How to practices statutory audit

Every March-end, the same scene repeats across CA offices in India. Files pile up, article assistants run between client offices, and somewhere in the middle of it, a young CA stares at a trial balance wondering, "Where do I even start?"

If that sounds familiar, you're not alone. Statutory audit looks simple on paper — check the books, confirm they're correct, sign the report. In reality, it's one of the most responsible jobs a Chartered Accountant does. Here's how to practice statutory audit in India, step by step, the way a senior would explain it to a new article assistant.

What Exactly Is a Statutory Audit?

A statutory audit is a legally mandatory audit under Section 139 of the Companies Act, 2013. Every registered company must get its accounts audited by a practising CA holding a valid Certificate of Practice from ICAI. The purpose is to confirm the financial statements give a true and fair view — a health check-up for the books, not just "does it look fine" but "is it actually fine."

Step 1: Planning Comes Before Everything Else

Don't jump into vouching before understanding the business — that's like a doctor prescribing medicine without asking what's wrong. Before touching a voucher:

• Understand the client's industry and how money actually flows
• Identify related party transactions and risk areas
• Study last year's file and past qualifications
• Decide your audit approach and sample sizes

Step 2: Fix Your Materiality First

Materiality is arguably the most important concept in auditing, yet many new auditors skip it. Materiality is the threshold above which an error would actually change a user's decision about the company. A ₹500 mismatch means nothing for a 200-crore company; a ₹50 lakh one might.

Set an overall materiality figure early (often a percentage of turnover, profit, or assets), and use it throughout deciding what to test in depth versus lightly, and which misstatements are worth reporting.

Step 3: Study the Internal Controls

Internal controls are the checks a company already has like requiring two signatures for large payments, or segregating who raises an order from who approves it. If controls are strong, you can rely more on samples. If weak, dig deeper. Example: if the storekeeper also raises purchase orders, that's a red flag worth noting early, and it should widen your substantive testing in that area.

This is where audit judgment is actually built. Each major cycle needs its own process-flow understanding, test of controls, and substantive testing.

Revenue

Understand the order-to-cash flow — order, dispatch, invoicing, collection. Test controls like credit approval and dispatch-to-invoice matching. For substantive testing, check cut-off (right period), trace a sample of invoices to dispatch documents, verify discounts and returns, and send balance confirmations to key customers.

Follow the trail: Purchase Order → Goods Receipt Note → Invoice → Ledger → Payment. Test whether approvals happened at the right stage, and vouch a sample of high-value and unusual purchases.

Inventory

Check the stock process: receipt, storage, issue, physical verification. Attend or review the stock count, test valuation methods, and look for slow-moving or obsolete stock that hasn't been provided for.

Other Key Heads

• Employee benefit expenses: Match payroll to attendance/HR records, check statutory deductions (PF, ESI)
• Property, Plant & Equipment: Verify additions, disposals, and depreciation policy
• Cash & Bank: Reconcile bank statements, verify cash-in-hand physically
• Trade Receivables/Payables: Send confirmations, check ageing, and assess provisioning for doubtful debts

Sample Smartly

You don't need to check every entry. Pick a risk-based sample, high-value and unusual transactions get extra attention; routine small ones can be sample-tested.

• CARO 2020 reporting, wherever applicable
• Schedule III format and disclosures
• GST and TDS reconciliation with the books
• Compliance with applicable Ind AS
• Timely payment of statutory dues (PF, ESI, professional tax)
  
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Step 6: Documentation Is Not Optional

"If it's not documented, it's not done." No matter how thorough your testing, without a working paper, it doesn't count. Record what you checked, what you found, client explanations, and your conclusion on each area.

Once fieldwork ends, review the statements as a whole, discuss open items with management, and form your opinion: unqualified, qualified, adverse, or disclaimer before filing with the Registrar of Companies.

A Story Worth Remembering

A CA article once shared how she joined her firm right in the middle of tax audit season, spent the first month just doing data entry and vouching bills, and felt completely lost when the statutory audit season began right after. It was only when a senior explained the "why" behind each procedure, not just the "what" that things started clicking. By the time she finished her first full statutory audit, she realised the biggest skill she'd built wasn't technical knowledge; it was attention to detail and the confidence to ask "does this make sense?"

That's really what practising statutory audit is about. It's not about memorising checklists it's about developing the judgment to look at a set of numbers and ask whether they genuinely reflect what's happening in the business.

Common Mistakes New Auditors Make

• Vouching before understanding the business or setting materiality
• Treating checklists as formality instead of thinking "why"
• Poor time management leading to rushed, last-minute work
• Weak documentation that can't be defended later
• Hesitating to raise queries out of fear of looking "new"

Tools That Make the Work Easier

Strong Excel skills are non-negotiable for reconciliations and workings. Beyond that, Tally, ERP systems, and audit/practice management tools help cut down manual errors, especially for GST and TDS reconciliation.

In Conclusion 

Statutory audit is where many CAs in India build the foundation for everything that follows. Set your materiality, understand each cycle, document everything, and stay curious rather than mechanical. That's how a good auditor is made — one audit file at a time.

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Frequently Asked Questions (FAQs)

1. How can a beginner start practicing statutory audit?

Ans. A beginner should start by understanding the client's business, reviewing previous audit files, identifying key risk areas, setting materiality, and learning the relevant auditing and accounting requirements. Practical exposure to revenue, purchases, inventory, payroll, fixed assets, receivables, payables, and bank reconciliations helps build strong statutory audit skills.

2. What are the most important skills required for statutory audit?

Ans. Important skills for statutory audit include analytical thinking, attention to detail, knowledge of accounting and auditing standards, risk assessment, documentation, communication, and professional judgment. Strong Excel skills and familiarity with accounting software such as Tally or ERP systems can also make audit work more efficient.

3. What should a CA check during a statutory audit?

Ans. During a statutory audit, a CA generally examines financial statements, accounting records, internal controls, supporting documents, major transactions, assets and liabilities, revenue, purchases, inventory, employee expenses, cash and bank balances, receivables, payables, and applicable statutory compliances. The exact audit procedures depend on the nature, size, and risk profile of the entity.

4. Why is documentation important in statutory audit?

Ans. Documentation provides evidence of the audit procedures performed, information examined, findings identified, explanations received, and conclusions reached by the auditor. Proper working papers help demonstrate that the audit was appropriately planned and performed and make the audit file easier to review and defend when required.