Types of Audit – Statutory Audit and Non-statutory Audit
A statutory audit is an engagement of a financial statement audit between an entity and an independent audit firm in Johor Bahru that comply with the requirement of local laws in the sector that the organisation is operating. The financial statement audit is required by law in most countries and the auditors need to comply with the principles of auditing when they are performing the audits. According to the requirement of law, entities that operate in those countries need to submit their audited financial statements (Also see Financial Statements that Financial Accounting Generates) to the related authorities. As an instance, the management of an insurance company needs to submit its company’s financial statements to the relevant government department.
Among the examples of the related government bodies, the tax department is the best example in which the entities have to submit their annual financial statements and audit report. This is for the authorities to review and examine whether the organisations are paying their taxes properly (Also see Types of Audit – Tax Audit).
The primary aim of the statutory audit is to allow the qualified auditors to assess the objectivity and independence of the financial statements of the entities. Also, they need to identify whether there is any material misstatements (Also see What is Audit Materiality?) in the financial statements before expressing audit opinion on those statements.
What differs the statutory audit from the usual financial statement audit is that, in normal conditions, some organisations may have their financial statements audited due to the requirement from the shareholders or the board of directors. However, in the case of statutory audit, the entity still has to engage the audit services, although its shareholders or board of directors do not want as it is the requirement of law. If that entity refuses to engage external auditors to review its financial statements, it will probably face legal enforcement from the related authorities.
A non-statutory audit refers to the financial statement audit, which is not a requirement of the laws. Some entities are exempt from the requirement of laws, yet they still choose to engage an audit firm to have a financial statement audit. This can be due to the demand from the board of director, shareholders, management, or sometimes the parent company in some cases.
Usually, the small or newly set up company will request the auditors to review its financial statements, although such an action is not required by law. The companies do not have to submit the reports to the authorities or the government bodies. Instead, they will send the report to the shareholders or the board of directors.
The primary aim of a non-statutory audit has no difference from the statutory audit, that is to allow an independent auditor to review and express their opinion on the financial statement of a company according to the results of their audit work (Also see What is Audit Working Paper?).
In this type of engagement, the auditors need to determine the audit objective (Also see What are the Audit Procedures and Its Objective?), audit scope and the responsibilities of both the company and the auditors. Besides, the auditors should state the audit fee, reporting deadline and the engagement period in the engagement letter. Also, the auditors have to state the audit approach (Also see What is Substantive Audit Approach?) that they will use when they perform the financial statement review.