It is a legally required review of the accuracy of a company’s or governments financial records. The purpose of a statutory audit is the same as the purpose of any other audit – to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions.
It ensures that financial statements including Balance Sheet, Profit Loss Account as well as Cash Flow Statement provide a true & fair view as well as are also free from any material mis-statements. Statutory Audit of financial statements is done to provide reasonable assurance that accounts are prepared in accordance with:
- Generally Accepted Accounting Principles (GAAP)
- Are free of any misstatements, errors and discrepancies
Differences between Internal Auditor and Statutory Auditor
|Headings||Internal Audit||Statutory Audit|
|Appointment||By Management||By Shareholders or in AGM|
|Legal Requirement||It is the need of management||It is the legal requirement|
|Qualification||Does not required specific qualification||Qualification of statutory auditor is specified|
|Conducting of Audit||It is of regular nature||It is conducted after preparation of final account|
|Status||They are generally dependent and are appointed by management.||They are independent person appointed by shareholders.|
|Scope of Work||It is related to examination of books of accounts and other activities of organization. Scope is vague.||They check the books of accounts and related evidential documents. Scope is limited.|
|Removal||They can be removed by the management.||They can be removed in the AGM only.|
|Remuneration||Remuneration is fixed by the management.||Remuneration is fixed by the shareholders.|
|Report||They are required to give suggestions to improve weakness but no need to present report.||They are require to prepare report after the completion of work on the basis of facts found during the course of audit and present such report to the appointing authority.|
Type of Companies covered under the CARO – 2016
The Companies (Auditor’s Report) Order, 2016 shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013.
According to section 2(42) of CA, 2013, Foreign Company means any company or body corporate incorporated outside India which—
- has a place of business in India whether by itself or through an agent, physically or through electronic mode and
- conducts any business activity in India in any other manner.
Class of companies which are excluded from applicability of CARO – 2016
All types of Companies specified in paragraph 2 of CARO – 2016 are specifically exempted from application of CARO. In other words, CARO – 2016 applies to all Companies except certain categories of Companies specifically exempted therein.
Accordingly, following are the class of companies whose auditors are not required to comment on matters specified in CARO – 2016.
a. Banking Company:
- CARO – 2016 shall not apply to a banking company as defined u/s 5(c) of the Banking Regulation Act, 1949.
b. Insurance Company:
- CARO – 2016 shall not be applicable to an insurance company as defined under the Insurance Act, 1938.
c. Companies registered with Charitable Objects:
- Any company which has been incorporated and licensed to operate under section 8 of CA, 2013 shall not be required to comply with CARO – 2016.
d. One Person Company:
- A One Person Company (OPC) as defined under clause (62) of section 2 of CA, 2013 is not covered under CARO – 2016. OPC means a company which has only one person as a member.
e. Small Company:
- A small company as defined under section 2(85) of the Companies Act, 2013 is excluded from the scope of CARO – 2016. According to section 2(85) of CA, 2013 small company means a company, other than a public company,—
- paidup share capital of which does not exceed 50 lakhs or such higher amount as may be prescribed which shall not be more than 5 crore and
- turnover of which as per its last profit and loss account does not exceed 2 crore or such higher amount as may be prescribed which shall not be more than 20 crore:
Note that the definition of Small Company has been amended vide the Companies (Removal of Difficulties) Order, 2015 [S.O. 504(E)] w.e.f. 13th February, 2015.
However, following companies will not qualify as a Small Company:
- a holding company or a subsidiary company
- a company registered under section 8 or
- a company or body corporate governed by any special Act
f. Private Company:
The auditors of the following private limited companies are not required to comment on the matters prescribed under CARO – 2016:
- A private company being a subsidiary or holding of a public company, with a paid up capital and reserves not more than 1 Crores as on Balance Sheet Date? and
- Such private company does not have loan outstanding exceeding 1 Crores from any bank or financial institution at any point of time during the financial year and
- Such private company does not have a total revenue as defined in Schedule III to the Companies Act, 2013(including revenue from discontinuing operations) exceeding 10 crore during the financial year as per the financial statements.