Are you an LLP with a turnover of over Rs 40,00,000 or does your capital contribution exceed Rs 25,00,000?
Are you a private limited company or a public limited company?
If you fall under the above categories, an audit of your financial statements is compulsory.
What is an Audit?
The audit is the systematic and independent examination of the books of accounts of a legal entity whether profit-oriented or not with a view to assessing if the financial statements provide a true and fair view.
Who should get their accounts audited?
The mandatory applicability of audit depends on the nature of the legal entity.
In the case of LLP, an audit is compulsorily required if the turnover exceeds Rs 40,00,000 or the contribution exceeds Rs 25,00,000 in any year.
For a private limited company, their accounts have to be compulsorily audited every financial year.
In fact, a private limited company has to appoint an auditor within 30 days of incorporation.
In case an auditor is not appointed within 30 days, the shareholders need to be informed. They will be required to appoint an auditor within 90 days of incorporation.
Benefits of Audit
Apart from the obvious peace of mind of complying with statutory requirements, there are several benefits of getting the books of account audited.
Statutory Compliance
It is mandatory to complete the audit once every financial year to meet the statutory requirements. Completion of the audit on time provides the owners with peace of mind. The cost and temporary discomfort of the audit process is a small price to pay compared to the price of non-compliance. Statutory compliance is an important parameter to measure business enterprises by.
Business Process Improvements
A proper detailed audit will take an unbiased look at your internal processes, systems and controls. The audit is the perfect opportunity for experts to suggest process improvements that can make your operations more efficient. Flaws in internal controls, governance, system controls, accounting practices and organizational culture can come to the fore through the audit process giving you the opportunity to fix them.
Enterprise Reputation
An audit is an independent verification of the financial statements of an enterprise that is considered an important parameter by all stakeholders, both existing and prospective. An audit provides credibility and confidence that the financial situation is correctly depicted. This is especially important for potential investors as the audit is an independent evaluation.
Early Identification and Prevention of Fraud
A proper yearly audit helps to identify flaws or loopholes in the system that are being misused or have the potential to be misused in future. Early detection will help the enterprise to plug the loopholes and prevent the occurrence of fraud. In the absence of audits, these frauds can continue for a very long time without being caught.
Better Decision Making
A proper audit confirms the accuracy of the financial statements of the enterprise. This detailed examination along with audit observations provides startups with critical information regarding the financial health of their enterprise. This information helps the business owners in their decision-making process related to financial planning, capital expenditure and budgeting.
Audit forms an important part of compliances and needs to be adhered to in order to avoid penalties. When you register your business entity, it is important to know the statutory requirements regarding audit and ensure that the needs are complied with.
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