December 7, 2021

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Meaning and Importance of Statutory Audit

Meaning and Importance of Statutory Audit
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Statutory audit, as it were, is more pronounced in companies that have their shares listed or traded in a recognized stock exchange market. Such as the Nigerian Exchange Group. In this article, let’s learn the meaning and importance of this term.

Definition of Statutory Audit

Statutory audit means the examination of organization accounting books and financial statements to comply with a government law or Act.

Explanations of Statutory Audit

Statutory audits may apply to a company or industry. In this situation, the companies in the industry must comply. For example, it is a must for all money deposit banks to employ the service of an external auditor. Whether it is a public company or a small one, as long as it accepts deposits, auditing becomes compulsory.

Statutory audit involves examining the business books of accounts. This includes bank statements and their reconciliations, payroll records, accounts receivables, and account payables, carrying out audit trails, among other things. In addition, the prepared financial statements will be examined. This is to ensure compliance with generally accepted accounting practices (GAAP). And government legislation that affects the industry.

The statutory audit does not apply only to private sector organizations. Government ministries, departments, and agencies also engaged in statutory audits. This audit is legally binding. That means affected organizations don’t have a choice. Why? Failing to comply means going against the law.

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In Nigeria, statutory audits are not necessary for organizations registered as business names. An individual, a partnership, a club, or a nonprofit can register as a business name with the corporate affairs commission. However, organizations that register as limited liability companies must employ the service of external auditors.

Importance of Statutory Audit

Statutory audit adds value to the financial statement. A good investment analyst and another user of financial statements will always examine the auditor’s report before analyzing the financial reports.

Compliance helps to avoid sanctions and protect the business from regulatory risk. In some industries, performing statutory audits is compulsory. Therefore, failing to do so results in regulatory risk which may attract fines.

The external auditor may see what the company’s management cannot see from the inside. And provide possible solutions to it.

It helps users trust the financial statements prepared by the directors. A top-notch touch by an external auditor, especially if it is coming from one of the big 4 accounting firms, will increase the trust of the financial reports by various users.

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Conclusion

This is necessary for a limited liability company in Nigeria. And it is about complying with regulators. All listed companies in the stock exchange market perform statutory audits. Doing so builds confidence in various users of financial statements.

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