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Company audit refers to a review of financial statements and accounting records of a company to examine its financial performance and position. A company audit’s purpose is to make sure that the business’s financial reporting is accurate and that the company is keeping the required legal records.
Generally, a company audit is conducted by a chartered accountant. As per the Companies Act 2013 and the Companies (Accounts) Rules, 2014, every private limited company must get their annual accounts audited each financial year.
Read this article to know how a company audit works, reasons for conducting audit, types of company audits in India, four stages of company audit and auditing challenges faced by companies.
Whether a company is a private limited company or a public limited company, they must undergo an audit each financial year. The company’s book of accounts must be conducted by an independent chartered accountant.
In a company audit, the auditor reviews the company’s book of accounts, bank balance, financial statements and other crucial documents. After the company has undergone an audit, it must file the audited report, financial statements and annual return with the RoC.
Conducting an audit is essential to ensure the company complies with legal requirements, but it also offers several benefits. Some of these benefits include:
Company audit of a public limited company allows investors to find out about the exact financial status of the company, allowing them to decide whether or not to invest in it.
When stakeholders get genuine financial information about the company, they are willing to purchase more of its stocks, or hold, or sell them.
A private limited company’s audited report can help banks to make out whether it’s suitable to grant loan or debts to the company.
An audit can help the company to identify its weaknesses and suggest improvements regarding risk management and overall governance.
A company audit is more of a general term that may be used to refer to different kinds of audits done for a company. The major types of company audits in India are internal audit and external audit. They have been described below:
An internal audit can be understood as an internal process of the company. It is conducted within the organization, and the auditors carrying it out are employees of the company itself.
Internal audits don’t pay much attention to the company’s financial statements. Their prime focus is on the company’s corporate governance and the business operations’ efficiency. Internal audit is the opposite of external audit in the sense that the result of internal audits remain confidential. The internal audit result is only shared with the executives and audit committee of the company.
The internal audit report provides an overview of the company’s performance across various areas like internal controls, risk management and compliance. By shining a light on these critical aspects, the internal audit helps the company to ensure that it functions in a smooth manner and doesn’t go off the track.
An external audit can be understood as the opposite of an internal audit. In an external audit, the auditors are independent i.e., they are from outside the organization. The reason why they’re hired is because they can provide unbiased opinions about the organization’s financial reports.
For companies that are listed publicly on stock exchanges, the audit report is made publicly available to investors and stakeholders. Large companies hire big auditing firms to carry out company audits for their finances. A fresh perspective may be provided by external audits, which the internal audits can generally lack.
Irrespective of the company’s turnover or its nature, it is required to undergo a company audit as per the Companies Act, 2013.
Every company audit process is unique because it depends on the specific needs of the organization being examined. Factors such as the business entity type, rules they’re required to follow and how big the company is affect how the company audit is conducted.
However, regardless of these factors, the company audit process generally consists of four stages. These stages are planning, fieldwork, testing and reporting. Each auditing stage has been described below:
In this company audit stage, the auditor gathers details, sets forth auditing objectives, and develops a company auditing strategy for conducting the audit.
Based on these details, the company auditor comes up with an audit plan, which is a detailed action plan that guides them throughout the company audit process.
The Fieldwork Stage a.k.a the internal controls stage is an evaluation phase wherein auditors gather financial records and any other information necessary for conducting the company audit. This allows the auditor to examine the accuracy of financial statements.
The fieldwork stage involves testing transactions, records, and resources, assessment of identified risks, interviewing departmental personnel, and reviewing department records and practices.
It also involves performing any other procedures which are required to meet the company audit’s objectives.
In the company audit’s testing stage, auditors use various tests to verify the accuracy of the financial statements of the business. It may include verifying transactions, overseeing procedures, or requesting more information.
This company audit stage’s goal is to obtain evidence regarding the validity, completeness and accuracy of the financial report.
The reporting stage of the company audit is the final stage. In this stage, the auditor prepares an audit report that expresses an audit opinion, collects fees and files statements with the authorities.
A number of challenges are faced by companies while an audit is conducted. Some of these challenges are stated below:
To comply with regulatory requirements, the companies are required to keep detailed and well-organized records of their business. If their records are disorganized, finding the necessary information quickly can be hard. To check for errors or fraud, clear and accurate data is needed by auditors.
Sometimes, there may be a lack of skilled auditors to carefully evaluate the financial information of a company.
The use of outdated technology may slow down the company auditing process.
Accurate data must be obtained by the companies. If they fail to do this, they may face legal repercussions or be seen as unreliable by customers/clients.
Accounting standards are ever-evolving and the companies must keep up with them at all times.
Compliance costs can be expensive for the companies, and many companies may have budget constraints.
Sometimes, companies may find it challenging to communicate the audit's findings to stakeholders, investors, or managers. This could occur if there are misunderstandings, the conclusions are overly technical, or the stakeholders don't have the financial expertise to understand all the specifics.
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A company audit is a review of a company’s financial statements. An audit is conducted by an auditor and consists of four stages namely planning stage, fieldwork stage, testing stage and reporting stage. Every private limited company and public limited company registered under the Companies Act, 2013 must mandatorily undergo an audit each financial year to ensure compliance with the legal and regulatory requirements.
Need assistance in conducting a company audit for your business? Connect with Registrationwala’s chartered accountants!
Q1. Do private limited companies need to undergo company audits?
A. Yes, private limited companies in India need to undergo company audits, just like other companies registered under the Companies Act, 2013.
Q2. How many stages are involved in the company audit process?
A. A company audit generally consists of four stages: planning stage, fieldwork stage, testing stage and reporting stage.
Q3. What happens if a company fails to conduct an internal audit?
A. A company may be fined up to Rs. 10,000 for failing to comply with the Companies Act 2013's internal audit obligations. Additionally, the company may be subject to a further fine of Rs. 1,000 for every day that the non-compliance persists.
Q4. When is late filing of a tax audit report allowed?
A. Section 273B of the Income Tax Act 1961 permits you to file your tax audit report late or not at all in some circumstances. A few examples of this are natural disasters, strikes or lockouts, document theft, or the tax auditor's resignation.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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