An audit is an independent examination of financial records and statements to ensure accuracy, compliance, and transparency. Different types of audits serve different purposes, but all share the goal of providing stakeholders with reliable financial information. Here is everything you need to know.
Types of Audits
Statutory Audit
All companies registered under Companies Act
Mandatory for all companies regardless of turnover
An independent examination of financial statements to express an opinion on whether they present a true and fair view. Required under the Companies Act, 2013.
Tax Audit (Section 44AB)
Businesses & professionals exceeding turnover limits
Business: Rs. 1 crore (Rs. 10 crore if digital) | Profession: Rs. 50 lakhs
Audit of books of accounts to verify the correctness of income, deductions, and tax compliance. Report is filed in Form 3CA-3CD or Form 3CB-3CD.
Internal Audit
Companies meeting prescribed criteria
Listed companies, unlisted companies with turnover > Rs. 200 crore or loans > Rs. 100 crore
An ongoing evaluation of internal controls, risk management, and governance processes. Helps management improve operational efficiency.
The Audit Process (Step-by-Step)
Engagement & Appointment
The auditor is appointed by the board/members. An engagement letter is issued defining scope, responsibilities, and timeline of the audit.
Understanding the Business
The auditor studies the business operations, industry, accounting policies, internal controls, and identifies risk areas requiring focused attention.
Audit Planning & Strategy
An audit plan is prepared defining the nature, timing, and extent of audit procedures. Materiality levels are set and an audit team is assigned.
Testing Internal Controls
The auditor tests the effectiveness of internal controls over financial reporting. This includes testing authorization procedures, segregation of duties, and IT controls.
Substantive Testing & Verification
Detailed testing of transactions and balances including vouching, bank confirmations, debtor/creditor confirmations, physical stock verification, and analytical procedures.
Review of Financial Statements
The auditor reviews the complete financial statements (Balance Sheet, P&L, Cash Flow, Notes) for accuracy, completeness, and compliance with accounting standards.
Discussion with Management
Audit findings, adjustments, and observations are discussed with management. A management representation letter is obtained. Any disagreements are resolved.
Audit Report Issuance
The auditor issues the final audit report with their opinion: Unqualified (clean), Qualified, Adverse, or Disclaimer. The report is filed with relevant authorities.
How to Prepare for an Audit
- Maintain organized and up-to-date books of accounts throughout the year
- Reconcile all bank statements before the audit begins
- Prepare a schedule of fixed assets with depreciation details
- Keep all invoices, vouchers, and supporting documents readily available
- Complete all pending TDS/GST filings before audit commencement
- Prepare a list of related party transactions
- Ensure statutory registers and minute books are current
- Resolve any outstanding queries from previous audits
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