“Statutory Audit” and “Tax Audit” are two essential types of audits that any company must go through. While both audits involve the examination of financial records, their objectives, scopes, and the entities involved differ significantly. Statutory audits focus on financial statement accuracy and compliance with accounting standards, while tax audits focus on tax compliance and the correct calculation of taxes owed by the taxpayer.
What is a Statutory Audit?
A Statutory Audit is a legally required examination of a company’s financial statements and records to ensure accuracy and compliance with applicable laws and regulations. Statutory audits are typically conducted by independent certified public accountants (CPAs) or audit firms who are registered with relevant regulatory bodies. The objective of a statutory audit is to provide assurance to stakeholders, such as shareholders, creditors, and regulatory authorities, regarding the company’s financial health, integrity, and compliance with statutory requirements.
Key Characteristics of Statutory Audit:
- Legal Requirement: Statutory audits are mandated by law or regulation. They are typically required for certain types of entities, such as public companies, large private companies, or entities receiving government funding.
- Independence: The audit is conducted by an independent, external auditor who is not affiliated with the company being audited. This independence ensures objectivity and impartiality in the audit process.
- Objective: The primary objective of a statutory audit is to provide assurance to stakeholders, such as shareholders, creditors, and regulatory authorities, regarding the accuracy and reliability of the company’s financial statements.
What is Tax Audit?
A Tax Audit is an examination of a taxpayer’s financial records and other relevant documentation by tax authorities to verify the accuracy and completeness of the taxpayer’s tax returns and compliance with tax laws. Tax audits are conducted by government agencies, such as the Internal Revenue Service (IRS) in the United States or the HM Revenue and Customs (HMRC) in the United Kingdom, to ensure that taxpayers are paying the correct amount of taxes owed under the law.
Key Characteristics of Tax Audit:
- Government Authority: Tax audits are conducted by government agencies responsible for administering tax laws and regulations, such as the IRS or HMRC.
- Objective: The primary objective of a tax audit is to verify the accuracy and completeness of the taxpayer’s reported income, deductions, credits, and other tax-related items to ensure compliance with tax laws.
- Selection Process: Taxpayers may be selected for audit based on various criteria, including random selection, specific issues or transactions identified by the tax authority, or red flags detected through data matching or automated systems.
Difference between Statutory Audit and Tax Audit
|
Basis |
Statutory Audit |
Tax Audit |
|---|---|---|
|
Meaning |
Statutory audit is made compulsory by the law. |
Tax audit is conducted in case of turnover of assessee reaches a specific limit. |
|
Governing Act |
Companies Act 2013 or any other statute governing the corporation. |
Income Tax Act, 1961. |
|
Purpose |
To ensure that the companies financial statements are authentic and transparent. |
To ensure proper maintanence of books of accounts and they reflect the true taxable income of the assessee. |
|
Audit of |
It is the audit of full accounting records of the company. |
The audit is performed only on tax related matters. |
|
Time period |
A company has to perform statutory audit within six months of the end of an accounting year. |
A company or a professional must conduct the tax audit and file the report with the Income Tax Department by September 30 of each fiscal year. |
|
Auditor |
It is conducted by external auditors. |
This is performed by practising Chartered Accountant. |
|
Applicable |
All companies |
All companies |
|
Report Submission |
Shareholders |
Income Tax Department |
|
Documentation |
Companies has to provide documents supporting financial statements and disclosure at the time of audit. |
Assessee must provide relevant documentation and evidence to support the information reported on their tax returns during audit. |
Conclusion
In summary, statutory audit and tax audit conducted for entirely different purposes. A statutory audit is a broder term as compare to tax audit. In addition, all the companies are required to perform statutory audit, however tax audit is only applicable to companies or professionals if they are subject to Income Tax Act rules.
Statutory Audit and Tax Audit – FAQs
What is the meaning of statutory audit?
A statutory audit is conducted mandatory according to law to review the accuracy and transparency of the companies financial statements and records.
Who should be carrying out statutory act?
All the companies registered under Companies Act, 2013 needs to do statutory audit.
What is the meaning of tax audit?
A tax audit is the process of verifying the financial records of assesses to determine their accurate taxable income.
Who conducts the work of tax audit?
A practising Chartered Accountant performs the tax audit of the companies and individuals.