statutory audit follows a structured approach.
The auditor first needs to understand the business, its financial reporting framework and the areas where material misstatement could occur. The auditor then designs appropriate procedures, examines selected transactions and balances, evaluates relevant evidence, considers identified misstatements and ultimately reports on the financial statements in accordance with applicable requirements.
For companies governed by the Companies Act, 2013, statutory audit is part of the legal framework applicable to companies. The Act contains provisions dealing with the appointment and functions of auditors, access to books and vouchers, auditor reporting and related matters.
The exact audit procedures differ from one business to another. A manufacturing company with inventory and machinery will require a different audit approach from a software company with primarily service revenue and employee costs.
Understanding the process can help management prepare better records, respond to audit queries efficiently and avoid unnecessary confusion.
What Is a Statutory Audit?
A statutory audit is an audit required under applicable law.
For a company covered by the Companies Act, the statutory auditor examines the financial statements and relevant records and reports in accordance with applicable auditing standards and legal requirements.
The auditor's role is not to prepare the company's books or guarantee that no error or fraud exists.
The audit is designed to provide reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, in accordance with the applicable framework.
This distinction is important.
An audit is not a complete verification of every transaction.
Instead, auditors use professional judgement, risk assessment, materiality and appropriate audit procedures to obtain sufficient appropriate audit evidence.
Step 1: Understanding the Business
Before detailed testing begins, the auditor needs to understand the business.
This can include understanding:
· What the company sells
· How it earns revenue
· Who its customers are
· How it purchases goods or services
· How inventory moves
· How employees are paid
· How transactions are recorded
· What accounting software is used
· What major assets the company owns
· What financing arrangements exist
· What regulatory requirements apply
For example, an e-commerce company may have thousands of small transactions, while a consulting company may have fewer but larger customer contracts.
The audit approach will therefore differ.
Step 2: Understanding the Accounting and Financial Reporting Framework
The auditor also needs to determine the financial reporting framework applicable to the company.
This matters because accounting treatment and disclosures depend on the relevant framework and applicable legal requirements.
The auditor considers whether the financial statements are prepared using the appropriate framework and whether relevant accounting policies and disclosures have been properly considered.
Management should therefore have a clear understanding of the basis used to prepare its financial statements.
Step 3: Identifying Audit Risks
The auditor assesses where material misstatements could occur.
These risks can arise from many areas.
For example:
· Revenue recognition
· Large receivables
· Inventory valuation
· Complex estimates
· Related-party transactions
· Loans
· Significant expenses
· Tax balances
· Unusual journal entries
· Rapidly changing business operations
The risk assessment helps determine which areas require greater audit attention.
A company with ₹100 crore of inventory will naturally have a different inventory-risk profile from a consultancy with no physical inventory.
Step 4: Determining Materiality
Auditors use the concept of materiality when planning and performing audits.
In simple terms, information is material if its omission or misstatement could reasonably influence the decisions of users of the financial statements.
Materiality is not simply a fixed rupee number that applies to every company.
The auditor considers the nature and circumstances of the entity and the financial statement users when determining appropriate materiality levels.
This is one reason an auditor may examine some transactions more extensively than others.
Step 5: Reviewing Internal Controls
The auditor may seek to understand relevant internal controls.
For example, the company may have controls requiring:
· Purchase approval
· Payment authorisation
· Customer credit approval
· Inventory verification
· Bank reconciliation
· Journal-entry review
· User access restrictions
Understanding these controls helps the auditor assess risks and determine appropriate audit procedures.
Internal controls are primarily management's responsibility.
The auditor evaluates relevant controls as part of the audit but does not take over responsibility for operating them.
Step 6: Requesting the Audit Documents
Once the audit is planned, the auditor will generally request information needed for the engagement.
This may include:
· Trial balance
· General ledger
· Financial statements
· Bank statements
· Bank reconciliations
· Sales records
· Purchase records
· Expense ledgers
· Receivables ageing
· Payables ageing
· Fixed asset register
· Inventory records
· GST records
· TDS records
· Loan statements
· Legal documents
· Related-party information
The exact list varies depending on the company.
A well-organised business can provide these records more quickly.
Step 7: Checking Cash and Bank Balances
Bank and cash balances can be important areas of audit testing.
The auditor may examine bank statements, bank reconciliations and selected transactions.
External confirmation from banks may also be used where appropriate.
