The objective of a statutory audit is to ensure the correctness, dependability, and compliance with applicable laws and regulations of an entity's financial statements, records, and activities. An external auditor, also known as a statutory auditor or an external auditor, who is qualified and independent, conducts the legally required audit.

A statutory audit's goal is to reassure interested parties, including shareholders, lenders, investors, and the general public, about the entity's financial situation, performance, and compliance with legal and regulatory obligations. The audit procedure entails a methodical and impartial evaluation of the organisation's accounting procedures, internal controls, and financial records.

The balance sheet, income statement, cash flow statement, and notes to the financial statements are all examined by the auditor during a statutory audit. The auditor looks over the supporting records, confirms the validity of financial transactions, evaluates the effectiveness of internal controls, and makes sure that accounting standards and applicable laws are being followed.

The internal control systems of the entity are evaluated as part of the statutory audit since they are intended to protect assets, stop and detect fraud, and guarantee the accuracy of financial reporting. If any flaws or defects are found, the auditor makes suggestions for improvement after evaluating the effectiveness of these controls.

Objectives of Statutory Audits

An entity's financial statements, records, and activities will be independently and impartially examined by a statutory auditor to make sure they are presented truthfully, accurately, and in line with the relevant financial reporting standards, laws, and regulations. The following are the main goals of a statutory audit:

Providing an opinion regarding financial statements: The auditor's principal goal is to provide an opinion regarding whether the financial statements give an accurate and fair representation of the entity's financial status, operating results, and cash flows. The financial data supplied to stakeholders gain credibility and dependability as a result of this view.

Legal and regulatory compliance: The auditor confirms that the financial statements abide by all applicable legal requirements as well as accounting standards. This guarantees that the firm complied with the applicable accounting principles and provided all pertinent data.

Fraud detection and prevention: As part of the audit process, the internal controls and systems are evaluated to find any potential fraud threats. It is the responsibility of the auditor to identify material misstatements brought on by fraud or error and to notify management or the proper authorities of any abnormalities.

Internal control evaluation: The auditor assesses the internal reporting controls of the entity, including their effectiveness and design. This evaluation offers suggestions for improvement and aids in identifying any flaws or gaps in the internal control systems.

Increasing credibility and assurance: Statutory audits increase stakeholders' assurance of the financial information supplied by the company, including investors, lenders, and the general public. The independent auditor's judgement gives the financial statements more veracity and credibility, which fosters trust in the organisation.

Facilitating accountability and transparency: The auditor makes sure that the company is responsible for its financial reporting by conducting a statutory audit. The auditing process fosters openness by offering a frank evaluation of the entity's financial performance and health.

Challenges and Limitations of Statutory Audit

There are several obstacles and restrictions that statutory auditors must work around. Some of the main difficulties and restrictions are as follows:

• Despite the efforts of auditors, there are nevertheless some audits that have intrinsic limitations. Auditors cannot guarantee the discovery of all material misstatements or fraud since they rely on sampling techniques and other risk assessment approaches. The financial statements are subject to reasonable assurance from the auditors, but not perfect assurance.

• The complexity of transactions and structures, As corporate transactions and structures get more intricate, auditors may have difficulty identifying and evaluating the risks that are involved. Evaluation of the correctness and completeness of financial statements can be challenging in cases where there are novel and complex financial instruments, complicated revenue recognition processes, or worldwide activities.

• Constraints of time and resources, Statutory audits are frequently undertaken in a short amount of time, which might put pressure on auditors to finish the audit procedures. This time restriction might restrict the breadth and scope of testing and analysis, thereby making it harder to spot specific risks or mistakes.

• Reliance on management representations, When conducting the audit, auditors rely on statements provided by management, including financial records and justifications. The effectiveness of the audit may be greatly impacted if management knowingly supplies inaccurate or misleading information. There is still some reliance on the honesty and integrity of management even while auditors carry out procedures to confirm the accuracy of management assertions.

• Auditors may establish long-term connections with clients, which could result in familiarity and potential prejudice. This familiarity may impair the auditor's objectivity and independence, making it more difficult for them to accurately detect and report major misstatements or irregularities.

• The environment for business and regulation is changing quickly, and auditors have a difficult time keeping up with these changes. To effectively address new difficulties, auditors must continuously upgrade their knowledge and abilities. These factors include new accounting standards, expanding laws and regulations, and growing hazards.

• Limited scope and focus: Statutory audits may not cover all facets of an entity's operations, even though they are primarily concerned with financial statements. Non-financial information, such as sustainability reporting or cybersecurity controls, which are becoming more significant to stakeholders, may not be guaranteed by auditors.

• Challenges in fraud detection: Since criminals might use sophisticated methods to modify financial data, detecting fraud can be difficult. To identify potential fraud threats, auditors must rely on professional scepticism, risk assessment processes, and internal control evaluations. However, these precautions may not always be effective.

Even while statutory audits have their drawbacks, it's vital to remember that they are still essential for boosting accountability, openness, and the accuracy of financial data. To reduce risks and give stakeholders an acceptable level of assurance, auditors constantly seek to address these issues and enhance audit procedures