Knowledge Centre

A statutory audit is an independent examination of financial statements required by a particular law, such as the Companies Act, 2013 for companies, or the LLP Act, 2008 for LLPs above prescribed thresholds. It results in an auditor's report addressed to the owners.

A tax audit is an examination of books of account to report particulars specified under the Income-tax law. It applies only to taxpayers who meet the conditions in that law.

One does not substitute for the other. An entity may need either, both or neither, depending on its constitution, size and activities.

Direct taxes, such as income-tax, are charged on income and are borne by the person on whom they are levied. Indirect taxes, such as GST, are charged on supplies of goods and services and are generally collected by suppliers from customers and paid to the government.

They are governed by different laws, administered by different authorities and reported through different returns.

Books of account are the day-to-day records of transactions. Financial statements, such as the balance sheet and the statement of profit and loss, are prepared from those books. Returns and forms are filings made to authorities, such as an income-tax return or a GST return, and they draw on the books and the statements.

Errors in the books flow through to everything that follows. This is why reconciling books, statements and returns is a recurring theme in compliance work.

Indian entities prepare financial statements under either the Accounting Standards or the Indian Accounting Standards (Ind AS). Which applies depends on the category of the entity, as set out in the relevant Rules under the Companies Act, 2013, and by other regulators where applicable.

The standards are developed with ICAI and notified by the government. ICAI publishes the text of the standards on its website.

Indian law offers several ways to carry on a business: as a sole proprietor, a partnership, an LLP, or a company. They differ in legal identity, liability, ownership, compliance and tax treatment.

The Company Formation Centre on this website compares them and explains how each is formed.