Audit & Assurance Practical Advisory
Compliant with ICAI Standards on Auditing, Central Board of Direct Taxes (CBDT), and CBIC GST notifications.
What You Need to Know at a Glance
- Companies Act 2013 mandates statutory audit for all registered companies regardless of capital or turnover.
- CARO 2020 requires enhanced scrutiny on Benami property proceedings, undisclosed income, working capital utilization, and crypto assets.
- Fixed asset registers must be reconciled with physical verification reports conducted at reasonable intervals.
- Bank balance confirmations, loan agreements, and customer balance circularizations should be initiated at least 3 weeks before audit start.
1. What is a Statutory Audit & Why Does It Matter?
Under Section 139 of the Companies Act 2013, every company registered in India must have its annual financial statements examined and reported upon by an independent, qualified Chartered Accountant.
Beyond meeting a legal obligation, an audit report provides independent credibility to financial statements, ensuring suppliers, commercial lenders, venture capitalists, and tax authorities that numbers represent a true and fair view.
2. Pre-Audit Documentation Checklist for Finance Teams
Preparing your accounting files before the audit team arrives reduces audit duration and prevents last-minute stress:
- Trial Balance & Ledger Scrubbing: Clear all suspense ledgers, unallocated debit/credit entries, and stale bank reconciliation entries.
- Physical Inventory Verification: Conduct physical stock taking as on March 31st with valuation matching AS-2 / Ind AS 2 (lower of cost or net realizable value).
- Fixed Asset Register (FAR): Verify asset descriptions, locations, original purchase costs, depreciation computations, and physical tagging.
- Third-Party Confirmations: Compile external confirmation letters for bank balances, fixed deposits, term loans, top 20 debtor balances, and top 20 creditor balances.
3. Navigating CARO 2020 Reporting Clauses
The Companies (Auditor’s Report) Order (CARO 2020) substantially elevated the level of diligence required from statutory auditors. Key focus areas include:
1. Working Capital Borrowings: Whether quarterly returns/statements submitted to banks (stock statements) align with books of accounts.
2. Benami Property: Whether any proceedings have been initiated against the company for holding Benami property under the Benami Transactions Act.
3. Undisclosed Income: Whether previously unrecorded transactions surrendered during tax search/surveys have been appropriately captured in books.
4. Material Uncertainty on Going Concern: Whether financial ratios, ageing of liabilities, and cash flows indicate risk of default within 1 year.
4. Internal Financial Controls (IFC) Testing
Section 143(3)(i) requires auditors of private companies (exceeding turnover thresholds) to report whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls.
Documenting standard operating procedures (SOPs) for Procure-to-Pay (P2P), Order-to-Cash (O2C), and Hire-to-Retire (H2R) provides tangible evidence of operating internal controls.
5. Frequent Auditor Observations & How to Avoid Them
1. Unreconciled GST/TDS Ledgers: Ensure 26AS, GSTR-2B, and GSTR-3B tie directly into statutory liability accounts.
2. MSME Dues Beyond 45 Days: Section 43B(h) disallows deduction for payments delayed beyond statutory limits; ensure MSME vendors are flagged and paid on time.
3. Related Party Transactions (Section 188): Ensure all loans, advances, or contracts with directors or relatives have prior Audit Committee / Board approval.
Frequently Asked Questions
CA Pranav Peddi
Partner & Assurance Lead
Guiding corporations, startups, and NRIs on tax planning, GST structuring, and regulatory audits. P. Ramesh & Associates has provided dependable financial counsel since 1988.