How Do Auditors Test for Statutory Compliance Under Ind AS?

Introduction

For many business owners, the mere mention of an “audit” can trigger a wave of anxiety. The thought of an external expert poring over your company’s records is daunting, especially with the complex web of Indian laws and regulations. The process of statutory compliance testing is at the heart of this scrutiny, ensuring your business is playing by the rules. In simple terms, “Statutory Compliance” means following the laws of the land, from tax regulations to corporate governance. For certain companies, this compliance must be reported under “Ind AS” (Indian Accounting Standards), which are a set of rules aligned with global standards. Understanding this process is not just about avoiding heavy penalties; it’s about building trust with investors, lenders, and customers, ensuring your business operates smoothly and ethically. This blog will break down exactly how auditors conduct statutory compliance testing under Ind AS, shine a light on the key areas they scrutinize, and provide actionable steps to keep your business audit-ready at all times.

What is the Framework for Statutory Compliance in India?

Understanding Statutory Compliance

At its core, statutory compliance means adhering to the vast framework of rules and regulations set forth by central, state, and local government bodies in India. It’s not a single law but a collection of acts that govern how a business must operate, manage its finances, treat its employees, and pay its taxes. For auditors, testing this compliance is a non-negotiable part of their job. They are tasked with verifying that a company is not just profitable, but also responsible. Developing robust statutory compliance practices in India is the bedrock of good corporate governance and long-term sustainability.

Key acts relevant to most Indian businesses include:

• The Companies Act, 2013: Governs the incorporation, management, and dissolution of companies.
• Income Tax Act, 1961: Dictates the rules for all direct taxes, including corporate tax, TDS, and advance tax.
• Goods and Services Tax (GST) Act, 2017: The primary law governing indirect taxation on the supply of goods and services.
• Labour Laws: A suite of regulations including the Employees’ Provident Fund (EPF) Act, Employees’ State Insurance (ESI) Act, and various state-specific Professional Tax acts.

Ind AS Applicability: Does It Apply to Your Business?

Indian Accounting Standards (Ind AS) are a set of accounting standards that are converged with the International Financial Reporting Standards (IFRS). They are designed to make Indian companies’ financial statements more accessible and comparable to global peers. However, Ind AS does not apply to every business. The applicability is phased and based on a company’s size and listing status.

Generally, Ind AS is mandatory for:

• All companies listed on a stock exchange in India.
• Unlisted companies with a net worth of ₹250 crore or more.
• Holding, subsidiary, and associate companies of the above.

It’s crucial to ascertain whether your company falls under the Ind AS framework, as this dictates your financial reporting and disclosure requirements. The rules can be updated, so it is always wise to refer to the latest official guidelines. For authoritative information, you can visit the Ministry of Corporate Affairs (MCA) page on Ind AS.

The Core of Statutory Compliance Testing: What Auditors Actually Do

When an auditor begins their work, they follow a systematic process to evaluate a company’s adherence to laws. These statutory compliance audit procedures India are designed to be thorough and objective, providing a clear picture of the company’s compliance health. Let’s walk through the steps an auditor typically takes.

Step 1: Risk Assessment and Planning

Before diving into the numbers, auditors perform a crucial first step: understanding the business. They don’t apply a one-size-fits-all checklist. Instead, they learn about the company’s industry, its specific operations, its internal control systems, and the unique set of laws and regulations that apply to it. Based on this understanding, they identify “high-risk” areas—for example, complex GST transactions in a logistics company or labour law compliance in a manufacturing unit. This risk assessment allows them to focus their time and effort where the potential for non-compliance is greatest, making the audit more efficient and effective.

Step 2: Key Areas Under the Microscope

Once the plan is in place, auditors zoom in on specific areas of compliance. While the scope can be vast, some areas are almost universally scrutinized during a statutory compliance audit.

Companies Act, 2013 Compliance
The Companies Act is the rulebook for corporate governance. Auditors meticulously check for adherence to its various provisions.
What they check: They verify the proper maintenance of statutory registers (like the register of members and directors), ensure annual returns (Forms AOC-4 for financial statements and MGT-7 for annual returns) have been filed with the Registrar of Companies (ROC) on time, and review the minutes of board and shareholder meetings to confirm that decisions were made and recorded correctly. They also pay close attention to related party transactions and compliance with rules regarding loans to directors.

Direct Tax Compliance (Income Tax)
This is a major focus area, as tax non-compliance can lead to significant financial penalties.
What they check:

• TDS/TCS: Auditors verify that Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) have been calculated at the correct rates, deposited with the government before the due dates, and that quarterly TDS/TCS returns have been filed accurately.
• Advance Tax: They will recalculate the company’s advance tax liability and check the payment challans to ensure installments were paid on time.
• Expenditure Disallowances: They scrutinize expenses to ensure compliance with specific provisions of the Income Tax Act, such as Section 40A(3) which disallows cash payments exceeding ₹10,000.

For more details on tax laws, you can visit the Income Tax Department’s official website.

Indirect Tax Compliance (GST)
Given its complexity, GST is a high-priority area for auditors.
What they check:

• Reconciliation: A key procedure is reconciling the sales figures reported in the company’s accounting books with the outward supplies declared in GSTR-1 and GSTR-3B filings. Any mismatch is a major red flag.
• Input Tax Credit (ITC): Auditors rigorously verify the eligibility of ITC claimed. This involves matching the claimed credit against the details appearing in the GSTR-2B statement and checking supporting invoices and documents.
• E-invoicing & E-way Bills: They check if the company is complying with the turnover-based requirements for generating e-invoices and e-way bills for the movement of goods.

