Auditors are professionals entrusted with the responsibility of maintaining transparency and compliance with the financial records of the company to ensure accuracy, transparency, and compliance with laws and regulations. The history of auditing dates back to ancient times when trade and governance required meticulous record-keeping and accountability. The word “audit” originates from the Latin term audire, meaning “to hear,” as financial accounts were traditionally presented verbally for review. Modern auditing emerged during the Industrial Revolution when expanding businesses needed formal financial oversight. In India, the concept of auditor was introduced by the British during colonial rule to monitor trade and administrative finances. With the passage of time, auditing became an essential part of corporate governance, with the establishment of institutions like the Institute of Chartered Accountants of India (ICAI) to regulate and develop the profession. Today, auditors play a crucial role in detecting fraud and assessing future risks for the company to make sure that the company stays compliant with the statutory obligations. They are essential for building trust among stakeholders by maintaining accountability and enhancing decision-making processes.
Who is a Company Auditor?
A company auditor is an independent professional who reviews and examines the financial records of a company to ensure that they are accurate and comply with relevant laws, regulations, and accounting standards. Their primary role is to provide an objective assessment of a company’s financial statements, which include the balance sheet, income statement, and cash flow statement. Auditors have to verify the accurate reporting of financials of the company to make sure that there is no discrepancies or mismanagement in reporting. There are two main types of auditors:
- Internal auditors: They are employees of the company, who are hired to check the internal processes of the company, manage associated risks, and improve the efficiency of operations of the company.
- External auditors: These are independent third parties hired by the company to review its financial statements. External auditors are Charted Accounts from the auditing firm that ensure the assessment of the financials of the company is impartial, without any discrepancy.
Statues governing Company Auditors in India
Different statutes in India govern the roles and responsibilities of company auditors. The Companies Act 2013 is a primary statute that is responsible for corporate governance in India. It regulates the appointment, qualifications, powers, and duties of auditors in India. It mandates that auditors can access all financial records and report fraud while also prohibiting them from offering non-audit services to avoid conflicts of interest. The Chartered Accountants Act of 1949 regulates the auditing profession and establishes the Institute of Chartered Accountants of India (ICAI) to enforce ethical standards. Furthermore, the listed companies have to follow SEBI guidelines to ensure the transparency of their financial records.
Roles and Responsibilities of Company Auditor
In India, the roles and responsibilities of company auditors are mentioned below:
A. Companies Act, 2013
Under the Companies Act 2013, auditors have several important responsibilities:
- Appointment and Removal: Auditors are appointed by shareholders, and their term lasts for five years. It is pertinent to note that the shareholders have the right to remove the auditor before the end of their tenure by passing the Special Resolution in the Annual General Meeting and obtaining approval from the government.
- Independence: Auditors have to be independent of the company they audit. They cannot have financial interests in the company or offer services like bookkeeping or internal auditing to avoid any conflicts of interest.
- Access to Records: Auditors have the authority to examine all the company’s financial records, such as books of accounts, bank statements, invoices, and contracts. They have to make sure that the financial statements are accurate and comply with the accounting standards.
- Audit Reporting: After completing the audit, auditors issue a report that gives their opinion on whether the financial statements are a true and fair representation of the company’s financial health. If they find any discrepancies, fraud, or mismanagement, they must report it to the management and, if necessary, to the authorities.
- Fraud Detection: One of the main responsibilities of auditors is to detect fraud or financial irregularities within the company. Suppose they find any evidence of mismanagement, fraudulent activity, or significant errors. In that case, they are required by law to report this to the board of directors and, in certain cases, the regulatory bodies.
- Make Inquiries: Auditors must make inquiries regarding the advancement of loans and personal expenses charged to the Revenue Account. If any loan is advanced on behalf of the company, then the auditor has to ensure that the financial statements of the company comply with the existing accounting standards of India.
- Compliance with Laws: Auditors ensure that the company follows all relevant corporate laws, such as the Companies Act, Income Tax Act, and other related laws, and the company is fully compliant with legal requirements.
B. Income Tax Act, 1961
The Income Tax Act of 1961 requires companies with a certain level of turnover to undergo a tax audit. In this case, auditors are responsible for:
- Tax Audits (Section 44AB): Audit is mandatory for the business the business that crosses a specific turnover. Auditors have to verify that the company’s tax filings are accurate and comply with tax laws. They also have to make sure that the audits are filed on time and within the prescribed deadline.
