This article covers what is internal and statutory audits mean and their functions. Also, shares key points comparing Internal audit vs statutory audit.
Mistakes are a part of human nature. They cannot avoid mistakes like robots and machines. For anything to be perfect, a person needs double-checking. Perfection and flaw-free work is a symbol of competitiveness in today’s world.
In every field, institutions try their best to give their audience or clients a work free of errors. In businesses, in different departments also, checks and inspections are done to avoid any last-moment errors. This practice of removing the flaws was initiated and made common while maintaining accounts.
Managers and accountants make several mistakes while creating the financial statements and reports of the company or business. These flaws might be willing or by mistake. The regular checks, inspection, examination, and rectification of the errors of a company’s financial statements or accounts is known as an audit.
The auditing process is primarily done to check for any fraudulent activities done by the company in accounting to get certain benefits. The auditing is performed by an external person who does not have any connection or underlying interest in the company or business operations. Nowadays, audits have become more significant due to the rising scams, frauds, tax evasions, etc.
In legal terms, things and activities have several terminologies. One such terminology is statutory, which means mandatory. Anything compulsory to have or maintain is called statutory.
Therefore, audits are also of two types:
- Internal Audit
- Statutory Audit
After getting a glimpse of both the audits, it is important to look into what these two audits mean and the differences between an internal audit and a statutory audit.
Internal Audit – Meaning, Functions, & Importance
In simple words, an internal audit is related to the inspection and examination of a company’s accounting processes and practices related to the internal parties of the company. This means handling and examining the accounting methods and processes according to the industry standards and expectations.
An internal audit comprises looking at the proficiency of the working standards of the employees and internal parties. They check whether there is compliance between the organization’s set standards and actual processes and efficiency.
Every company has its rules, policies, and working methods; these auditors mainly inspect whether these norms are followed or not. It catches any errors or frauds committed by the employees in order to avoid any long-term consequences.
An internal auditor mainly performs the following functions:
- Check and confirm the presence of the company’s recorded financial assets.
- Suggest proper safety measures for the protection of the recorded assets.
- Analyze and interpret the fairness of the internal system.
- Value, judge, and compare the actual performance and accounting methods with the accepted business practices.
- Evaluate the compliance with different laws and contracts.
- Review the actual methods and operations and determine whether the results are in accordance with the planned objectives or not.
- Identify, investigate, and report various frauds, waste, embezzlement of funds, laundering, theft, etc., if any.
Internal audit plays a key role in comparing objectives and actual performance standards. Apart from this, it is very helpful in enhancing operational efficiency, analyzing risks, safeguarding business assets, and gaining compliance with the law and industry parameters.
Statutory Audit – Meaning, Functions, & Importance
As stated earlier, anything that is compulsory to maintain is called statutory in the eyes of the law. Statutory audit means the regular inspection, examination, and assessment of the accuracy and fairness of the accounts of an institution (company or government).
It is a formally laid down principle by the government and authorities directed towards the company’s major stakeholders. It is a strict regulation by the government to perform statutory audits. It is a deep and careful examination of financial statements in order to spot the minutest errors and fraud activities.
A person involved in performing statutory audits performs the following functions:
- To get the necessary information on whether loans and advances provided are secure enough and recorded appropriately.
- Inspect the accounts to be real and accurate without being prejudicial.
- Analyze the expenditures and receipts, especially with the loans & advances entered as deposits.
- Review & confirm the personal expenses & related items shown in the revenue account.
- Verification of cash being accrued, outstanding, and actually received.
- Should outline the audit process keeping in mind the scope, objectives, type of organization, and complexity.
- Ensure efficiency, unbiasedness, and effectiveness during the complete statutory audit.
Statutory is an essential aspect of the company’s image. The level of accuracy in statutory audit depicts the brand equity of the company. It helps retain customers and bring trust to the shareholders. It also aids in attaining transparency within the organization and gaining an edge through internal control.
Internal Audit Vs Statutory Audit – The Key Differences
A non-specialist cannot differentiate between an internal audit and a statutory audit.
The following points will provide clarity about the ‘internal audit vs statutory audit’ comparison –
- In terms of its appointment, an internal auditor is usually appointed by the internal parties among the top management of the company. On the other hand, to find greater accuracy, shareholders or AGM (Annual General Meeting) select a statutory auditor.
- The most important yet basic difference between both audits is the legal need. Internal audit is done to get an additional layer of protection and a reality-check of the company’s practices. Against it, a statutory audit is compulsory to perform. The government lays down various laws for the non-performance of statutory audits.
- Usually, an internal audit is conducted anytime without any prior rigid announcements, whereas a statutory audit can only be initiated after the making of final accounts. It is not a regular activity of the management.
- The government has not laid any eligibility norms or qualifications requirements for a person to qualify for an internal auditor post. Contrary to it, there are various qualifications and requirements to clear before becoming a statutory auditor. Therefore, the latter is more credible than the internal auditor.
- The major difference lies in the scope of activities that both the auditors are involved in. An internal audit performs various duties such as analysis of accounts and different activities of the organization. On the other hand, a statutory audit is only concerned with inspection, spotting errors, and checking the financial reports, accounts, and related documents. This implies that the scope of internal audit is broader than the statutory audit.
- A statutory auditor works more independently than the internal auditor, as the latter is selected by the management itself.
- There is more flexibility in removing an internal auditor than the statutory auditor. The former can be fired at any time by the management, but a statutory auditor can be discharged from the position only by the AGM.
- The shareholders decide the pay and remuneration of the statutory auditor, whereas the fees or pay is fixed through the management’s decision.
- It is not compulsory to prepare and present a detailed report after the auditing process in an internal audit. Contrary to it, it is important as well as mandatory in statutory audit to present the report consisting of the audit details.
These differences above outline how crucial both the audits are for building a company’s reputation. Small and medium-sized businesses can get assistance from experts on accounting methods/practices via the Udyami Helpline business education platform.