In Simple words “Audit” means to examine something thoroughly.
Audit refers to the inspection or examination of different books of accounts of a company by an auditor followed by physical checking of the inventory to make sure that all departments are following the documented system of recording transactions of that company.
Audit is done to check the accuracy of financial statements which are provided by the organization. The three main types of Audits are: – internal Audits, External Audits and Internal Revenue Service Audits. Audit can be done by both internally by employees or heads of a particular department and externally by an independent auditor or outside firm. Auditing by an independent authority can be done to check and verify the accounts to ensure that all the books of accounts are done in a fair manner and there is no fraud or misinterpretation that is being conducted by the organization.
Any limited company registered under the Companies Act has to close its accounts every financial year and prepare the financial statements as per the books of accounts giving true and faire view of the affairs of the company. The financial statements of the company audited by the statutory auditor and have to be placed before the members for approval. All companies have to get its books of accounts audited by its statutory auditor irrespective of size and turnover and file the same with the Registrar of their companies.
Steps in Auditing Process
The four main steps in the process of Auditing are as given below:-
- The first step in auditing process is to define the Auditor’s role and the terms of engagement which is usually in the form of a letter that is signed by the client.
- The second step in the process of auditing is to plan the audit which would include the details of deadlines and the departments that the auditor would cover. It can be either a single department or whole organization which the auditor would be covering. The audits of the company can be happen on last day or even a week depending upon the nature of the audit.
- The third important step in auditing is compiling the information from the audit. The findings and information are usually put out in a report or compiled in a systematic manner, when an auditor audits the books of accounts or inspects financial statements of a company.
- The Last and important step in auditing is reporting the result. The results of the audit of a company are documented in the auditor’s report.
Appointment of the Auditor of a Company
The audits of every company shall be carried out by its statutory auditor appointed by the company in its Annual General Meeting. Any Chartered Accountant who have a valid certificate of practice under Chartered Accountants Act, 1994 can become an auditor of the company. A company also can appoint a firm as its auditor if majority of partners are practicing in India are eligible for appointment.
Appointment of First Auditor by a Company
The Board of directors of a company appoints the First Auditor of a Company within 30 days from the date of incorporation of the company. If the boards of directors are failing in appoint the auditor, the members of the company have to appoint the first auditor at an Extraordinary General Meeting within 120 days from the date of the incorporation of Company.
Appointment of auditor at AGM of Company
A company’s statutory auditor shall be appointed at an AGM by the members of the company who shall hold the office for 5 consecutive years unless removed or the auditors resigns himself.
Rotation of Auditors
The appointment of auditors of a company at an AGM is for a period of 5 years. Rotations of the auditors in the companies are applicable for the companies that come under the categories given below:-
- Listed Companies
- Unlisted Public Company having paid up share capital of rupees 10 crores or more than 10 crore.
- Private Limited companies having paid up share capital of rupees 50 crore or more.
- Unlisted Public Company and Private company having public borrowings from banks, financial institutions or public deposits of rupees 50 crore or more.
Rotations of Auditors are not applicable in the Small Companies and One Person Company.