Most larger entities must complete statutory audits each year as a legal requirement. A statutory audit reviews a company’s financial statements to verify their accuracy and completeness.
Public companies, government agencies, and nonprofit organizations must conduct statutory audits. These audits play a significant role as verification tools. They ensure financial statements remain free of material misstatements and reflect the company’s financial position accurately. Some businesses can skip this requirement if they meet certain criteria. Companies with annual turnover below £10.2 million don’t need audits for periods before April 6, 2025.
Let’s break down the simple definition of statutory audits and find out who needs one. We’ll get into the differences between statutory and non-statutory audit definitions. Statutory audits follow a strict schedule, but organizations can conduct non-statutory audits whenever they choose. Understanding the whole audit process will help you prepare better if your business needs this financial review.
What is a Statutory Audit?
A statutory audit checks an organization’s financial records as required by law. This independent review confirms if financial statements show a true and fair view of a company’s financial position and performance.
Statutory audit simple definition
A statutory audit is a legally required review that checks if a company’s financial statements are accurate and complete. The process involves a detailed look at financial records such as bank balances, transactions, and accounting documents. The word “statutory” means this type of audit must be done because laws or an organization’s management require it.
Statutory audit definition in accounting
Accounting professionals see a statutory audit as a detailed review done by an independent external auditor. The goal is to make sure financial statements don’t have major errors. Auditors will:
- Follow procedures to get audit evidence
- Check if financial statements follow laws and accounting standards
- See if the business can keep operating
The audit ends with an official report that states whether the financial statements accurately show the company’s financial position.
Why audits are required by law
Laws require statutory audits to protect stakeholders of all types. These audits make sure organizations follow relevant laws, regulations, and accounting standards.
These reviews create transparency, keep companies accountable, and build trust with investors, shareholders, and business partners. Statutory audits matter because they:
- Give investors and shareholders confidence by confirming financial statements are reliable
- Help catch financial risks through detailed analysis
- Make the company better by suggesting strategic improvements
Statutory audits don’t suggest wrongdoing. They act as a regular check where professional third parties review various documents to discourage financial crimes.
Who Needs a Statutory Audit and Who Doesn’t
Companies need statutory audits based on their size, structure, and industry. Each business has different audit obligations that depend on specific criteria.
Legal thresholds for mandatory audits
Different jurisdictions set clear thresholds that make statutory audits mandatory. These usually include:
- Total assets: Companies that have assets above certain values
- Annual turnover: Businesses with revenue above set limits
- Employee count: Organizations with staff numbers above defined levels
Many countries require statutory audits when companies meet two of these three criteria over consecutive financial years. These rules help balance oversight needs with what companies can handle.
Exemptions for small companies
Small businesses can often skip audits to save on costs and paperwork. Companies that qualify as “small” under the law don’t need statutory audits if they stay under certain limits.
To name just one example, see UK companies. They don’t need audits when they meet two of these conditions:
- Annual turnover stays under specified limits
- Balance sheet total remains below defined amounts
- Average employee numbers stay under certain levels
All the same, exempt companies must keep proper accounting records and prepare yearly financial statements that meet required standards.
Special cases: charities, groups, and regulated entities
Some organizations need statutory audits whatever their size:
- Charities: They face audit requirements at lower thresholds than regular businesses
- Group companies: Subsidiaries might need audits even when they qualify for exemption
- Regulated entities: Financial firms, insurers, and listed companies must have audits due to public interest
- Public sector organizations: Government bodies usually need statutory audits
Shareholders with enough voting rights can just need a statutory audit even for exempt companies. It also helps that companies with complex finances or those looking for investors often choose to get audits to boost their credibility.
Statutory vs Non-Statutory Audits
The sort of thing I love about statutory and non-statutory audits is their significant difference. Businesses need this knowledge to understand their obligations and opportunities on its coverage.
Non statutory audit definition
A non-statutory audit lets companies voluntarily examine their financial statements without legal requirements. The organization’s directors or shareholders initiate these audits when no law mandates them. These reviews give businesses more flexibility than mandatory ones. Companies can focus on specific concerns like internal processes, streamline processes, or manage risks better.
Key differences in purpose and scope
Legal requirements and objectives create the main difference between these audit types. Statutory audits ensure compliance with laws and financial regulations. Non-statutory audits can adapt to specific business needs such as performance evaluation or risk assessment.
