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Confusion always looms over the difference between internal audit and statutory audit in terms of the appointment of auditors, their eligibility criteria, scope of activities, degree of independence, pay and remuneration, removal from the position etc. This piece of writing discusses all these aspects in detail.
An internal Auditor is usually appointed by the people in the top echelons of the management of the company. On the other hand, a statutory auditor is appointed by the shareholders or at the Annual General Meeting (AGM) of the Company for ensuring greater scrutiny.
One of the most important difference between internal audit and statutory audit is on the basis of the legal need for appointing one. An internal auditor is appointed as an additional layer of security so that all the processes are being complied properly. This acts as an additional layer of protection and gives a company reality check. It also ensures that statutory flaws are not found at the time of statutory audit. As against internal audit, statutory audit is mandatory to be performed. The government has laid down various laws in case statutory audit is not performed.
There is a difference between both types of audits in terms of their timing i.e. when such an audit can be conducted. An internal audit can be conducted at any time of the year without giving any prior rigid announcements whereas a statutory audit can be initiated once the final accounts have been prepared by the company. Conducting statutory audit is not a regular activity of the management.
The law does not provide any specific eligibility criteria or qualification norms for any person to qualify as an internal auditor of the company. As against it, a number of eligibility criteria have been laid down by the law in order to become a statutory auditor of a company. Therefore, a statutory auditor to a certain degree is more credible than an internal auditor.
Another major difference between internal audit and statutory audit is the scope of activities that both are involved in. An internal audit’s scope of work is usually broader as compared to an internal audit. An internal auditor needs to take care of the accounts and other internal activities of the organisation and simultaneously suggest measures and implement processes to make the working of the company compliant with the necessary laws, rules and regulations whereas a statutory audit is only concerned with the spotting of errors, inspection of accounts, checking financial reports and other related documents.
The degree of independence with which audit is performed is another point of difference. An internal auditor has been appointed by the organisation to perform internal audit, therefore he is under the control of the management. However, appointment of a statutory auditor is the mandate of an organisation where there can be no interference from the management. Therefore, the control over a statutory auditor is fairly less from the side of the management.
The process of the removal of an auditor is a major difference between internal audit and statutory audit. Since an internal auditor is appointed by the management of the company and there is no such mandatory requirement on part of the company to appoint an internal auditor, so the management is free to hire and fire an internal auditor as it deems fit on the basis of the requirements of their organisation. However, a statutory auditor is appointed because of the statutory requirements and can be discharged from the position at the AGM by the members. Therefore, flexibility in the removal of a statutory auditor is fairly very low.
The remuneration received by an auditor is also a point of difference between internal audit and statutory audit. The internal auditor is appointed by the management and they decide the pay and remuneration of the internal auditor whereas in case of statutory auditor decide the pay and remuneration of the statutory auditor but the fees or pay is fixed through the management’s decision.
One way to point out a difference between internal audit and statutory audit is the compulsion of preparing and submission of audit report. The law does not make it mandatory for an internal auditor to prepare and present a detailed audit report to the management of the company on completion of the audit process. Contrary to it, in the case of statutory audit, the law make it mandatory for a statutory auditor to prepare and present a detailed audit report consisting of audit details to the management of the company.
From the above discussion it can be seen that a number of differences exist between both internal audit and statutory audit; however, the importance and necessity in their domains cannot be challenged. Understanding the difference between internal audit and statutory audit is very much important as both are important for building any company’s financial and fiscal reputation. Therefore, all the companies whether small or big must engage the services of auditors for smooth and sound functioning of their business ventures.
Read our Article:Statutory Audit Checklist for Manufacturing Companies