How to Prepare for a Statutory Audit in India: Complete Checklist & Guide

Wondering how to prepare for a statutory audit in India. We have a detailed guide you need. 

Explore with us a step by step preparation guide for statutory audits that covers everything from understanding the objectives right up to the start of the audit.

Step-by-Step Preparation Guide for Statutory Audits

Proper preparation for statutory audit ensures a smooth audit process, minimizes disruptions, and reduces audit qualifications. Here;s a structured 14 step guide:

Step 1: Understand the Audit Scope and Objectives

This is the first step in preparation for statutory audits.  It establishes mutual expectations and ensures alignment between your team and the audit firm from the beginning.

• Review the audit engagement letter to understand the scope, objectives, and auditor responsibilities
• Clarify the period under audit and applicable accounting framework (Indian GAAP, Ind AS, or AS)
• Identify any special audit areas such as CARO 2020 requirements, compliance audits, or industry-specific mandates
• Discuss materiality thresholds, timelines, deliverables, and key milestones with the auditors

Step 2: Review Previous Audit Reports and Management Letters

 This prevents repetition of past mistakes and showcases proactive corporate governance.

• Analyze findings and qualifications from prior statutory audits
• Verify if corrective actions were taken for previously identified issues or internal control weaknesses
• Review the prior year’s Management Representation Letter and Auditor’s Report
• Identify recurring problems that may require preventive steps

Step 3: Finalize and Reconcile Financial Records

This step is needed to ensure accurate, up-to-date books. This reduces audit exceptions, delays, and clarifications.

• Complete year-end closing: accrue expenses, recognize income, post adjustments for depreciation, provisions, etc.
• Lock accounting periods once books are finalized
• Reconcile all key accounts:
  • Bank Reconciliation Statements
  • Debtors and Creditors Aging
  • Inventory vs. Stock Records
  • Loans and Advances
  • Fixed Asset Registers

Step 4: Prepare Key Financial and Supporting Documents

Organized and accessible documentation for statutory audit ensures efficient audit execution and fewer audit queries.

Compile the following for auditors:

• Primary Financials: Balance Sheet, Profit & Loss Account, Cash Flow Statement
• Ledgers & Trial Balance: Updated general and subsidiary ledgers
• Supporting Schedules: Fixed asset schedule, depreciation, loan schedules, investment details
• Tax Records: GST returns, TDS certificates, Income Tax workings and returns
• Banking Info: Bank statements, reconciliations, sanction letters for loans
• Statutory Registers & Corporate Records: Members, Directors, Contracts, Charges

Step 5: Perform Internal Checks and Analytical Review

This is needed  to identify red flags and reduce surprises during auditor review.

• Conduct internal checks of key financial transactions, controls, and documentation
• Perform ratio analysis, trend analysis, and variance analysis (current year vs previous year)
• Review high-value or unusual transactions (e.g., related party, provisions, write-offs)
• Verify accuracy of significant estimates like depreciation, gratuity, or bonus provisions

Step 6: Physical Verification and Asset Reconciliation

This is  Required under CARO 2020 and ensures the correctness of asset reporting.:

• Conduct physical verification of:
  • Inventories (closing stock count)
  • Fixed Assets (tagging, location check, valuation)
  • Cash balances, if applicable
• Compare physical verification results with book records and resolve discrepancies

Step 7: Ensure Compliance with Legal and Regulatory Requirements

This is a must as non-compliance may lead to penalties and adverse audit comments.

Check:

• Tax Compliance: Timely filing of GST, TDS, and Income Tax returns; reconciliation of ITC and Form 26AS
• Labor Laws: EPF, ESI, minimum wages, gratuity, and bonus compliance
• Companies Act, 2013: Board/AGM resolutions, DIR-3 KYC, AOC-4, MGT-7, and maintenance of statutory registers
• Other Regulatory Compliance: Industry-specific licenses, RBI/FEMA (if applicable), environmental clearances, etc.

Step 8: Prepare Statutory and Board-Level Documentation

These are mandatory under the Companies Act and help complete the audit cycle smoothly.