The auditor may investigate old unreconciled items, unusual payments or differences between the bank statement and accounting records.
This is why businesses should complete bank reconciliation before the audit rather than preparing it only after the auditor asks.
Step 8: Testing Revenue
Revenue is often a significant area of audit attention.
The auditor may select sales transactions and examine supporting evidence.
Depending on the business, this may involve:
· Customer invoices
· Contracts
· Purchase orders
· Delivery documents
· Proof of service
· Receipts
· Credit notes
· GST records
The objective is to obtain appropriate audit evidence relating to the reported revenue.
Transactions near year-end can receive particular attention because incorrect cut-off can shift revenue between reporting periods.
Step 9: Testing Purchases and Expenses
Auditors may also select purchases and expenses for detailed testing.
For a selected transaction, the auditor may examine:
· Invoice
· Purchase order
· Goods receipt
· Payment record
· Accounting entry
· Tax treatment
· Approval
The exact procedures depend on the transaction and audit risk.
If a business has strong documentation, responding to these requests becomes much easier.
Step 10: Examining Trade Receivables
The auditor may review customer balances and ageing.
Depending on the circumstances, confirmation requests may be sent to selected customers.
The auditor may also examine subsequent receipts, invoices, contracts and other evidence.
The objective is to assess whether the reported receivables are appropriately supported and whether relevant accounting considerations have been addressed.
Long-outstanding receivables may receive additional attention.
Step 11: Examining Trade Payables
Creditors can also be reviewed.
The auditor may examine supplier statements, invoices, payments and balances.
A major concern can be whether liabilities existing at year-end have been completely recorded.
For example, if goods were received before year-end but the invoice was recorded afterward, the auditor may investigate the transaction and relevant cut-off.
This is why purchase cut-off testing can be important.
Step 12: Checking Inventory
For businesses holding inventory, auditors may perform procedures relating to stock.
This can include attending or observing physical inventory counts where appropriate, testing quantities, examining valuation records and checking selected inventory movements.
The objective is to obtain evidence regarding relevant assertions such as existence and valuation, depending on the audit circumstances.
Negative stock, unusual adjustments and unexplained differences can attract additional attention.
Businesses should therefore reconcile inventory records before the audit.
Step 13: Verifying Fixed Assets
The auditor may review the fixed asset register and selected asset additions or disposals.
For major purchases, supporting invoices and payment evidence may be examined.
The auditor may also perform physical verification procedures where appropriate.
If a company shows machinery worth ₹2 crore but cannot explain where significant assets are located, additional questions may arise.
A current fixed asset register can make this process considerably easier.
Step 14: Reviewing Loans and Borrowings
Loans and borrowings can involve several accounting and disclosure considerations.
The auditor may examine:
· Loan agreements
· Bank statements
· Confirmation letters
· Repayment schedules
· Interest calculations
· Security arrangements
· Year-end balances
The purpose is to verify relevant balances and understand the terms affecting financial reporting.
Step 15: Checking Statutory Dues
The auditor may review applicable statutory liabilities and payments.
Depending on the company, this can include:
· GST
· TDS
· PF
· ESI
· Income tax
· Other applicable statutory dues
The auditor may compare accounting balances with returns, challans and other records.
Differences between books and statutory records should therefore be reconciled before the audit.
Step 16: Reviewing GST Records
GST is particularly important for businesses registered under the indirect tax system.
The audit team may examine GST returns and reconcile selected information with the accounting records.
Sales, purchases, output tax, input tax credit and other relevant transactions may be reviewed.
GSTR-2B can provide useful information for ITC reconciliation because it contains auto-drafted data based on specified supplier filings and import information. The GST portal advises taxpayers to reconcile GSTR-2B with their own records and books.
A business with unresolved GST differences may therefore face additional audit queries.
For companies using GST accounting services in Delhi, maintaining regular book-to-return reconciliation can make year-end audit preparation much easier.
Step 17: Reviewing TDS
The auditor may also examine TDS-related transactions.
This can involve reviewing:
· TDS payable
· TDS receivable
· Challans
· Returns
· Certificates
· Ledger entries
· Reconciliation statements
The objective is to understand whether the relevant accounting and statutory records are consistent.
Step 18: Examining Payroll
Payroll can represent a major expense for service businesses.
The auditor may compare payroll records with salary expenses in the general ledger.
Selected employee payments may also be tested.
