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 the same as the purpose of any other type of audit: 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.

For example, a state law may require that all municipalities submit to an annual statutory audit examining all accounts and financial transactions and to make the results of the audit available to the public. The purpose of such an audit is to hold the local government accountable for how it is spending taxpayers' money. Many government agencies participate in regular audits. This helps ensure any funds directed by the larger government entity, such as at the federal or state level, have been used appropriately and according to any associate laws or requirements for their use.

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.

BREAKING DOWN 'Statutory Audit'

Understanding Statutes

The term statutory is used to denote 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 other municipality. In business, statute can also refer to any rule set forth by the organization’s leadership team or board of directors.

Understanding an Audit

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 but can also be applied to other areas. During a financial audit, an organization’s records regarding income or profit, investment returns, expenses and other items may all 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 auditing entity to perform its analysis. If inaccuracies are found, appropriate consequences may be levied.

RELATED TERMS
  1. Performance Audit

    A performance audit is an examination of a program, usually in ...
  2. Auditing Evidence

    Auditing evidence is information collected to review a company's ...
  3. Field Audit

    A field audit is a comprehensive tax audit conducted by the Internal ...
  4. Office Audit

    An office audit is an in-person examination of a taxpayer's records ...
  5. Horizontal Audit

    A horizontal audit involves an audit of the same activity across ...
  6. Audit Risk

    Audit risk is the risk that the financial statements are materially ...
Related Articles
  1. Taxes

    How Does An IRS Audit Work?

    It doesn't automatically mean an IRS agent will be ringing your doorbell. Understanding the different types of IRS audits can help you handle them.
  2. Taxes

    What To Do If You Get Audited

    If you're in the minority of those that get audited, find out how to prepare and how to handle the process.
  3. Taxes

    Audit Stories You Won't Believe

    Take comfort: Even if you do get audited, you'll have an easier time that these unlucky taxpayers.
  4. Insights

    How The IRS Works: Functions & Audits

    Even the most enlightened citizen curses taxes, possibly while simultaneously acknowledging that they're the price of a civilized society.
  5. Insights

    IT Security Auditing

    Find out about this promising career that can match IT with business studies.
  6. Taxes

    Should You Be Worried About a Tax Audit This Year?

    Tax audits have decreased in recent years and are targeted toward high earners and business owners.
  7. Taxes

    How to Avoid the 6 Most Common Tax Audit Triggers

    These are the most common scenarios that can trigger the IRS to audit a tax return.
  8. Taxes

    How To Appeal Your IRS Audit

    The auditor's review isn't always the last word. Many taxpayers who are audited can successfully appeal their audits and save thousands of dollars.
  9. Financial Advisor

    Retirees: Beware of These 6 IRS Red Flags

    Tax audits are stressful and can result in expensive fines. Here are six things to know about when it comes to sidestepping IRS scrutiny.
  10. Personal Finance

    Accountant: Career Path & Qualifications

    Learn the different career paths a new accountant can take, and understand the educational requirements for the career, which vary based on position.
RELATED FAQS
  1. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. Read Answer >>
  2. Who enforces GAAP?

    Take a deeper look at the private enforcement mechanisms behind the generally accepted accounting principles for American ... Read Answer >>
  3. What are general and administrative expenses?

    General and administrative expenses are not directly attributable to the production of goods and services and include audit ... Read Answer >>
Trading Center