At some point, most business owners hear the same suggestion. A banker, a consultant, or a friend in another business says, you should get an internal audit done. The owner is puzzled. My accounts are already audited every year, he thinks. My CA signs the balance sheet. Why should I pay for another audit?
It is a fair question, and the confusion is common. The two words sound similar, but they are two very different pieces of work, done for two different reasons. Once the difference is clear, it becomes much easier to decide what your business actually needs.
What a statutory audit does
A statutory audit is the audit required by law. Your auditor checks the accounts for the year and gives an opinion on whether the financial statements show a true and fair picture of the business.
The important thing to understand is who it is really for. A statutory audit is meant for people outside the business: the government, the bank, the shareholders, anyone who relies on your accounts. It looks backwards, at a year that has already ended. And it is about the accounts being correct, not about whether your business is being run well.
So a statutory audit can be completely clean while your business is still losing money through weak systems. The auditor is not asked to look at that, and it is not his job to.
What an internal audit does
An internal audit is for you. It is not about the balance sheet. It looks at how the business actually runs day to day, and whether your systems and checks are working.
It asks different questions. Is the stock in the godown matching the books? Is the same person ordering goods and also approving the payment? Are discounts being given without anyone checking? Is the branch in-charge taking decisions that should come to the head office? Are old customer payments simply piling up?
And it does not wait for the year to end. It runs through the year, so that problems are caught while you can still do something about them.
Simplified differences you must know
- Why it is done. Statutory audit is required by law for companies. Internal audit is required by law only for certain larger companies, and for everyone else it is a choice. Your CA can confirm which applies to you.
- Who it is for. Statutory audit is mainly for outsiders such as the government, banks and shareholders. Internal audit is for the owner and the management.
- What it looks at. Statutory audit looks at the accounts of a year that has finished. Internal audit looks at the systems that are running right now.
- What you get. Statutory audit ends with an opinion on the accounts. Internal audit ends with a list of what is going wrong and what to fix.
- How often. Statutory audit happens once a year. Internal audit is done through the year, monthly, quarterly, or as agreed.
So which one does your business need?
If your business is a company, the statutory audit is not a choice. It has to be done, and it will be done every year.
The real question is whether you also need an internal audit. It usually becomes useful when the business has grown beyond what one person can watch. A few signs that the time has come:
- You have stock in more than one place, or a godown you cannot visit every day.
- You have branches or staff taking money decisions without you.
- Your sales are growing but your profit is not growing with them.
- You find out about problems long after they happened, usually at year-end.
- Your bank or a large customer has started asking for better records and reports.
If none of these apply, and the business is small and simple enough that you can see everything yourself, then a clean statutory audit and good bookkeeping may be all you need for now. There is no benefit in adding work you do not need.
The two work together
One point worth clearing up: these are not competing options. They do different jobs, and they help each other.
A business with a good internal audit running through the year usually finds its year-end statutory audit far smoother, because the records are already clean and the surprises have been dealt with months earlier. The statutory audit tells the outside world that your accounts are correct. The internal audit tells you whether your business is being run the way you think it is. Most growing businesses eventually need both.
The simplest way to think about it is this. A statutory audit answers, are the accounts correct? An internal audit answers, is my business under control? Those are two different questions, and as a business grows, the second one usually starts to matter more.
If you are unsure whether an internal audit would be useful for your business, you can connect to the team at Agarwal Ajay & Co in Patna for a first discussion.