Other areas can include salary payable, bonuses, reimbursements and applicable statutory deductions.
The exact procedures depend on the audit.
Step 19: Checking Related-Party Transactions
Transactions involving related parties may require particular attention.
The auditor may examine:
· Nature of relationship
· Transaction amount
· Agreements
· Approvals
· Accounting entries
· Financial statement disclosures
The exact requirements depend on the applicable law and accounting framework.
Management should therefore maintain a clear record of relevant relationships and transactions.
Step 20: Reviewing Journal Entries
Auditors may analyse journal entries, especially unusual or significant entries.
Attention may be given to entries:
· Posted near year-end
· Made manually
· Involving unusual accounts
· Having large round amounts
· Reversing previous entries
A large journal entry is not automatically suspicious.
The key question is whether it has a reasonable explanation and appropriate supporting evidence.
Step 21: Examining Estimates and Provisions
Financial statements can contain estimates.
Examples include:
· Depreciation
· Provisions
· Expected credit losses or other applicable impairment considerations
· Employee-related obligations
· Tax provisions
· Inventory adjustments
The auditor evaluates relevant estimates based on the applicable accounting framework and available evidence.
Management should therefore maintain calculations and supporting assumptions for significant estimates.
Step 22: Reviewing Legal Matters and Contingencies
The auditor may ask management about litigation, claims, guarantees and other potential obligations.
Legal correspondence may be reviewed where relevant.
The objective is to understand whether significant matters have been appropriately considered in financial reporting and disclosures.
Businesses should not assume that legal matters are separate from accounting.
A significant dispute may affect the financial statements depending on its nature and circumstances.
Step 23: Evaluating Financial Statement Disclosures
The audit is not limited to checking numerical balances.
The auditor also considers whether relevant disclosures in the financial statements are appropriate under the applicable reporting framework and legal requirements.
A balance may be mathematically correct but still require additional disclosure.
This is why financial statement notes should be reviewed carefully before the audit.
Step 24: Discussing Audit Findings With Management
During the audit, auditors may identify differences, missing information or control observations.
They may ask management to explain specific transactions.
Some issues may be resolved immediately.
Others may require accounting adjustments or additional audit procedures.
Management should respond with clear, factual information rather than guessing.
If the finance team does not know the answer, it is better to investigate and provide the correct information later.
Step 25: Passing Appropriate Audit Adjustments
The audit may identify accounting differences.
Some may be clearly immaterial or may not require adjustment depending on the circumstances.
Others may require management to correct the financial statements.
Management is responsible for preparing and presenting the financial statements.
The auditor evaluates identified misstatements and considers their effect in accordance with applicable auditing requirements.
The final treatment depends on the facts and circumstances.
Step 26: Final Review of the Financial Statements
Before the audit report is finalised, the auditor performs completion procedures.
The audit team reviews whether sufficient appropriate audit evidence has been obtained and whether identified matters have been appropriately addressed.
Management may also be asked to provide specific representations or confirmations as required by the audit.
The exact completion procedures vary according to the engagement.
Step 27: Issuing the Auditor's Report
Once the audit is completed, the auditor issues the appropriate report.
The report communicates the auditor's opinion and other matters required under applicable law and auditing standards.
The opinion can take different forms depending on the circumstances.
A clean or unmodified opinion generally indicates that the auditor concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework and that the audit evidence supports the opinion.
A modified opinion may be required in circumstances involving material misstatements or limitations in obtaining sufficient appropriate audit evidence, depending on the facts.
Therefore, “audit completed” does not automatically mean “everything is perfect.”
What Happens If the Auditor Finds an Error?
Finding an error does not automatically mean the company has committed wrongdoing.
Errors can arise from:
· Data-entry mistakes
· Incorrect classification
· Timing differences
· Calculation errors
· Missed invoices
· Duplicate entries
· Incorrect depreciation
· GST reconciliation issues
The auditor may communicate the issue to management and assess its significance.
Management can then determine whether an adjustment is required.
The important thing is to address errors transparently.
What If the Auditor Finds a Control Weakness?
A control weakness is different from a financial statement error.
For example, the company's books may be accurate, but the same employee may be able to create a supplier and approve payment.
The auditor may identify this as a control concern depending on the audit scope and applicable reporting requirements.
Management should evaluate the issue and consider appropriate corrective action.
How Long Does a Statutory Audit Take?
There is no universal duration.
