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Statutory Audit: Process, Requirements, Documents & Penalties

Manthan Experts

August 25, 2025

Audit & Assurance, Blog

Introduction to Statutory Audit

A legally required audit of a company’s financial records to ensure accuracy and compliance with regulations is called as Statutory Audit. It is conducted by an independent auditor asmandated by the applicable laws governing a business entity.

Purpose of Statutory Audit

The primary objectives of a statutory audit include:

Ensuring Accuracy – Verifies that financial statements are free from material mis-statements and errors.
Legal Compliance – Ensures adherence to financial laws such as the Companies Act, Income Tax Act, and GST regulations.
Fraud Detection and Prevention – Identifies fraudulent activities, financial mis-management and operational in efficiencies.
Assessing Financial Health – Helps in evaluating a company’s financial position and sustainability.
Risk Management – Identifies potential financial risks and suggests improvements in internal controls.
Strategic Planning – Provides reliable inputs that help management inplanning.

Importance of Statutory Audit

Mandatory Requirement – Required by law for various entities, ensuring uniform financial reporting standards.
Prevention of Legal Penalties – Avoids fines and legal actions due to non-compliance with statutory obligations.
Better Financial Control – Helps in detecting and correcting accounting and compliance irregularities and inefficiencies.
Improved Governance – Strengthens internal corporate governance and accountability.

Who Needs a Statutory Audit?

Companies Act 2013 mandates Statutory Audits for every Public limited and Private limited company.

1. Companies Registered Under the Companies Act, 2013

Private Limited Companies (Pvt Ltd)
Public Limited Companies (Ltd)
One Person Companies (OPC)
Foreign Companies operating in India

2. Limited Liability Partnerships (LLPs)

LLPs are required to undergo a statutory audit as per the LLP Act, 2008 only if annual turnover exceeds ₹40 lakhs or a capital contribution is more than ₹25lakhs.

3. Banks & Financial Institutions

All banks and financial institutions regulated by the Reserve Bank of India (RBI) must conduct statutory audits as per banking regulations.

4. Insurance Companies

Insurance companies must undergo statutory audits as per the Insurance Regulatory and Development Authority of India (IRDAI) guidelines.

5. Non-Banking Financial Companies (NBFCs)

NBFCs registered under RBI regulations must conduct statutory audits to ensure compliance with financial regulations.

6. Government Organizations & Public Sector Undertakings (PSUs)

Entities controlled by the government must have statutory audits conducted as per CAG (Comptroller and Auditor General of India) requirements.

7. Trusts, Societies, and NGOs

Organizations registered under Section 8 of the Companies Act, 2013 or receiving government grants must conduct a statutory audit.

8. Listed Companies

All companies listed on the stock exchange (NSE, BSE, etc.) must undergo statutory audits as per the guidelines issued by SEBI.

9. Entities with Foreign Direct Investment (FDI)

Any company receiving FDI must conduct a statutory audit to comply with FEMA (Foreign Exchange Management Act) regulations.

Statutory Audit Process

It follows a structured process as mandated by the companies act 2013 to ensure compliance and financial accuracy:

1. Appointment of Auditor

It is mandatory for every company to appoint first auditor within 30 days of incorporation.
Subsequent auditors are appointed annually at the Annual General Meeting (AGM).

2. Planning the Audit

Understanding the entity’s business operations. Assessing risks and internal control measures.
Preparation of an audit plan based on the risk involved, complexity of business and compliance needs.

3. Examination of Financial Statements

Verifying Balance Sheet, Profit & Loss Account, Cash Flow Statements, and Notes to Accounts.
Cross-checking financial transactions, records, and disclosures.
Evaluating the company’s internal control mechanisms.

4. Compliance Check

Ensuring adherence to Company Law provisions, Income Tax, GST, and other financial regulations.
Reviewing statutory compliance for TDS, ESI, PF, and other legal obligations.

5. Auditor’s Report & Opinion

The statutory auditors are mandatorily required to issues a Report with an opinion on companies financial performance and compliance.

The report may include:

Unqualified Opinion (Auditor has not reported any issue in Financial statements).
Qualified Opinion (Minor issues found but do not affect overall fairness).
Adverse Opinion (Serious misstatements or fraud detected).
Disclaimer of Opinion (Insufficient information available to form an
opinion).

Documents Required for Statutory Audit

Financial Statements (Balance Sheet, P&L Statement, Cash Flow Statement)
General Ledger and Trial Balance
Bank Statements and Reconciliation
Invoices, Vouchers, and Tax Records
GST, TDS, and Income Tax Returns
Fixed Assets Register and Depreciation Schedule
Board Meeting Minutes and Resolutions

Penalties for Non-Compliance

As per the Companies Act, 2013, statutory audits are mandatory for all companies. Non-compliance attracts penalties under various sections:

1. Penalty on the Company

As per Section 147(1), if a company fails to conduct a statutory audit, it may be fined between ₹25,000 and ₹5,00,000.

2. Penalty on Directors & Officers

A fine ranging from ₹10,000 to ₹1,00,000.
Imprisonment for up to 1 year.
Both fine and imprisonment (in case of willful non-compliance).

3. Penalty on the Auditor
If an auditor fails to report financial misstatements or fraud:

A fine can be imposed as per section 147(2) of ₹25,000 to ₹5,00,000 can be imposed {Section 147(2)}

If the auditor knowingly falsifies the audit report, they can be penalized with:

Fine up to ₹25 lakh.
Imprisonment up to 2 years.
Both fine and imprisonment.

4. Penalty Under LLP Act, 2008

For LLPs failing to conduct a statutory audit when required:

A Penalty can be imposed from ₹25,000 to ₹5,00,000.
Penalty of ₹10,000 to ₹1,00,000 on designated partners.

5. Disqualification of Directors

As per Section 164(2) of the Companies Act, if any company fails to file financial records for 3 consecutive years.
the directors can be disqualified from holding directorship in any
company for 5 years.

6. Other Consequences of Non-Compliance

Regulatory Scrutiny: The company may face investigations from MCA, SEBI, RBI, or other regulators.
Loss of Stakeholder Trust: Non-compliance damages credibility, affecting investors, lendersand clients.
Legal Actions & Business Restrictions: The government can take legal action, restricting company operations.

Conclusion

A statutory audit is a crucial process that ensures financial transparency, regulatory compliance, and business credibility. Companies must adhere to statutory audit requirements to enhance governance, build stakeholder trust, and avoid penalties. Engaging a qualified auditor and maintaining proper financial records can streamline the audit process effectively.

If you require assistance on Audit & Assurance Services, Manthan Experts can be your trusted advisor. Contact them at info@manthanexperts.com. to discuss your specific needs and explore how their expertise can benefit your business.