Key differences include:
- Legal requirement: Legally mandated statutory audits contrast with voluntary non-statutory audits
- Focus: Regulatory compliance drives statutory audits while non-statutory audits examine internal controls and business efficiency
- Flexibility: Organizations can adjust non-statutory audit scopes based on their specific objectives
- Frequency: Annual statutory audits differ from non-statutory audits that happen at the organization’s convenience
Who performs each type of audit
Qualified external auditors must conduct statutory audits independently. These professionals hold certifications from recognized bodies like ICAEW or ACCA. Non-statutory audits allow more flexibility – external consultants or internal auditors can perform them.
Reporting and compliance differences
Statutory auditors provide formal reports with opinions about financial statements’ accuracy. These opinions come as unqualified (showing accurate statements) or qualified (highlighting concerns). Non-statutory audits take a different approach. They don’t always need formal reports and are a great way to get recommendations that improve internal controls and operational efficiency.
How the Statutory Audit Process Works
A systematic and structured methodology helps auditors deliver reliable financial reports. Auditors must really understand how a business works to examine it properly.
Planning and risk assessment
Auditors create an overall strategy before starting their fieldwork. This strategy helps develop the audit plan. This crucial phase helps identify key risk areas and learn about management’s risk mitigation approach. It also determines materiality levels. Risk assessment procedures help auditors learn about the entity’s environment, including internal controls. These procedures identify potential material misstatements.
Evidence collection and testing
Audit evidence creates the foundations for conclusions. Auditors collect information through several methods:
- Inspection of records and documents
- Observation of processes
- External confirmations
- Recalculation of mathematical accuracy
- Re-performance of controls
- Analytical procedures
The evidence must be sufficient in quantity and appropriate in quality to be reliable.
Audit report and opinion types
Auditors issue one of four opinions after completing their work:
- Unqualified opinion: Financial statements fairly represent the company’s position
- Qualified opinion: Material but not pervasive issues exist
- Disclaimer of opinion: Inability to get sufficient evidence
- Adverse opinion: Material and pervasive misstatements present
Role of internal controls
Internal controls give reasonable assurance about financial reporting reliability. Strong controls let auditors reduce testing since they trust the financial information more. The core team oversees these controls through audit and risk committees.
Auditor independence and qualifications
Auditors must stay independent throughout their engagement. Many jurisdictions require rotation to prevent familiarity risks. Auditors must also have proper licenses and follow professional standards.
Conclusion
Statutory audits are crucial for financial transparency and accountability in organizations of all sizes. These legally mandated examinations make sure financial statements show a true picture of a company’s position. Companies that exceed specific thresholds in assets, turnover, and employee numbers must follow these requirements. Smaller entities often qualify for exemptions.
Statutory audits differ from non-statutory ones in timing and scope. Qualified external auditors must conduct them following strict guidelines. This difference matters to organizations that plan their financial oversight strategies. The audit process starts with planning and moves through risk assessment to evidence collection and final reporting. This gives stakeholders reliable assurance about their financial statements’ accuracy.
Smart companies see statutory audits as more than just regulatory requirements. These audits are a great way to get insights to improve internal controls and financial management. A detailed analysis helps prevent financial risks and builds trust with investors, shareholders, and business partners. The recommendations from these audits often lead to better financial practices.
Your organization’s audit requirements are key to responsible financial management. Proper accounting records and transparent financial reporting remain vital for success and credibility in today’s business world, whether you need a statutory audit or qualify for exemptions.
FAQs
Q1. What is the main purpose of a statutory audit?
A statutory audit is primarily conducted to verify the accuracy and completeness of a company’s financial statements, ensuring they present a true and fair view of the organization’s financial position. It helps build transparency, maintain accountability, and strengthen trust among stakeholders.
Q2. Are all companies required to undergo a statutory audit?
No, not all companies are required to undergo a statutory audit. The requirement typically depends on factors such as the company’s size, annual turnover, and number of employees. Small businesses often qualify for exemptions, while larger entities and those in regulated industries are usually mandated to have statutory audits.
Q3. How does a statutory audit differ from a non-statutory audit?
The main differences are that statutory audits are legally required and focus on regulatory compliance, while non-statutory audits are voluntary and can be tailored to specific business needs. Statutory audits must be conducted by qualified external auditors, whereas non-statutory audits can be performed by internal auditors or external consultants.
