schedules before the arrival of statutory audit engagement teams:
1. Revenue and Inward Supply Reconciliations
- Reconcile gross turnover declared in GST returns (GSTR-1 and GSTR-3B) with ledger revenues.
- Match input tax credit claimed in financial ledgers against auto-populated GSTR-2B statements.
- Reconcile TDS deducted by corporate clients visible in Form 26AS / Annual Information Statement (AIS) with trade receivables.
2. Fixed Assets and Depreciation Schedules
- Maintain updated Fixed Asset Registers (FAR) classifying assets according to Schedule II useful life mandates.
- Obtain physical asset verification certificates signed by management.
- Review capital work-in-progress (CWIP) aging schedules and verify that completion timelines adhere to original project estimates.
3. Statutory Dues and MSME Vendor Compliance
- Verify timely deposit of statutory dues including Provident Fund (PF), ESIC, Professional Tax, and withholding tax (TDS/TCS) prior to the due date of filing the income tax return.
- Scrutinize trade payables to identify Micro, Small, and Medium Enterprises (MSMEs). Under Section 22 of the MSMED Act and Section 43B(h) of the Income Tax Act, payments to registered micro and small enterprises exceeding statutory limits (15 days, or up to 45 days if contracted in writing) are disallowed in tax computations and require mandatory disclosure in financial statement notes.
4. Internal Financial Controls over Financial Reporting (IFCoFR)
Under Section 143(3)(i), the auditor must report on whether the company has adequate internal financial control systems in place and their operating effectiveness. Ensure process flowcharts, risk control matrices (RCMs), and segregation of duties are clearly documented.
Partner with S R Mahajan & Co for Independent Assurance
Our audit and assurance practice conducts independent, thorough, and value-accretive statutory and tax audits rooted in ICAI professional standards. Explore our full capabilities under Audit and Assurance Services, or consult our regional industrial audit practice via our Chartered Accountant in Sambhaji Nagar office. To discuss your statutory audit timetable with CA Saket Mahajan, contact us through our Contact Us page.