Statutory audit explained

A Statutory audit arises when an audit is required by the law of a country. This implies that such an audit is mandatory, and every company that falls within the requirement must carry it out. In this article, we explain the term and the role of external auditors in such examinations.

1. What's a Statutory Audit?

A statutory audit is a mandatory examination of an organization's financial statements. It implies that such an audit is required by statute and is enshrined in the country's legal system. In Nigeria, certain companies, as explained below, are required to audit their financial statements. This must be done by an external auditor in practice.

Auditing might be voluntary or statutory. However, some audits might be mandatory but not statutory. For example, an entity registered as a business name in Nigeria is not required by statute to engage the service of an external auditor. 

However, if such a firm has an external investor, the investors may require an audited financial statement before they can provide funds to the business. Thereby, making an audit mandatory for such entities but not a statute requirement.

2. Companies required by law to audit their financial statements

All companies with the abbreviation Plc are mandated to engage an external auditor for the examination of their financial statements annually. Limited liability companies that fall as medium and large businesses must audit their financial statements. Small entities are not required to do so. However, they can voluntarily audit their report.

Microfinance banks, even if they fall within companies referred to as small companies, must audit their financials. This is because the Central Bank of Nigeria required them to do so. This is also true with all financial institutions that are not commercial banks. Such as insurance, stock brokers, financial technology companies, and investment firms.

Government business entities are also required by statute to get their financial results audited by an external auditor. Ministries, Departments, and Agencies of government audit their report. Also, local government financials are audited to ensure compliance and accountability.

3. Role of external auditors in statutory audit

The Nigerian company's law (Companies and Allied Matters Act, 2020) imposes some duties on external auditors. It states that an external auditor engaged in an audit must

• Examine the books of accounts of the company under review.
• Issue an audit report on those statements.
• And present the report to the shareholders at the Annual General meeting.

The auditor must state in his/her opinion if the financial statements presented are true and fair and comply with the appropriate laws. These laws include the Companies and Allied Matters Act and relevant laws relating to the industry. For example, banks are expected to comply with the Bank and Other Financial Institution Acts (BOFIA).