Understanding the Differences Between External Audit and Statutory Audit

When it comes to financial compliance and assurance, understanding the differences between an external audit and a statutory audit is crucial. This article will provide a clear distinction between these two types of audits, their purposes, and the regulations that govern them.

External Audit

Definition: An external audit is an independent examination of an organization's financial statements. Unlike statutory audits, external audits are often conducted voluntarily by organizations looking to enhance their internal controls, improve financial health, or to provide stakeholders with an objective assessment of their financial statements.

Purpose: The main objective of an external audit is to ensure that the financial statements are accurate and adhere to the relevant accounting standards. External auditors are external parties who do not have any affiliation with the organization being audited.

Scope: External audits can be performed for a variety of reasons, including compliance with regulatory requirements, improvement of internal controls, and providing assurance to stakeholders. They are not always mandated by law.

Statutory Audit

Definition: A statutory audit is a specific type of audit that is legally required by law. Unlike voluntary external audits, statutory audits involve the examination of financial statements to ensure compliance with statutory requirements and regulations.

Purpose: The primary goal of a statutory audit is to ensure that the financial records of an organization are accurate and adhere to relevant laws and regulations. These audits are typically required for public companies and certain private entities, depending on the jurisdiction and size of the organization.

Scope: Statutory audits have a broader scope due to legal requirements. They often involve more detailed scrutiny and are conducted to meet specific regulatory standards. Statutory auditors, who are typically required to be qualified and knowledgeable in statutory requirements, are appointed in accordance with specific statutes, such as the Company Act.

Summary

In essence, while all statutory audits are external audits, not all external audits are statutory. Statutory audits are legally required and focus on compliance, whereas external audits can be voluntary and provide assurance and insights into financial practices.

For more detailed information on external audits, including the appointment of special external auditors for specific purposes, refer to the provided links.

Statutory audits are authorized and governed by law or specific statutes, while

audit conducted voluntarily without legal or statutory force is considered non-statutory. Generally, statutory audits are conducted by Chartered Accountants as required by the Ministry of Corporate Affairs. An external audit is authorized by any government law or statute and is not voluntary by any business house.