Audit means an examination of books of accounts, conducted with the purpose of establishing the fact that the accounting records presents a true and fair view. Many people get confused amidst statutory audit and tax audit in this context. While the former is an audit carried out under the Companies Act, the latter is an audit conducted under the Income Tax Act.
The rules related to the audit of financial statements of an entity are dealt in the statutory audit. On the other extreme, the provisions associated with taxation are dealt in the tax audit. Take a read of this article to know the differences between statutory audit and tax audit.
Content: Statutory Audit Vs Tax Audit
|Basis for Comparison||Statutory Audit||Tax Audit|
|Meaning||Statutory Audit is the audit made compulsory by the law.||Tax Audit is an audit made compulsory by the Income Tax Act, if the turnover/gross receipts of the assessee reaches the specified limit.|
|Carried out by||External Auditor||Chartered Accountant|
|Audit of||Full Accounting records.||Matters related to tax.|
|Purpose||To ensure reliability and transparency of financial statement.||To ensure proper maintenance of books of accounts and they truly reflect the taxable income of the assessee.|
Definition of Statutory Audit
A statutory audit is an audit, which is made mandatory by law. The purpose is to check the truthfulness and fairness of accounting records. The appointment of auditors, his removal, rights and duties, remuneration, are set according to the provisions of the law, as applicable to the organisation.
In the case of companies, the auditor is appointed by the shareholders at the annual general meeting (AGM), and the remuneration is also fixed by them. Companies registered under The Companies Act, 1956 need to get their accounts audited by a qualified chartered accountant, only after the preparation of the financial statements. The statutory auditor presents his report, in which he expresses his opinion on the true and fair view of the final accounts. In addition to this, he ensures the compliance of the financial statements as per the provisions of the act.
Definition of Tax Audit
Tax Audit is defined as an audit of the accounts of the taxpayer, by a Chartered Accountant, for the requirement of Section 44AB, in which the auditor needs to express his views and observation by way of the audit report.
An audit which is held mandatory, under the Income Tax Act, 1961 only on the condition that: The assessee is covered under the definition of person as per Income Tax Act, who carries on a business or profession with an object of earning profit/gain, maintains books of accounts, the profits or gains are calculated under Chapter IV, where income is subject to tax and loss is allowable.
The assessee engaged in the business, whose turnover is more than Rs. 1 Crore and for the assessee engaged in a profession, in which their gross receipts in above Rs. 25 lakhs. The assessee needs to get his account audited, if the turnover/gross receipts exceed the stipulated limit, even his income is less than the taxable income. It assists the assessing officer, in ascertaining the taxable income of the assessee, as per various provisions of the Act.
Key Differences Between Statutory Audit and Tax Audit
The differences between statutory audit and tax audit are drawn clearly on the following grounds:
- An audit, which is required by the statute (law) is known as a Statutory audit. Tax Audit is an audit made compulsory by the Income Tax Act if the turnover of the assessees reaches the specified limit.
- Statutory Audit is performed by external auditors whereas tax audit is conducted by a practising Chartered Accountant.
- Statutory Audit is the audit of complete accounting records. Conversely, Tax Audit is the audit of tax related transactions.
- The purpose of the statutory audit is to ensure reliability and transparency, truthfulness and fairness of financial statement. As opposed to a tax audit, which ensures proper maintenance of books of accounts and they truly reflect the taxable income of the assessee as well as the deductions claimed are actually made by the assessee.
After discussing, the above points, it can be said that the statutory audit and tax audit are completely different. The latter is often a type of the former. Therefore, the scope of the statutory audit is wider than the tax audit. Statutory Audit is compulsory, for all the companies, whereas Tax Audit is mandatory for those assessees, that fulfils the conditions of the Income Tax Act.
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