What is a Statutory Audit?
A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. The purpose of a statutory audit is to determine whether an organization is providing a fair and accurate representation of its financial position by examining information, such as bank balances, bookkeeping records, and financial transactions.
How Statutory Audits Work
The term statutory denotes that the audit is required by statute. A statute is a law or regulation enacted by the legislative branch of the organization’s associated government. Statutes can be enacted at multiple levels, including federal, state, or municipal. In business, a statute also refers to any rule set by the organization’s leadership team or board of directors.
An audit is an examination of records held by an organization, business, government entity, or individual. Generally, this involves the analysis of various financial records or other areas. During a financial audit, an organization’s records regarding income or profit, investment returns, expenses, and other items may be included as part of the audit process.
The purpose of a financial audit is often to determine if funds were handled properly and that all required records and filings are accurate. At the beginning of an audit, the auditing entity makes known what records will be required as part of the examination. The information is gathered and supplied as requested, allowing the auditors to perform their analysis. If inaccuracies are found, appropriate consequences may apply.
Being subject to a statutory audit is not indicative of any wrongdoing, as the purpose of the audit is to deter such activities.
Being subject to a statutory audit is not an inherent sign of wrongdoing. Instead, it is often a formality designed to help prevent such activities, such as the misappropriation of funds, by ensuring regular examination of various records by a competent third party. The same also applies to other types of audits.
Examples of Statutory Audits
State law may require that all municipalities submit to an annual statutory audit. This may entail examining all accounts and financial transactions and making the audit results available to the public. The purpose is to hold the local government accountable for how it spends taxpayers' money. Many government agencies participate in regular audits. This helps ensure any funds disbursed by the larger governmental entity, such as at the federal or state level, have been used appropriately and according to any associated laws or requirements for their use.
It is also common for international companies to have some foreign governments that require access to the results of a statutory audit. Assume, for example, that XYZ Corp is based in the United States but does business regularly and operates branches in Europe. It may be required by law in a European country to have a statutory audit performed on those business units.