Statutory Audit Vs Internal Audit

A statutory audit is an audit which is performed to ensure the correctness of the accounting records maintained by a company. On the other hand, an internal audit is an audit which is performed to ensure that the system of internal controls instituted by the management of a company is functioning in the appropriate manner. The appropriate manner refers to the manner intended by the key managerial personnel of the company. The functioning of the system of internal control arranged by the management should result in the continuous enhancement of the welfare of the members. A statutory audit takes into consideration the question of whether the annual accounts give an impartial and fair view and are prepared according to the applicable legal requirements. On the other hand, an internal audit takes into consideration the question of whether the business practices deployed by the officers of the company are helpful in prudently managing the business and meeting the strategic objective of the organisation. Typically, an internal audit can cover both operational as well as financial issues. The process of a statutory audit should compulsorily be conducted by a practising Chartered Accountant. On the other hand, the process of internal audit is generally understood to be a limited one and managed by any qualified person who can audit the governance of an organization and the methodology by which it assesses and manages the risks faced by it in the dynamic business environment. In this article, the differences between a statutory audit and an internal audit are discussed.

Statutory Audit

Statutory audit is an audit by a

practising Chartered Accountant which has its operations exterior to the organization which it is auditing. Statutory Auditors are a part of the external audit process. Statutory auditors are focused on the various financial accounts or risks associated with the domain of finance and are appointed by the shareholders of the company. The chief responsibility of statutory auditors is to perform the process of the annual statutory audit of the company’s financial accounts and providing studied opinions on whether they are an impartial and fair reflection of the company’s financial position. As part of this effort, statutory auditors by means of the statutory audit process often deal with the examination and evaluation of internal controls to manage the risks that could possibly affect the financial accounts, so as to decide if they are working as according to the plans formulated by the key managerial personnel of the company.

Internal Audit

Internal audit is a function that, even though operating independently from other departments and involves reporting directly to the audit committee, remains within an organization i.e. the company's employees. Internal audits involve performing audits of both financial and non-financial nature within a wide of areas of operation in business, including those that are directed by the annual audit plan. Internal audit deals with the main risks facing the business and the action being taken to manage those risks in an effective manner so that the organization can achieve its various objectives. For example, the internal audit process evaluates the risks threatening a company’s reputation such as the employment of cheap labour in foreign countries, or the strategic risks such as producing too many products in comparison to available resources.

Differences in Scope

The internal audit is limited to the governance of an organization, management controls over the operations of an organization and risk management. The external audit is related to the reports on financial statements of the corporate entity.
The external audit is a legal requirement while the internal audit is conducted based on the personal resolve of the business owners to measure the operation’ efficiency as conducted by the business.
The external audit is performed by an external auditor or audit firm while the process of internal audit is performed by the firm’s employees, nevertheless, an audit firm can also be selected and appointed to conduct the process of internal audit.
The internal auditor is selected or appointed by the company while the selection of the external auditor is at the shareholder’s annual general meeting.
The external audit is performed while maintaining in perspective the various requirements of any acceptable financial reporting standards while no such rules hold for internal audit.
The internal auditor by means of the internal audit process is responsible to report to the management or audit committee while statutory auditor as part of the statutory audit process reports to the company shareholders.

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Frequently Asked Questions

A statutory audit is an audit conducted by an external, practicing Chartered Accountant to ensure the correctness and fairness of a company's financial statements and their compliance with applicable legal requirements. Its main objective is to provide an independent opinion on whether the annual accounts give a true and fair view of the company's financial position.

According to the article, statutory auditors are appointed by the shareholders of the company during the annual general meeting. They are external, independent auditors focused on examining the company's financial accounts and associated risks.

The primary difference is that a statutory audit is an external audit mandated by law and conducted by an independent, practicing Chartered Accountant. In contrast, an internal audit is an internal function performed by employees or a hired firm to evaluate the effectiveness of the company's internal controls, risk management, and operational efficiency.

An internal audit can cover both financial and non-financial aspects of a company's operations, including assessing risks related to reputation, strategy, and governance. It evaluates the management of various risks and the achievement of organizational objectives across different areas.

According to the article, internal auditors report directly to the audit committee, which oversees their independence and effectiveness, even though they operate within the organization as employees.

No, the article does not mention internal audits as a legal requirement. It states that internal audits are conducted based on the management's decision to assess the organization's efficiency and risk management processes.

Yes, the article suggests that while statutory audits must be conducted by external, practicing Chartered Accountants, an audit firm can also be appointed to perform the internal audit function for a company.

A statutory audit focuses specifically on the financial statements and associated risks, ensuring compliance with financial reporting standards. An internal audit has a broader scope, covering various operational areas, risk management processes, and the achievement of strategic objectives.

As part of the statutory audit process, external auditors often examine and evaluate the internal controls related to financial reporting risks. This evaluation helps them determine if the internal controls are functioning as intended by the management.

Statutory auditors report their findings and opinions to the company's shareholders, providing an independent assessment of the financial statements. In contrast, internal auditors report directly to the audit committee or management, providing insights into the effectiveness of internal controls and risk management processes.