After liberalization, doing business in India has become easier for foreign entities. But you need to have the basic knowledge of the different audit procedures practiced in the country. Being equipped with the right knowledge will allow you start your business in this country without any hassle.
Generally, there are different types of audits conducted in India namely:
• Statutory Audits: This type of audit shows the prevailing accounts and finance status of the company. The report generated is to be submitted with the Indian government. Qualified workers employed as independent and external parties conduct such audits. Statutory audit report is generated following the government department rules.
• Internal Audits: Generally, the internal management requests conducting this type of audit. It is to determine the company’s current finances as well as to evaluate operational efficiency. Internal staff or an independent party may be appointed to carry out this audit.
• External Audit: In this type of audit, the audit firms, also referred to as external auditors provide certain auditing services. It includes Consultant Service, Assurance Service, Legal Service, Tax Consultant Service, Risk Management Advisory and Financial Advisory. Such firms are also known as CPA firms. According to law, they are to be CPA certified/qualified to operate as well as issue audit reports. This audit type ensures proper maintenance of professional ethic code while following stringently the set International Auditing Standards along with local standards. External audit firms offer the following services like advisory services, tax consultancy and financial statement audit.
• Special Audit: The internal auditor conducts this type of audit if the organization experiences issues/cases like special case, business case or fraud. The organization’s internal staff performs this audit. On completion, the audit team prepares a report and submits the same to the board of directors or audit committee. They might also require providing the report to the organization’s management.
Statutory Audits practiced in India
Statutory audits are performed on every fiscal year (1st April to 31st March). It does not follow the calendar year. The common statutory audits followed here are:
It comes under Sec. 44AB of IT Act 1961. An independent CA (Chartered Accountant) is to audit the company accounts of
o Every person with a business turnover of over Rs. 2 crore during previous year.
o Every person employed in a profession having gross receipts that exceeds Rs. 50 lakhs.
o The tax audit limit of Rs 2 crore has been increased to Rs 10 crore with effect from AY 2021-22 (FY 2020-21) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.
Tax audit provision is application to everyone, be it a company, any entity, a partnership firm or an individual. It is necessary to obtain the tax audit report by 30th September after completion of preceding financial year. It tax audit provisions are not complied upon, then 0.5% penalty is levied on the turnover or Rs. 100,000, whichever is lower. Moreover, no specific rules are present concerning tax auditor appointment/removal.
For this type of audit, the provisions are mentioned within 2013 Companies Act. Every company, whatever is its turnover or nature of business is required to audit its annual accounts every financial year. This warrants employing an auditor.
The company shareholders at the AGM (Annual General Meeting) will appoint an auditor. He/she is likely to hold the position until the selection of the next auditor.
The 2017 Companies (Amendment) Act allows appointment of Auditors for 5 consecutive AGMs. It is not necessary to ratify their appointment in every AGM. An auditor can be appointed only for a max period of two terms. It will be necessary to change the auditor on successful completion of the specified term.
To appoint the company’s auditor, the selection process is limited to an independent or partnership chartered accountants. According to the Companies Act, the following are disqualified from the auditor process:
• Company employee or officer
• Body corporate
• Any individual indebted to the company for an amount exceeding Rs. 1,000. It also includes those who have guaranteed on behalf of the other person for an amount exceeding Rs. 1,000.
• An employee working for the company’s employee or partner with the company’s employee.
• Person holding company securities after a period of one year from commencement date of Companies (Amendment) Act. in 2000.
Functions of the Auditor
The auditor’s function is to prepare an audit report complying the 2016, Co. Auditor’s Report Order (CARO). The auditor is to report about the company’s varying aspects like inventories, fixed assets, internal controls, internal audit standards, statutory dues, etc. It is necessary to obtain the audit report before the AGM is held. It should be within 6 months from the completion of current financial year.
About Audit reporting
There are present four opinions out of which the auditor can select any one. This is to express the company’s financial statement in a fair manner.
• Qualified Opinion: This type is expressed if the company’s financial statements are accompanied with material misstatements. The latter can be material however, not pervasive. Information pertaining to such misstatement is held material if user decision is affected pertaining to financial statements. It is considered pervasive if not confined to just an item, account or element, thereby reflecting widespread misstatement effect.
• Unqualified Opinion: It holds true as the independent auditor declares the company statements and financial records to be fair. It also means complying with the set financial reporting framework. It indicates:
o Complying of company financial statements.
o Proper application GAAP to prepare financial statements.
o Adequate disclosure of financial related material matter, etc.
• Adverse Opinion: The auditor issues this opinion if his work is restricted with limitations. It also gets issued if disagreement takes place with the management with regards to accepting the selected accounting policies. It also includes the application method or financial statement disclosure adequacy. In this case, clear description is included with substantive reasons.
• Disclaimer of Opinion: It is expressed if the scope limitation’s possible effect is material. It should be pervasive as such that the appointed auditor is not in a position to avail adequate, appropriate audit evidence. Thus, the auditor does not offer any opinion about the company’s financial statement.
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