Statutory and voluntary audits explained

Auditing can be done voluntarily. This means that the entity's management is not mandated to engage an external auditor. However, an audit might be mandatory. In this case, certain laws or statutes request for it to be done. In this article, we differentiate statutory from voluntary audits.

1. Five Similarities between statutory and voluntary audits

• In both cases, an external auditor is engaged to carry out the job.
• Audit evidence is required for statutory and voluntary audits.
• The audit adds credibility to the financial statement.
• Financial statements are mostly the subject matter of the audits.
• Statutory and voluntary auditing requires the payment of a sum of money to the auditor. Which are extra costs to the entity.

2. Five Differences between statutory and voluntary audits 

2.1 Mandatory

Statutory audit (SA) is mandatory. It is enshrined in the law of the land of selected companies to carry them out. Voluntary audit (VA) is not mandatory. Companies decide on their own to do so. This might be to attract investors, get favorable loan terms, or as requested by investors.

2.2 Scope

The scope of the SA is in the laws provided by the government as well as the relevant accounting and auditing standards. For example, the scope of auditing banks and other financial institutions can be found in the Company and Allied Matters Act 2020 as well as the Bank and Other Financial Institution Acts. 

However, for VA, the scope is agreed on by the business owners, directors, and the external auditor along with the relevant accounting and auditing standards.

2.3 Objective

The primary objective of statutory auditing is to enhance the usefulness and reliability of financial information of the company to its stakeholders. Here, stakeholders include the government, creditors, and shareholders. For voluntary auditing, the objective is to enhance confidence in the financial statements of their investors.

2.4 Audit report 

SA audit reports are made available to regulatory authorities. The audit report of a bank is submitted to the Central Bank of Nigeria. Also, the report is made available to the public if the company is listed in the Nigeria Exchange Group. On the other hand, the audit report from a voluntary audit is sent to the investors and/or shareholders only.

2.5 Penalties 

Failure to carry out a statutory audit will result in certain penalties as stated in the statute. The entity may pay a fine for not doing so. However, failure to engage an external auditor in a voluntary audit does not attract fines. The company may lose a potential investor's fund if that's the purpose of the audit.