A small company with straightforward transactions may require considerably less time than a large organisation with multiple locations, complex revenue arrangements and substantial inventory.
Factors affecting audit time can include:
· Transaction volume
· Quality of bookkeeping
· Availability of documents
· Complexity of accounting
· Number of bank accounts
· Inventory
· Number of locations
· Tax and compliance matters
· Related-party transactions
· Quality of reconciliations
How quickly management responds to queries
A major factor is often not the auditor's working speed but the quality and readiness of the company's records.
How Can a Business Make the Audit Easier?
The best preparation is continuous.
A business should reconcile bank accounts monthly.
Review receivables and payables regularly.
Keep GST and TDS records aligned with the books.
Maintain an updated fixed asset register.
Record inventory movements promptly.
Retain invoices and supporting documents.
Review unusual journal entries.
Maintain legal and corporate records.
Track previous audit observations.
This transforms audit preparation from a year-end emergency into a routine financial-control process.
A Practical Example
Consider a Delhi-based company preparing for its statutory audit.
Before the auditor begins, the finance team completes:
· Bank reconciliations
· Debtor ageing
· Creditor ageing
· GST reconciliation
· TDS reconciliation
· Fixed asset reconciliation
· Inventory reconciliation
· Loan confirmation
· Expense review
The auditor then raises a question regarding a ₹6 lakh customer balance.
Because the customer ledger is already reconciled, the finance team quickly provides:
The invoice
Delivery evidence
Customer statement
Subsequent payment details
The query is resolved quickly.
Now compare this with a company that has not reconciled its books.
The same ₹6 lakh question could require several days of investigation.
This illustrates why audit readiness matters.
What Business Owners Should Not Do During an Audit ?
Do not alter records simply to make an audit query disappear.
Do not create backdated documents that do not reflect the actual transaction.
Do not provide unsupported explanations.
Do not hide known liabilities or disputes.
Do not assume that the auditor will fix the accounting records.
Instead, provide accurate information, investigate genuine differences and make appropriate corrections through the normal accounting process.
Why Professional Bookkeeping Helps ?
A large part of audit difficulty originates before the audit begins.
When accounting records are updated irregularly, reconciliations are incomplete and documents are scattered, even a straightforward audit can become time-consuming.
Regular bookkeeping services in Delhi can help businesses maintain:
· Updated ledgers
· Bank reconciliations
· Customer balances
· Supplier balances
· GST records
· TDS records
· Fixed asset schedules
· Supporting documentation
For companies in Delhi, Noida, Gurugram, Ghaziabad and Faridabad, organised bookkeeping can make communication between management, accountants and auditors significantly more efficient.
Final Thoughts
A statutory audit is not simply an auditor checking whether every invoice in the company is correct.
It is a structured process involving business understanding, risk assessment, materiality, audit procedures, evidence gathering, financial statement review and reporting.
The auditor may examine bank balances, revenue, expenses, receivables, payables, inventory, fixed assets, loans, taxes, related parties and other significant areas depending on the company's circumstances.
For management, the most effective strategy is simple:
Keep the books updated. Reconcile regularly. Maintain supporting documents. Investigate unusual balances. Respond honestly to audit queries.
The better organised the records are, the easier it becomes for everyone involved.
For businesses across Delhi NCR, including Delhi, Noida, Gurugram, Ghaziabad and Faridabad, professional accounting and compliance support can help maintain audit-ready records throughout the year rather than scrambling to prepare them at year-end.
A statutory audit should be viewed not just as a legal obligation, but also as an opportunity to understand the quality of the company's financial reporting and identify areas where accounting processes can be strengthened.
Need Help Preparing for a Statutory Audit?
If your business needs help with bookkeeping, bank reconciliation, GST and TDS reconciliation, financial schedules or organising accounting records before an audit, FilingSuvidha can assist with the accounting and compliance preparation process.
For businesses operating across Delhi, Noida, Gurugram, Ghaziabad and the wider NCR region, maintaining accurate financial records throughout the year can reduce last-minute audit pressure and make financial reporting more structured.
Website: https://filingsuvidha.com/
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Disclaimer
This article is intended for general informational and educational purposes only. Statutory audit procedures, auditor responsibilities, reporting requirements and financial reporting obligations can vary depending on the company's legal structure, size, industry, applicable accounting framework and prevailing law. Businesses should obtain appropriate professional accounting and audit advice based on their specific circumstances.