Internal Audit vs Statutory Audit
Though there is an accountant in all organizations to record the financial transactions and for general book keeping, companies have to pass through an audit that is a sort of scrutiny of the financial statements of the company prepared by the accountant. This statutory audit is carried out under the provisions of the Companies Act 1956 (to give opinions under section 227 of the Act). This statutory audit is a tool to safeguard the interests of the shareholders of the company to ensure that that the organization is performing satisfactorily financially. However, there are companies that get performed an internal audit also to ensure they are following the rules and regulations of accounting and to verify the statements prepared by accountants. There are many differences in an internal audit and statutory audit and these will be highlighted in this article.
Internal audit is not mandatory and it is the choice of the management of the company to get it done by its internal auditors. Management does not want to be red faced in case of any irregularities when statutory audit is conducted which is why, to keep a check on the operations of the company, internal audit is done. Whether an internal audit has been carried out or not, statutory audit is done that comments on the effectiveness of the financial statements of the company. It is necessary to ensure that the company is following the rules and regulations in maintaining its books and there is no compromise with the financial interests of the shareholders.
The most obvious difference lies in the appointment of the auditor. While internal auditors are appointed by the management of the company, statutory auditors are appointed by the shareholders of the company. Another difference lies in the qualifications of the auditors. While it is mandatory for statutory auditors to be certified chartered accountants, it is not necessary for internal audit and the management may appoint persons it deems fit.
The main objective of statutory audit is to give a fair and impartial assessment of the financial performance of the organization while at the same time try to spot any discrepancies and frauds. Internal audit also tries to detect any anomalies and errors that may have crept in the financial statements. There is no way internal management can change the scope of statutory audit as is the case with internal audit where the mutual consent of the management and the auditors is enough to decide the scope of the audit exercise. While the auditors of a statutory audit submit their final report to the shareholders in their general meeting, the report of the internal audit is handed over to the management by the auditors. Once appointed, statutory auditor is extremely hard to get removed and the management has to take permission of the central government after its board of directors recommends a proposal to this effect. On the other hand, management can at any time remove internal auditors.
Difference Between Internal Audit and Statutory Audit
• While the objective of statutory as well as internal audit is same and that is to verify the financial performance of the company and to ensure that all rules and regulations are followed in book keeping, the scope of statutory audit is much wider than internal audit.
• Internal auditors are answerable to the management whereas statutory auditors are responsible to the shareholders.