Difference Between Statutory Audit and Non-Statutory Audit

Auditing is a crucial aspect of financial reporting that ensures transparency and trustworthiness in an organisation’s financial statements. It provides the public, stakeholders, and regulators with the assurance that the financial information presented by an entity is accurate and complies with relevant accounting principles. There are two primary types of audits conducted in the corporate world: statutory audits and non-statutory audits. This article aims to clarify the distinctions between these two types of audits, their scope, purposes, and their significance in the business environment.

What is a Statutory Audit?

A statutory audit is a mandatory process required by law for certain companies or organisations. The term ‘statutory’ refers to something that is governed by law or statute. In India, the Companies Act, 2013 mandates that every company (except for certain small entities) must undergo a statutory audit every year. This process involves an independent auditor examining a company’s financial records, statements, and reports to ensure that they are true and fair, in compliance with accounting standards and legal requirements.

The purpose of a statutory audit is to ensure the accuracy and reliability of the financial statements presented by an organisation, and to confirm that they have been prepared in accordance with the relevant statutory and accounting regulations. The statutory auditor expresses their opinion on the financial health of the organisation, whether the financial statements present a true and fair view of the company’s state of affairs.

What is a Non-Statutory Audit?

A non-statutory audit, on the other hand, is not mandated by any law or statute. This type of audit is voluntarily undertaken by organisations or businesses to verify their financial statements or to provide additional assurance to stakeholders. While statutory audits focus on compliance with laws, non-statutory audits are more flexible and can be tailored to suit the needs of the organisation.

Non-statutory audits can be conducted for a variety of reasons, including providing transparency for stakeholders, ensuring accuracy in internal controls, or meeting the needs of specific stakeholders such as investors or creditors. These audits are not governed by any specific legal framework but are still important for enhancing the credibility and integrity of the financial statements.

Statutory Audit and Non-Statutory Audit: Key Differences

Auditing is a critical process for ensuring that an organisation’s financial statements are accurate and reliable. Depending on the nature of the organisation and its requirements, audits can be statutory or non-statutory. While both types of audits share the fundamental goal of reviewing financial records, they differ in several aspects such as legal requirements, purpose, scope, and the nature of the auditor’s report.

Legal Requirement

A statutory audit is a mandatory process dictated by law. In India, under the Companies Act, 2013, it is a legal requirement for certain companies, such as public companies, private limited companies, and limited liability partnerships (LLPs), to undergo a statutory audit. This ensures that the organisation’s financial statements comply with the legal framework and accounting standards laid down by regulatory bodies.

On the other hand, a non-statutory audit is voluntary and not mandated by law. Organisations may opt for a non-statutory audit based on their own needs or requests from stakeholders such as investors, management, or financial institutions. This type of audit is carried out to improve internal controls, enhance transparency, or provide additional assurance, rather than to comply with legal obligations.

Purpose

The primary purpose of a statutory audit is to ensure that the organisation’s financial statements provide a true and fair view and comply with statutory laws, accounting standards, and regulations. This audit is necessary for verifying the accuracy of the financial records and ensuring that they meet the legal and regulatory standards established by authorities like the Ministry of Corporate Affairs (MCA) and the Institute of Chartered Accountants of India (ICAI). Statutory audits aim to establish trust and transparency for stakeholders, including shareholders, tax authorities, and the general public.

In contrast, a non-statutory audit does not primarily focus on legal compliance. Instead, it provides additional assurance to the business and its stakeholders about the accuracy of the financial statements or other internal processes. This type of audit may be undertaken for reasons such as evaluating internal controls, improving business efficiency, or ensuring transparency in financial reporting. It offers a more tailored approach, focusing on specific areas of interest for the organisation.

Appointment of Auditor

For a statutory audit, the auditor is appointed by the shareholders or board of directors during the Annual General Meeting (AGM) or a board meeting. The auditor’s appointment is governed by statutory guidelines, and the process is typically formalised as part of the organisation’s compliance requirements.

