Statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:
- Tax Audits
- Company Audits
Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that every person whose business turnover exceeds INR 1 crore and every person working in a profession with gross receipts exceeding INR 25 lakh must have their accounts audited by an independent chartered accountant.
It should be noted that the provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company or any other entity. The tax audit report is to be obtained by September 30 after the end of the previous fiscal year. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or INR1 lakh, whichever is lower.
There are no specific rules regarding the appointment or removal of a tax auditor.
The provisions for a company audit are contained in the Companies Act 1956. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors have to first appoint an auditor at the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM.
The new Companies Bill 2012 provides that an auditor shall be appointed for a term of five consecutive AGMs. Individuals and partnership firms, auditors cannot be appointed for more than one or two terms, respectively. After the completion of the term, the auditor must be changed.
Only an independent chartered accountant or a partnership firm of chartered accountants can be appointed as the auditor of a company. The following persons are specifically disqualified from becoming an auditor per the Companies Act:
- A body corporate;
- An officer or employee of the company;
- A person who is partner with an employee of the company or employee of an employee of the company;
- Any person who is indebted to a company for a sum exceeding INR 1,000 or who have guaranteed to the company on behalf of another person a sum exceeding INR 1,000; or
- A person who has held any securities in the company after one year from the date of commencement of the Companies (Amendment) Act, 2000.
The auditor is required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO) 2003. CARO requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit standards, internal controls, statutory dues, among others.
The audit report must be obtained before holding the AGM, which itself should be held within six months from the end of the financial year.