For the latest GST rules, refer to the official GST Portal.

Labour Law Compliance
Compliance with labour laws is critical for protecting employee rights and avoiding legal disputes.
What they check: Auditors verify the timely calculation and deposit of employee and employer contributions towards Provident Fund (PF) and Employees’ State Insurance (ESI). They also check if proper employee records are maintained and that state-specific regulations like Professional Tax are being followed correctly.

Step 3: Common Auditor Testing Methods

To gather sufficient evidence, Ind AS statutory compliance auditors employ a variety of techniques. These methods are designed to verify information from multiple angles, ensuring a high degree of assurance.

• Vouching and Verification: This is the most fundamental method. Auditors examine the source documents that support financial transactions. This includes reviewing tax payment challans, statutory return filings, invoices, bank statements, and legal agreements to confirm their authenticity and accuracy.
• Inquiry: Auditors don’t just look at paper; they talk to people. They will conduct discussions with management, the finance team, and other relevant personnel to understand the company’s compliance processes, internal controls, and any known issues.
• Recalculation: As part of their procedures, auditors will independently recalculate key figures like GST liability, TDS deductions, and PF contributions. This helps them verify the accuracy of the company’s own calculations and identify any errors.
• Review of Filings: A core part of auditors testing statutory compliance India involves comparing the data presented in the financial statements with the actual returns and forms filed with government authorities (like the ROC, Income Tax Department, and GSTN). This ensures consistency and confirms that what is reported internally matches what has been declared externally.

How to Prepare Your Business for a Compliance Audit

Knowing what auditors do is half the battle. The other half is proactively preparing your business. This shift in mindset—from reactive scrambling to proactive readiness—can transform an audit from a stressful ordeal into a smooth, routine process.

Maintain Impeccable Records

The single most important preparation step is maintaining organized, complete, and easily accessible records. When an auditor asks for a specific TDS challan, a GST return, or board meeting minutes, you should be able to produce it quickly. Disorganized or missing documents are a major red flag and can prolong the audit process unnecessarily. Use a reliable accounting system and maintain digital and physical files in a logical order.

Create a Compliance Calendar

With so many due dates for TDS, GST, PF, ROC filings, and advance tax, it’s easy to miss one. A simple mistake can lead to late fees and interest. Create a comprehensive compliance calendar that lists every statutory due date applicable to your business. Assign responsibility for each filing to a specific person and track its completion. This simple tool is incredibly powerful for preventing last-minute rushes and costly errors.

Conduct Periodic Internal Reviews

Don’t wait for the statutory auditor to find problems. Conduct your own internal audits or “health checks” periodically throughout the year. This involves reviewing your own compliance status for key laws every quarter. This proactive approach helps you get a clear Ind AS compliance audit overview before the official audit even begins, giving you time to identify and rectify issues internally. You can also hire a professional firm like TaxRobo’s Audit Service to perform an independent review and provide valuable insights.

Consult the Experts

Statutory regulations in India are not static; they are complex and constantly evolving. What was compliant last year might not be this year. Partnering with financial and legal experts is not a cost—it’s an investment in peace of mind. Professionals can help you navigate the complexities of understanding auditors Ind AS compliance, interpret new regulations, and set up robust internal systems to ensure you are always on the right side of the law.

Conclusion

An audit is an integral part of the corporate ecosystem, designed to uphold accountability and transparency. The role of the auditor is to verify that a company is not only financially sound but also a responsible corporate citizen. By meticulously reviewing key compliance areas like the Companies Act, Direct and Indirect Taxes, and Labour Laws, they provide assurance to all stakeholders. Instead of viewing an audit as a threat, see it as an opportunity to strengthen your business’s foundations. Strong compliance is not just about avoiding penalties; it’s about building a sustainable, reputable, and trustworthy enterprise that can thrive in the long run. Being prepared for statutory compliance testing transforms it from a stressful event into a valuable, routine check-up for your business’s health.

If you need help strengthening your compliance framework or preparing for an upcoming audit, contact the experts at TaxRobo today for a consultation.

Frequently Asked Questions (FAQ)

1. What is the difference between a statutory audit and statutory compliance testing?

A statutory audit is a broad examination whose primary goal is to express an opinion on whether a company’s financial statements present a “true and fair” view. Statutory compliance testing is a crucial part of this broader audit. It consists of the specific procedures an auditor performs to check if the company is following all applicable laws and regulations, such as tax laws, corporate laws, and labour laws.

2. Does Ind AS apply to every small business in India?

No. Ind AS is mandatory only for certain classes of companies, primarily those that are listed or have a net worth and turnover above a specified high threshold. The vast majority of small businesses, startups, and private limited companies fall under the purview of regular Accounting Standards (AS), which are comparatively simpler. It’s essential to check the latest applicability criteria from the Ministry of Corporate Affairs (MCA) to determine which standards apply to you.

3. What are the most common penalties for non-compliance found during an audit?

The penalties vary depending on the law. Some of the most common ones include hefty interest and late fees for delayed payment or filing of GST and TDS returns, penalties under the Income Tax Act for under-reporting income or other defaults, and significant fines levied by the Registrar of Companies (ROC) for non-compliance with the Companies Act, such as the late filing of annual returns.

4. Can my auditor help me fix the non-compliance issues they discover?

An auditor’s primary role is to maintain independence and report their findings objectively. Therefore, they cannot directly “fix” the non-compliance issues themselves, as this would create a conflict of interest. Their audit report will clearly highlight the areas of non-compliance. Your company’s management is then responsible for taking corrective action. You can engage a separate consulting firm, like TaxRobo, to help you resolve these issues and improve your internal processes.