The audit is associated with examining the company's accounts to determine whether the company's accounting records are correct, and its functions are legal. People often get confused about the objectives of choosing tax audit and statutory audit. The auditor conducts a tax audit under the Income-tax Act, and the latter is an audit related to the Companies Act, 2013.
Definitions of Statutory Audit and Tax Audit
Statutory Audit
The Indian judiciary regards a statutory audit as a mandatory audit for the corporate selector. The purpose of the audit is to keep the company's legal accounting records up to date. The Companies Act of 2013 governed the appointment of auditors, removal of auditors, rights and duties of auditors, and remuneration. The auditor conducts the audit in accordance with the law, and the audit will apply to the organization. Companies can appoint auditors by seeking approval from their shareholders at the company's annual meeting. In that case, they also have authority over the auditor's remuneration. The Companies Act of 1956 allows registered colonies to employ a chartered accountant. After preparing the final statements of the company's account records, the company can hire such a person. The statutory auditor will submit his report once the audit is completed. The audit report must include a fair view of the accounts as well as his personal opinions. The audited financial statements must adhere to the provisions of the Companies Act.
The following are the characteristics of statutory audit:
- The statutory auditor's qualifications are specified in the Companies Act of 2013. Only a practicing Chartered Accountant or a firm of practicing chartered accountants can be appointed as a statutory auditor in the case of a corporation. A statutory audit, on the other hand, must be conducted solely by external agencies. He cannot be an employee of the company whose accounts he is scrutinizing. The scope of the statutory audit is defined in the Companies Act of 2013. It cannot be changed by mutual agreement between the auditor and the auditee's business unit management.
- At each AGM, the company's owners or shareholders appoint a statutory auditor. The appointment is for a period of five years, after which the auditor may be re-appointed for another five years, subject to Rule 5 of the Companies (Audit and Auditors) Rules, 2014. Furthermore, the first statutory auditors of a company are appointed by its Board of Directors within 30 days of the company's registration. He is in office until the end of the first AGM.
- At the company's annual general meeting, a statutory auditor presents his report to the shareholders.
- The Annual General Meeting (AGM) of a company must be held within 6 months of the end of the fiscal year, and notice of the AGM must be given to all members at least 21 days before the AGM. Along with the notice of the AGM, shareholders should be given a copy of the Directors' Report and Audited Financial Statements, as well as the auditors' report.
- Statutory auditors should have constant access to the company's books of accounts and vouchers, and they should be able to obtain any information they require from company officers.
- The procedure for removing a statutory auditor before the end of his term is extremely complicated. The company can only remove the statutory auditor in a general meeting. It must also be approved by the federal government.
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The Companies Act of 2013 states that an auditor cannot accept the statutory audit of more than 20 companies in a single fiscal year. However, the Ministry of Corporate Affairs has exempted a dormant company and a one-person company from this limit. Furthermore, this cap does not apply to small businesses or private limited companies with less than 100 crores in paid-up capital.
Tax Audit
The goal of a tax audit is to find an audit of the taxpayer's accounts. A Chartered Accountant also conducts the audit. Section 44AB is the act that is associated with this audit. The auditor must express his thoughts and opinions about the audit report in this section. A tax audit is a legal requirement under the Income Tax Act of 1961. However, there is a stipulation for carrying out the audit. The condition is that the assessee is defined by the Income Tax Act. The assessee usually runs a business or works in a profession that allows him to profit from his job. He must also keep a business accounting record. Income tax considers profit to be taxable, and there is the possibility of a loss in that operation. The tax audit is described in detail in Chapter V of the Income-tax Act. The company's minimum turnover for performing a tax audit is more than Rs 1 crore, and its gross receipt cannot be less than Rs 25 lakhs. If the assesse's turnover and gross receipts exceed the aforementioned limit, the assessee can easily choose to have its accounts audited. Even if the company's income is less than the taxable amount, it can choose to have a tax audit. The auditor determines taxable income in accordance with the provisions of the Act.