- Verification of Income and Expenses: Auditors check whether the company is declaring its income and expenses correctly. They confirm that the company has accounted for all its revenue, claimed the correct deductions, and calculated its tax liability correctly.
- Timely Filing of Tax Returns: Auditors ensure that the company files its tax returns on time and that all taxes, including corporate tax, are paid as per the due dates mentioned in the Income Tax Act. Any discrepancies or late filings are reported to the authorities.
C. GST Act, 2017
The Goods and Services Tax (GST) Act 2017 mandates that companies with turnover exceeding a certain limit undergo GST audits. Auditors play a crucial role in ensuring the company complies with GST laws:
- GST Compliance: Auditors verify that the company is following the GST law. This h includes ensuring that taxes are being correctly levied on the sale of goods and services, as well as the input tax credit on purchases. They check if the company is collecting and paying the right amount of GST.
- GST Returns: Auditors verify the company’s GST returns to ensure that they are accurate. They check if the company has reported the right amount of sales, purchases, and taxes correctly in their GST filings. They also ensure that the input and output tax credits are properly claimed.
- Avoidance of Penalties: If auditors find discrepancies or mistakes in the company’s GST filings, they must report them so that the company can rectify the errors before the authorities impose penalties. This is critical for maintaining compliance with the law.
E. Indian Auditing Standards
The Institute of Chartered Accountants of India (ICAI) sets auditing standards that all auditors in India must follow. Some important standards are:
- SA 200: This standard establishes audit goals to ensure objectivity and compliance with standards.
- The SA 300 standard outlines audit planning standards. It assists auditors in determining the scope of the audit and how to carry it out efficiently, ensuring that all financial aspects of the organisation are thoroughly assessed.
- SA 315: This standard examines a company’s operations to identify potential possibilities for substantial misstatements in financial statements. It helps auditors identify risks and address them during the audit process.
F. Other Responsibilities
In addition to the above roles, auditors also have the following duties:
- Internal Controls: Auditors evaluate the effectiveness of a company’s internal controls. They check whether the company has the right systems in place to prevent fraud, errors, and financial mismanagement.
- Audit Report: After completing the audit, auditors must sign off on the company’s financial statements, confirming that the audit was conducted properly and that the financial statements give a true and fair view of the company’s financial position.
- Communication with Management: Auditors must communicate any issues they find during the audit to the company’s management. If they find weaknesses in internal controls or any other serious issues, they must ensure that the management takes corrective actions.
Conclusion
In India, the function of an auditor is critical as they are in charge of verifying that corporations follow the provisions of the statutes governing corporate organizations as well as tax regulations. Auditors are essential in finding errors, fraud, and discrepancies in the financial records of the company to guarantee moral corporate practices. Auditors can perform their tasks with independence and professionalism by following major legislative frameworks such as the Chartered Accountants Act and the auditing standards established by the Institute of Chartered Accountants of India (ICAI). Their efforts help to create a trustworthy and reliable environment for both enterprises and investors.
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FAQs
1. Why is auditing important for businesses?
Auditing helps maintain financial transparency, trust, and accountability within a company.
2. How are auditors appointed in India?
Auditors are appointed by a company’s shareholders, as per the provisions of the Companies Act 2013.
3. Can auditors be removed before their term ends?
Yes, auditors can be removed before their term ends, but only under specific conditions outlined in the Companies Act.
4. What is the significance of the audit report?
The audit report provides an independent opinion on a company’s financial statements and their accuracy.
5. Are auditors allowed to offer non-audit services?
No, auditors are prohibited from providing certain non-audit services, like management consulting, to maintain independence.
6. How do auditors detect fraud during audits?
Auditors look for discrepancies, irregularities, and unusual transactions that could indicate fraud or mismanagement.
7. What is a tax audit, and who conducts it?
A tax audit, conducted by an auditor, ensures that a company’s tax returns comply with the Income Tax Act of 1961.
8. What happens if an auditor finds a misstatement in financial reports?
The auditor must report any misstatements, fraud, or irregularities to the company’s management and relevant authorities.
