Statutory 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.

How Statutory Audits Work

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 included as part of the audit process. 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. The information is gathered and supplied 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.

Being subject to a statutory audit is not indicative of any wrongdoing, as the purpose of the audit is to deter such activities.

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. Small businesses are generally exempt. Businesses must meet a certain size and employee base — usually under 50 employees — to be exempt from an audit.

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 does business regularly and operates branches in Europe. It may be required by law in a European country to have a statutory audit performed on those business units.