In a non-statutory audit, the auditor is appointed by the organisation or specific stakeholders involved. Unlike statutory audits, the appointment is not bound by any legal procedure, and the organisation has the flexibility to choose an auditor based on its needs. The focus here is on addressing internal concerns, improving business processes, or gaining the confidence of stakeholders.

Scope of Audit

The scope of a statutory audit is defined by legal requirements. It is a comprehensive audit that includes reviewing financial statements, verifying their compliance with accounting standards, and ensuring that all legal obligations, such as tax compliance and adherence to the Companies Act, are met. The statutory auditor will assess the accuracy of the company’s balance sheet, profit and loss statements, cash flow reports, and internal controls in accordance with prescribed auditing standards.

A non-statutory audit has a more flexible scope, which is decided based on the organisation’s specific objectives. It may focus on particular areas such as internal controls, financial performance, or areas where management seeks to identify inefficiencies or improve processes. The scope is not rigid, as it is shaped by the organisation’s requirements rather than legal mandates.

Opinion/Report

The auditor’s report in a statutory audit includes an opinion on the organisation’s financial statements. The auditor evaluates whether the financial statements present a true and fair view of the organisation’s financial position and whether they comply with the applicable accounting standards and legal requirements. Depending on the findings, the statutory auditor may issue a clean (unqualified) opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion.

In a non-statutory audit, the auditor does not provide a formal opinion on the financial statements. Instead, they offer findings and recommendations aimed at improving the organisation’s internal controls, financial practices, or operational efficiency. These reports do not serve as a legal statement on the financial health of the company but provide practical advice for improvement.

Compliance

Statutory audits are specifically focused on ensuring compliance with statutory laws. The statutory auditor’s role is to verify that the financial statements and operations of the organisation are in line with the requirements of relevant legal frameworks, such as the Companies Act, Income Tax Act, and accounting standards like Indian Accounting Standards (Ind AS).

In comparison, a non-statutory audit is more concerned with improving internal controls and transparency. While it may review compliance with certain internal policies or industry standards, it does not require the organisation to comply with a prescribed legal framework. Its focus is on ensuring that the organisation’s financial statements and processes are accurate and efficient, regardless of whether they are legally required.

Frequency

Statutory audits are typically conducted annually, as they are mandated by law. The organisation must undergo a statutory audit at the end of each financial year to ensure compliance with statutory obligations and provide up-to-date financial information to stakeholders.

Non-statutory audits, however, are carried out as needed. The frequency depends on the organisation’s goals or the needs of its stakeholders. For example, a business may choose to conduct a non-statutory audit every few years, or on a more regular basis if it seeks continuous improvement in internal controls or financial reporting.

Comparison Between Statutory and Non-Statutory Audits

Significance of Statutory and Non-Statutory Audits

Both statutory and non-statutory audits play vital roles in the business and financial world, although their objectives and scope differ significantly.

• Statutory Audit: The statutory audit is essential for ensuring that businesses comply with regulatory requirements. It adds credibility to the financial statements and enhances trust among shareholders, investors, and regulators. It is also an essential tool for maintaining transparency in corporate governance and financial reporting.
• Non-Statutory Audit: Non-statutory audits, while voluntary, offer businesses the opportunity to gain valuable insights into their financial health. These audits help identify potential risks, inefficiencies, and areas of improvement. They are particularly useful for businesses looking to boost internal controls, gain investor confidence, or ensure that their financial reporting aligns with best practices.

Conclusion

While statutory audits are mandatory and required by law, non-statutory audits are voluntary but still play a crucial role in enhancing the credibility and accuracy of financial statements. Both types of audits serve different purposes, but both are essential in ensuring that businesses maintain transparency, meet legal requirements, and provide accurate and reliable information to stakeholders.

For businesses, choosing between a statutory or non-statutory audit depends on their specific needs. However, both audits contribute to better financial practices, stronger internal controls, and improved organisational governance. Understanding the differences between these two types of audits can help organisations make informed decisions about their financial reporting and auditing requirements.