What is a Statutory Audit? (Definition, Purpose, and How Statutory Audits Work)


Most of the businesses have distinct owners and management due to the lack of adequate knowledge and skillset required by the owners to run the corporation. As a result, they hire people with experience and knowledge to run their business. Yet, there are certain drawbacks to it as well. While owners hand over control of their company to management, they also lose control over them with time.

Consequently, they are unable to direct how the business operates. With their authority, management can change the company’s records to offer a dishonest appearance. These documents are usually in the form of financial statements. Hence, business owners require a system to assist them in determining if the financial statements give a truthful and fair image. It takes the form of financial statement auditing.


A statutory audit is a lawfully mandated examination of a firm or government’s financial records and statements for correctness. It is an evaluation of a firm’s financial records in agreement with a government administration’s regulations.

Statutory audits are essential for various corporations, including banks, brokerage firms, insurance companies, and municipalities. As they are focused on government inspection, these organizations are required to undergo statutory audits.


The main aim of a statutory audit is to inspect data that includes financial accounts and transactions and bank balances to evaluate whether a business presents its financial condition rationally and correctly. A thorough evaluation of the business’s bookkeeping records and related source documents are used to determine whether that targeted business is delivering fair and precise financial statements.

The auditor is expected to express his opinion without being misled in any way. He must go through the financial accounts and offer his take on the audit statement. This process makes it easier for the shareholders to trust financial statements. Other investors, including stockholders, benefit from this process.

Auditors can make their decision centered on the financial records to see if resources were managed correctly and that all necessary records and filings were completed correctly.

See also  Auditing Casino Sector: Procedures, Risks, and More

Companies That Require a Statutory Audit

Certain businesses, irrespective of their dimensions, must undergo a statutory audit to maintain transparency and productivity. Below are some of them:

  • Insurance companies
  • Brokerage firms
  • Public companies
  • Banks or investment firms

How Statutory Audits Work

The term statutory refers to an audit that is mandated by law. A statute is a rule or law established by the organization’s affiliated government’s legislative branch. Legislation can be passed at various levels, including state, federal, and municipal. It also refers to any rule established by the organization’s executive team or board of directors in the business world.

At the start of the audit, the auditing entity specifies which records will be required as part of the examination. The data is obtained and provided when demanded, allowing the auditors to complete their analysis. If inaccuracies are detected, reasonable penalties may be imposed.

Being subjected to a statutory audit is not a sign of misconduct in itself. Alternatively, it is often a formality envisioned to contribute to error-free actions such as financial mismanagement by confirming that several records are tested consistently by a capable third party.

Method to Conduct a Statutory Report

All statutory auditors are usually given a time limit to complete the audit of the branches assigned to them. An auditor should accept the assignment right away and submit a formal notification to branch management and all other information he will need for his audit.

The auditor must confirm that the deposits, advances, expenses, and interest revenue are quantified in their report. An auditor is required to provide an audit report after performing a thorough audit. According to the engagement letter, an auditor must prepare a report in which he must declare the following:

  1. Whether the balance sheet offers an accurate and reasonable image of the banks’ actions, including all significant details.
    1. If the profit and loss account for the time covered by the account displays a right balance.
    1. If the branch has conducted any transactions that were not within the branch’s authority.
    1. Any other matter that the auditor believes should be brought to the Statutory Central Auditor’s attention.
See also  Auditing Hotel Industry: Risks, Significant Account and More


There are several benefits of conducting a statutory audit. Among them, some are mentioned below:

  • As a liberated party, the auditor verifies the financial statements; it strengthens the validity and trustworthiness of the financial accounts.
  • It demonstrates that management has exercised great care in carrying out its duties.
  • The auditor also provides remarks on the strength of the firm’s core control and checks within segments or departments.
  • It mentions concerns in agreement with non-statutory standards such as business governance.
  • The auditor also mentions a risky area where internal management is lacking.
  • It assists the organization in risk management and enhances the company’s performance.
  • If a small company’s financial statements are audited, they gain more value than if they are not audited.
  • Companies can obtain banking loans and other types of financing more easily with the help of audited financial statements.


Aside from the benefits, statutory auditing has several drawbacks. Some of which include:

  • The expense of conducting an audit can be prohibitively expensive. However, an audit firm that is responsible for the day-to-day operations, such as accounts preparation, will charge a far lower fee to do the audit than a firm that is not.
  • Employees’ routine work may be interrupted in order to respond to the auditor’s day-to-day demands or to provide the auditor with any reports or data they request.
  • The financial accounts comprise both objective and subjective information. Individual judgmental issues may differ. Personal matters are occasionally included.
  • Audits also have inherent restrictions, such as they need to be completed on time, internal control inside the business, the auditor’s restricted power, and so on. It is important to acknowledge that auditors report on sample data rather than entire data, and that because frauds are deliberate, they are more difficult to detect.
  • In many cases, auditors have little choice but to accept management’s representation. If management is implicated in fraud, there is a risk. They will provide you the modified image in that scenario. 
  • The auditor does not assess every single transaction. The auditor only shares his judgement on the financial statements and data that he is given, and he never provides complete assurance.
  • An auditor advises on the organization’s ongoing operations, but makes no guarantees about its long-term sustainability. Stakeholders should not invest their money only because the organization’s data is being audited.
See also  Journal Entry Testing: Definition, Process, and Importance

Examples of Statutory Reports

Examples of statutory reports include:

  • Annual Return on Investment
  • Report of the Auditors
  • Statutory Report presented at the company’s statutory meeting
  • Directors’ Report to the Annual General Meeting
  • Reports from Inspectors responsible for investigating the company’s operations

Therefore, statutory audits are one of the most common types of audits, as law to examine the precision of a company or government’s financial statements mandates them. It is carried out for the auditor to decide on the true and impartial view of the company’s financial status as the balance sheet date by gathering various data.

Because an independent party verifies the company’s financial accounts, the statutory audit strengthens the validity and reliability of the financial statements. The auditor will write an audit report based on the numerous pieces of evidence and data on the accurate and unbiased perspective of the financial statements presented to him after completing the full verification and gathering information.

Scroll to Top