Audit firms play a crucial role in ensuring financial transparency, regulatory compliance, and operational efficiency in businesses. Whether it’s a small startup or a multinational corporation, audit firms provide essential services that help organizations maintain credibility, meet statutory requirements, and improve financial management. In India, the auditing industry operates under various legal frameworks, including the Companies Act, 2013, the Income Tax Act, 1961, and SEBI regulations, among others. This article explores what audit firms do, their key functions, relevant legal provisions, and notable case studies.
Key Functions of Audit Firms in India
- Statutory Audits (Under Companies Act, 2013)
Definition:
A statutory audit is a legally required examination of a company’s financial statements to ensure they provide a true and fair view of its financial position.
Legal Framework:
- Section 139-147 of the Companies Act, 2013 mandates the appointment and conduct of statutory audits.
- Accounting Standards (AS) and Indian Accounting Standards (Ind AS) must be followed during audits.
Key Activities:
- Reviewing financial statements, including the balance sheet, profit and loss account, and cash flow statement.
- Ensuring compliance with AS/Ind AS and Schedule III of the Companies Act.
- Submitting an audit report under Section 143(3) with observations and qualifications, if any.
Case Study:
Satyam Scandal (2009) – The failure of statutory audits in detecting fraudulent financial statements led to major reforms in corporate governance and auditing regulations in India.
- Internal Audits (Under Companies Act, 2013)
Definition:
An internal audit evaluates a company’s internal controls, risk management processes, and operational efficiency.
Legal Framework:
- Section 138 of the Companies Act, 2013 mandates internal audits for specified class of companies.
- Rule 13 of the Companies (Accounts) Rules, 2014 outlines the applicability and scope of internal audits.
Key Activities:
- Assessing the effectiveness of internal controls.
- Identifying operational inefficiencies and risks.
- Recommending improvements in governance and financial practices.
Case Study:
ICICI Bank Case (2018) – The importance of effective internal audit in detecting conflict-of-interest transactions could have controlled related loss, chaos which later led to regulatory scrutiny and stricter corporate governance norms.
- Tax Audits (Under Income Tax Act, 1961)
Definition:
A tax audit involves examining a company’s financial records to ensure compliance with tax laws and regulations.
Legal Framework:
- Section 44AB of the Income Tax Act, 1961 mandates tax audits for businesses with turnover exceeding Rs. 1 crore.
- Tax audits must be conducted as per Form 3CA/3CB and 3CD.
Key Activities:
- Reviewing income, expenses, and deductions.
- Ensuring accurate GST compliance and tax filings.
- Preparing and submitting audit reports to the Income Tax Department.
Case Study:
Vodafone Tax Case (2012) – A landmark case on taxation of cross-border transactions, reinforcing the importance of tax audits for international companies.
- Forensic Audits (Under SEBI & RBI Regulations)
Definition:
A forensic audit investigates financial irregularities, fraud, or disputes.
Legal Framework:
- SEBI (LODR) Regulations, 2015 mandate forensic audits in cases of suspected financial fraud.
- RBI guidelines require forensic audits for Non-Banking Financial Companies (NBFCs) facing regulatory action.
Key Activities:
- Analyzing financial records for signs of fraud.
- Tracing misappropriated funds and uncovering financial misconduct.
- Preparing legal evidence for regulatory and judicial proceedings.
Case Study:
Punjab National Bank (PNB) Fraud (2018) – A failure in forensic audits led to a Rs. 11,400 crore scam, triggering stricter forensic auditing norms.
- Compliance Audits (Under Various Acts)
Definition:
A compliance audit ensures that a company adheres to applicable laws, regulations, and internal policies.
Legal Framework:
- Companies Act, 2013 (Corporate Governance & Secretarial Compliance)
- GST Act, 2017 (Indirect Tax Compliance)
- Labor Laws & Environmental Regulations (ESG Compliance)
Key Activities:
- Ensuring compliance with corporate governance standards.
- Reviewing tax, labor, and environmental laws adherence.
- Recommending corrective actions to avoid legal penalties.
Case Study:
Nestlé India (2015 – Maggi Controversy) – A failure in compliance audits led to a nationwide ban on Maggi, highlighting the importance of regulatory compliance.
How to Choose the Right Audit Firm in India
Key Factors to Consider:
- Reputation & Experience – Firms with a proven track record (e.g., Big 4 – EY, PwC, Deloitte, KPMG).
- Industry Specialization – Expertise in tax audits, forensic audits, or statutory audits.
- Technology & Tools – Use of AI, blockchain, and data analytics for modern auditing solutions.
- Global Network – Ideal for businesses with international operations.
- Cost-Effectiveness – Ensuring value-for-money audit services.
Emerging Trends in Audit Firms in India (2025)
- AI & Data Analytics in Audits – Advanced predictive analytics for fraud detection.
- Blockchain for Financial Audits – Ensuring tamper-proof financial records.
- Sustainability Audits (ESG Reporting) – Compliance with global environmental and governance norms.
- Cybersecurity Audits – Growing demand for IT security and data protection assessments.
- Remote Auditing – Increased use of cloud-based audit tools post-pandemic.
Conclusion
Audit firms play a vital role in ensuring financial integrity, regulatory compliance, and operational efficiency in India. With stringent laws like the Companies Act, 2013, Income Tax Act, 1961, and SEBI regulations, businesses must engage competent audit firms to navigate legal complexities and ensure financial transparency. By choosing the right audit partner, companies can enhance investor confidence, prevent fraud, and optimize operational efficiencies.
Understanding the functions of audit firms and their legal frameworks will help businesses make informed decisions and maintain compliance in an evolving regulatory landscape.
Find Our List of Top Audit Firms in India :
- Dewan P.N. Chopra & Co
- Desai Hari Bhakt & Company
- SN Dhawan & Company
- Nangia Advisors
