What is a Statutory Audit?

Statutory Audit

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Statutory Audit

A statutory audit is a legally mandated review and verification of a company’s financial statements and related operations to ensure accuracy and conformity with accounting standards and regulations. The primary purpose of a statutory audit is to provide an independent assurance to stakeholders, such as shareholders or regulators, that the company’s financial statements present a true and fair view of its financial position and performance.

Key aspects of a statutory audit include:

  • Legal Requirement: Statutory audits are typically required by national regulatory bodies or legislation, depending on the jurisdiction and the type of entity. For instance, publicly traded companies are usually mandated to undergo statutory audits.
  • Auditor Qualifications: Only certified or recognized professional accountants can conduct statutory audits. The qualifications required vary by country but often include professional accreditation and adherence to professional standards.
  • Scope: The scope of a statutory audit usually covers the examination of a company’s financial statements, underlying records, and related operations to determine if they are in compliance with the applicable financial reporting framework (e.g., IFRS, GAAP) and other legal requirements.
  • Audit Report: At the conclusion of the statutory audit, the auditor issues an audit report. This report provides an opinion on whether the financial statements present a true and fair view of the company’s financial position, financial performance, and cash flows. If the auditor identifies any misstatements or discrepancies, these will be highlighted in the report.
  • Purpose: The main objective of the statutory audit is to provide stakeholders with an unbiased and clear picture of the company’s financial health, ensuring transparency and trust in the financial reporting process.
  • Frequency: Statutory audits are usually conducted annually. However, the frequency might vary based on regulatory requirements or the specific needs of stakeholders.
  • Difference from Other Audits: Apart from statutory audits, companies might undergo internal audits, tax audits, or other types of specialized audits. These are different from statutory audits in terms of their objectives, scope, and regulatory implications.

The specifics of statutory audits, including their requirements, procedures, and reporting standards, can vary widely between jurisdictions based on local regulations and standards. It’s essential for companies to be aware of their local requirements to ensure compliance.

Example of a Statutory Audit

Let’s use a hypothetical example to illustrate how a statutory audit might unfold:

Company: TechFlow Ltd., a publicly traded tech company specializing in cloud computing solutions.

Jurisdiction: United States

Regulatory Body: U.S. Securities and Exchange Commission (SEC)

Applicable Accounting Framework: U.S. Generally Accepted Accounting Principles (U.S. GAAP)


TechFlow Ltd. has just ended its fiscal year, and as a publicly traded company in the U.S., it is mandated by the SEC to undergo a statutory audit before submitting its annual report (Form 10-K).

Audit Steps:

  1. Engagement: TechFlow Ltd. engages a well-known accounting firm, “Precise Auditors,” to conduct its annual statutory audit.
  2. Planning and Risk Assessment: Precise Auditors reviews TechFlow’s business operations, industry dynamics, internal controls, and previous audit findings. They identify areas of significant financial statement risk, such as revenue recognition given the complexities of cloud computing contracts.
  3. Fieldwork: The audit team conducts a series of tests, including:
    • Confirming large account balances with customers and vendors.
    • Testing a sample of transactions for proper authorization, accuracy, and documentation.
    • Reviewing the company’s methods of revenue recognition, especially for multi-year contracts.
    • Assessing depreciation calculations for the company’s data centers and equipment.
    • Evaluating the company’s disclosures regarding potential legal liabilities.
  4. Audit Report: After the fieldwork, Precise Auditors prepares its audit report. They conclude that TechFlow Ltd.’s financial statements present a true and fair view in accordance with U.S. GAAP, but they highlight a few minor discrepancies in the company’s inventory accounting, suggesting improvements for the future.
  5. Submission: TechFlow Ltd. incorporates the audit findings into its annual report (Form 10-K) and submits it to the SEC. The audit report is included in the annual report, providing investors and stakeholders with an independent assurance of the company’s financial statements.
  6. Shareholder Meeting: TechFlow’s management presents the audited financial statements at the annual shareholder meeting. Shareholders use the information to assess the company’s performance, make investment decisions, and vote on company matters.

This example provides a snapshot of the statutory audit process. In reality, the audit would be more intricate, with auditors spending weeks or even months reviewing various aspects of the company’s finances, depending on the company’s size and complexity.

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