The following are the characteristics of a Tax Audit:
- The deadline for submitting a tax audit report is September 30th of the relevant assessment year. Thus, if a taxpayer is required to have a tax audit performed under Section 44AB, he must submit his income tax return along with a tax audit report by September 30th. A tax audit report for fiscal year 2021-22, which corresponds to assessment year 2022-23, for example, must be obtained by September 30, 2022.
- Statutory auditors of a company may also conduct tax audits.
- There is a limit to the number of tax audits that a Chartered Accountant can perform. This is limited to 60 audits per fiscal year. In the case of a partnership, this limit will apply to each partner individually.
- A company's management has the authority to fire a tax auditor if the auditor has delayed submitting his report to the point where it is no longer possible to upload the audit report by the due date.
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A corporation's tax auditors are appointed by the Board of Directors (BOD). The Board may delegate this authority to any other officer, such as the CEO or CFO. In addition, in a partnership or sole proprietorship firm, a partner, proprietor, or a person authorized by the assessee can appoint auditors.
The Main Difference Between Tax Audit and Statutory Audit
The functions of a Tax audit and a Statutory audit differ in several ways. Here is a chart to help you understand the purposes and functions of these audits, as well as the distinction between tax audit and statutory audit.
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Areas for comparison
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Statutory audit
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Tax Audit
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What they represent
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The audit is a required audit that all businesses must perform.
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The Income Tax Act requires this audit if the company has a net turnover of more than 1 crore and receipts of more than 25 lakhs.
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The auditor who conducts the audit
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An external auditor may be hired by the company.
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Chartered accountant
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The audit process covered the following areas:
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The company's entire accounting record
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The accounts and other essential parts of the business that are taxed
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The function of the audit
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Ensure the company's accounting is transparent.
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Maintaining the accounts and determining the company's exact taxable income
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Detailed Differences Between the Two Audits:
- A statutory audit can be performed by any external auditor, whereas a tax audit can be performed by a practising Chartered Accountant hired by the company.
- Section 143 of the Companies Act of 2013 mandates statutory audits. A tax audit, on the other hand, is governed by Section 44AB of the Income Tax Act of 1961.
- A statutory audit is required of every company registered under the Companies Act of 2013. On the other hand, if a company, LLP, or Partnership Firm, as well as Individuals or any Professionals, have a turnover or Gross Receipts that exceed the threshold limit, they can choose a tax audit.
- The Turnover or Gross Receipt limit is not required for performing a Statutory Audit. A statutory audit is required for all businesses, even those with no revenue. Tax audits, on the other hand, are required for any organization with an annual turnover of more than 1 crore and gross receipts of more than 25 lakhs.
- A company is required to conduct a statutory audit within six months of the end of a fiscal year. However, before beginning the audit, the company must hold a general meeting with company officials and shareholders. A company or individual, on the other hand, must perform a Tax Audit and file the Tax Audit Report with the Income Tax Department by September 30th of each fiscal year.
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If the company fails to comply with a statutory audit, it may be fined between $25,000 and $5,000,000. The penalty for officers who fail to comply with the audit is between $10,000 and $1,000,000. In the event of a tax audit, the penalty could be as much as 0.5% of total sales, gross receipts, or turnover. If the penalty is paid in cash, it will be at least $150,000.00.
Is a tax audit required if a person's accounts have already been audited under another law?
Companies and cooperative societies, for example, are required by law to have their financial statements audited. Section 44AB states that if a person is required to have his accounts audited by or under other legislation, he is not required to have his accounts audited again to comply with the requirements of Section 44AB. In such a case, having the accounts of his or her business or profession audited under such law and obtaining the audit report as required under such other law, as well as a report from a chartered accountant in the form specified under Section 44AB, i.e., Form No. 3CA and Form 3CD, will suffice.
As a result, if a statutory audit has already been completed, a tax audit is not required.
Conclusion
As a result, it is possible to say that statutory audits and tax audits serve entirely different purposes. A statutory audit has a broader scope than a tax audit. Furthermore, while statutory audits are required for all companies, tax audits are only required for companies subject to the Income-tax Act. Connect with Compliance Calendar LLP to receive the best legal assistance for your organization, including statutory and tax audits.