Documents to Ensure Readiness:

• Updated Board and Shareholder Resolutions, including approval of financials
• Minutes of Board and Committee Meetings (especially Audit and Nomination Committees)
• Finalized Draft Financial Statements (Schedule III format) with Notes to Accounts
• Documentation of related party transactions and management declarations

Step 9: Prepare for Third-Party Confirmations

This step matters since third-party confirmations (bank, debtor, legal) are a key audit procedure and provide independent assurance on balances and disclosures

• Compile updated lists of:
  • Trade receivables and payables with names, balances, and contact details
  • Banks and financial institutions (account numbers, balances, loans, overdrafts)
  • Legal advisors (for pending litigations or contingencies)
  • Investors or lenders for investment confirmations
• Initiate confirmation requests early, either directly or through auditors
• Follow up with external parties to ensure timely responses

Step 10: Assign a Dedicated Point of Contact and Team

 A clear point of contact avoids communication gaps and ensures timely audit support and query resolution.

• Nominate a senior-level individual (e.g., CFO, Controller) as the primary audit coordinator
• Assign domain-specific staff (e.g., accounts, tax, legal, IT) to handle respective queries
• Ensure backup personnel are identified for continuity during absences
• Brief the internal team on audit timelines, cooperation expectations, and document protocols

Step 11: Ensure Data Security and Controlled Access

This protects organizational data integrity and ensures compliance with confidentiality and IT governance standards during the audit process.

• Provide secure, role-based (read-only) access to accounting systems or cloud portals for auditors
• Implement access controls, encryption, and password protections for sensitive data
• Set up a secure digital workspace (if remote audit), or a controlled physical space (if on-site)
• Back up critical financial data and maintain access logs for accountability

Step 12: Prepare for Auditor Queries and Supporting Documentation

 Readiness to respond to auditor queries reduces delays, fosters transparency, and improves audit efficiency.

• Organize all financial data and supporting documents by ledger or audit area (e.g., revenue, expenses, provisions)
• Anticipate questions related to:
  • Significant variances or one-off transactions
  • Changes in accounting policies or estimates
  • Judgmental areas such as provisions, impairment, or deferred tax
• Create a running query tracker to log and monitor responses
• Prepare clear explanations with documentation ready for review

Step 13: Draft Management Representation Letter (MRL)

This letter is a mandatory part of the audit process and shifts accountability for representations made during the audit.

• Use the standard format provided by the auditors or as per SA 580
• Cover key declarations such as:
  • Accuracy and completeness of records provided
  • Disclosure of fraud, litigation, and non-compliance (if any)
  • Confirmation of accounting policies and estimates used
• Review the draft with senior management
• Keep the final version ready for signing by the CEO/CFO before audit report issuance

Step 14: Conduct Final Pre-Audit Meeting with Auditors

Aligns expectations, clarifies responsibilities, and ensures a smooth start to the fieldwork phase of the audit.

• Hold an internal readiness meeting to ensure:
  • Documents and confirmations are in place
  • Staff availability is confirmed
  • Queries from internal review are resolved
• Then, meet with the audit team to:
  • Discuss audit plan, scope, and areas of focus
  • Finalize the audit schedule, timelines, and logistics
  • Address any last-minute concerns or open items

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FAQs For Statutory Audit Preparation in India

1. How to start preparing for a statutory audit in India?

Begin by reviewing your previous audit reports, cleaning up your accounting records, and understanding what documents your auditor will require. Make sure all your books are updated, reconciliations are complete, and compliance documents are in order.

2. What should be included in a statutory audit preparation checklist?

Your checklist should include financial statements, trial balance, GST and TDS returns, board meeting minutes, bank statements, and ROC filings. Also include reconciliations, expense vouchers, and proof of statutory payments.

3. How can I organize financial records for an audit?

Use accounting software or Excel to neatly categorize transactions, tag expense types, and reconcile balances. Ensure that invoices, receipts, and bank statements are stored in chronological and easily retrievable format.

4. Do I need to prepare supporting documents for all expenses?

Yes, every major expense must have supporting proof like invoices, payment receipts, and approval notes. Missing documentation can delay the audit and raise compliance flags.

5. Who in the company should coordinate the statutory audit?

Ideally, a senior accountant or finance officer should be the point of contact. This person should be familiar with accounts, taxes, and company compliance history.