Statutory Audit: Definition, Examples, and Type of Audit

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 provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and financial transactions.

Understanding Statutory Audits

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. This generally 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 examined. Several of these items are also used when calculating a combined ratio.

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. A company being audited gathers and supplies information 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 an inherent sign of wrongdoing. Instead, it is often a formality designed to help prevent 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.

Special Considerations

Not all firms have to undergo statutory audits. Firms that are subject to audits include public companies, banks, brokerage and investment firms, and insurance companies. Certain charities are also required to complete statutory audits.

Those generally exempted include nonpublic companies and small businesses below a certain size.

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. For example, assume that XYZ Corp is based in the United States but operates branches in Europe and regularly does business there. It may be required by law in a European country to have a statutory audit performed on those business units.

The Bottom Line

Audits help to stop people getting misled. They determine whether an organization is providing a true and fair view of its financial performance, which is essential for shareholders and anyone else with a stake in how they perform.

Some countries and pundits question whether this is necessary. To them, audits force honest organizations to spend time and money solely to prove their innocence, stripping away resources that could be better used. In an ideal world, that theory would stand up. However, the sad truth is that not everyone is honest; third-party checks are sometimes the only way to get peace of mind.