Statutory Audit:
A statutory audit is the engagement of an audit of financial statements by independent auditors to the entity’s financial statements in compliance with the local law that the entity is operating.
In most countries or territories, the audit of financial statements is required by law or status.
And the entity that operated in those countries is required to submit the audited financial statements as per the law requires.
For example, insurance companies are required to submit their financial statements to a related government body to review.
The tax department is one of the best examples of a government body. The entity must submit the annual financial statements and audit reports to them for review and assess if the tax expenses are properly paid off.
Objective:
The main objective of a statutory audit is not different from other financial statements auditing. However, it enables the qualified auditors to examine the entity’s financial statements’ independence objectively and then express their opinion on the financial statements.
The main difference of that some entities may engage with external auditors to audit their financial statements because of the requirement of the board of directors or shareholders requirement.
However, even though the board or shareholders don’t want a statutory audit, the entity still has to engage because it is what the law requires.
If the entity doesn’t engage with the external auditor to review its financial statements, then the entity may face legal enforcement from the authority.
Non-statutory audit:
The non-statutory audit is the audit of financial statements that are not required by law. It is different from the statutory audit in that the entity needs to engage with an audit firm to perform its review of financial statements.
For the non-statutory audit, the entity may be exempt from the law’s requirement, but the entity still engages with the firm.
This is because of shareholders’ requirements, the board of directors’ requirements, management requirements, or sometimes because of parent company requirements.
The entity that requests auditors to review financial statements that are not required by law is normally small or newly established.
In this kind of audit, the report is not submitted to the government body or authority, but it is submitted to the entity’s board of directors or shareholders.
Objective:
The main objective of the non-statutory audit of financial statements is to let an independent auditor review and then express their opinion based on their works. This is the same as the statutory audit.
In this kind of engagement, the auditor will have to identify the scope, objectives, and responsibility of the entity.
The engagement period, reporting deadline, audit fee, and other important information need to state in the engagement later properly. In addition, the auditor may need to state the approach that they will be used to perform their review.
Importance of statutory audit:
- This audit could prove to the government that their financial statements fully comply with the required standard and frameworks.
- The government will check the importance of information like reserve requirements and tax liability. This could help the entity comply with the law and prove its transparency to the government.
- The entity’s management team could access the expertise that they will get from the professional audit firm.
- Maintain the entity management’s integrity with shareholders and board of directors. Will could subsequently improve the relationship between management and board directors as well as shareholders.
