TLDR: Audits are crucial for every business, big or small. They ensure your financial records are accurate, protect you from legal penalties, and boost trust with investors. A 2022 study revealed that 79% of companies saw increased investor confidence after an audit, and 62% reported reduced financial fraud.

Now, let’s dive into the two main types: financial audit and secretarial audit.
 

Introduction

Running a business is full of challenges—managing finances, complying with laws, keeping stakeholders happy—and one crucial part of ensuring smooth operations is conducting audits. While the term "audit" can often sound intimidating or even cause anxiety, audits are essential for maintaining the transparency and credibility of your business.

Among the various types of audits, two of the most common and vital are financial audits and secretarial audits. These audits serve different purposes but work together to ensure the overall well-being of a company, from a financial and legal standpoint.

But here’s the thing: most people are familiar with financial audits, but when you bring up secretarial audits, you may get a few blank stares. Why? Because financial audits are required in nearly every country and are familiar to anyone who has dealt with business finances, whereas secretarial audits are more specialized and specific to certain jurisdictions, like India.

So, if you’re confused about what a secretarial audit is, how it differs from a financial audit, or why your business might need both, don’t worry—you’re not alone. Let’s walk through everything you need to know in a simple, easy-to-understand way.
 

Financial Audit: A Vital Examination of Your Company’s Financial Health

Most business owners and managers are familiar with financial audits. It’s essentially a detailed examination of your company’s financial statements, carried out by an independent, external auditor. The goal of a financial audit is to ensure that your financial records are accurate, complete, and in compliance with regulations like GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).

Think of a financial audit as a check-up for your business’s financial health. Just as you go to a doctor for regular physicals to ensure your body is functioning well, your business needs regular financial audits to ensure its financial "health" is in good shape.
 

What Happens During a Financial Audit?

During a financial audit, the auditor will look at the following key components of your financial records:

  • Balance Sheet: A snapshot of your company’s financial position at a particular point in time, showing assets, liabilities, and shareholder equity.

  • Income Statement: A report showing how much revenue your company earned during a specific period, alongside expenses and net profit.

  • Cash Flow Statement: This tracks how much cash is coming in and out of the business, ensuring liquidity.

The auditor will carefully review these documents, comparing them with supporting records to ensure there are no material misstatements. They’ll also assess whether your financial processes are robust, and if your internal controls prevent fraud and errors.
 

Key Types of Financial Audits

Financial audits can be classified into different types depending on their purpose:

  1. External Audit: This is the most common type of financial audit, carried out by an independent firm or auditor. Its objective is to provide an objective assessment of whether a company’s financial statements are free from significant errors or fraud.

  2. Internal Audit: Unlike external audits, internal audits are conducted by an internal team within the company. These audits focus more on internal controls, risk management, and compliance with internal policies rather than just financial accuracy.

  3. Tax Audits: Tax audits are conducted by government agencies to ensure that a company is complying with tax laws and accurately reporting tax liabilities.
     

The Outcome: Auditor’s Opinion

At the end of a financial audit, the auditor issues an opinion based on the findings. There are four possible outcomes:

  1. Unqualified Opinion (Clean Opinion): This means that the financial statements are accurate and free from material misstatements. Essentially, your business gets a clean bill of financial health.

  2. Qualified Opinion: This indicates that the financial statements are mostly accurate, but there are some reservations or concerns about certain areas.

  3. Adverse Opinion: A red flag—this means that there are significant inaccuracies in the financial statements, and they do not accurately reflect the company’s financial condition.

  4. Disclaimer of Opinion: This happens when the auditor is unable to form an opinion due to a lack of sufficient evidence or information.
     

Why is a Financial Audit Important?

  • Increased Transparency: Investors and stakeholders trust your business more when they see that your financial statements have been independently audited.

  • Fraud Prevention: Regular audits help identify weaknesses in your internal controls, reducing the risk of fraud or financial mismanagement.

  • Regulatory Compliance: Most jurisdictions mandate financial audits for businesses over a certain size or with specific types of operations, like publicly traded companies.
     

Real-Life Example

Take the case of Satyam Computers, once a leading IT company in India. In 2009, Satyam was embroiled in one of the biggest corporate fraud scandals in the country, where its financial statements were grossly overstated. The company’s external audits failed to reveal these discrepancies until it was too late, leading to a massive collapse. This incident not only shocked India’s corporate world but also underscored the critical importance of thorough and independent financial audits. It prompted regulators to tighten corporate governance norms and enforce stricter financial auditing practices.
 

Secretarial Audit: Your Compliance Guardian

While financial audits focus on verifying the accuracy of financial data, secretarial audits ensure that your business is complying with all the legal and regulatory requirements governing corporate governance.

If financial audits are about checking your business’s financial health, secretarial audits are about making sure your business is playing by the rules. Secretarial audits are mandatory in India for certain types of companies, such as listed companies or those with a specific paid-up capital or turnover.
 

What is a Secretarial Audit?

A secretarial audit is a specialized audit carried out by a Company Secretary (CS) in practice. It focuses on ensuring that a company complies with the various laws, regulations, rules, and procedures that apply to it. These laws include the Companies Act, 2013, SEBI regulations, and various other laws specific to the company’s industry.

The primary purpose of a secretarial audit is to ensure that your company is following corporate governance standards, keeping your shareholders, investors, and other stakeholders confident in your company’s legal and procedural compliance.
 

Key Aspects of Secretarial Audits

  1. Applicability: Not all companies are required to undergo a secretarial audit. The audit is mandatory for:

    • Public companies with a paid-up share capital of ₹50 crore or more.

    • Public companies with an annual turnover of ₹250 crore or more.

    • Companies listed on stock exchanges.

  2. Scope: Secretarial audits cover areas like:

    • Compliance with corporate governance norms.

    • Filing of returns with regulatory bodies like the Registrar of Companies (RoC).

    • Legal provisions related to shareholders, investors, and stakeholders.

    • Adherence to laws like the Companies Act and SEBI guidelines.

  3. Audit Report: At the end of the audit, the Company Secretary (CS) submits a report, known as Form MR-3, detailing their findings. This report is shared with the company’s board of directors and filed with the RoC as part of the annual compliance process.

  4. Purpose: The goal of the secretarial audit is to ensure that companies function ethically, comply with the law, and protect their stakeholders from any legal risks.
     

Why is a Secretarial Audit Important?

  • Ensures Legal Compliance: With the ever-increasing complexity of corporate laws, a secretarial audit helps ensure that your company is complying with all applicable laws.

  • Detects Non-Compliance: The audit helps identify any non-compliance issues early, giving the company time to address them before they escalate into legal problems.

  • Builds Stakeholder Confidence: Just as a financial audit builds investor confidence, a secretarial audit builds trust among shareholders and other stakeholders by ensuring legal and procedural transparency.
     

Real-Life Example

In 2019, a well-known Indian company, Jet Airways, faced legal and compliance issues related to its governance practices. Had the company conducted thorough secretarial audits, it might have been able to identify and address these issues earlier, potentially avoiding legal consequences and bolstering investor trust.
 

Financial Audit vs. Secretarial Audit: Key Differences

Now that we’ve explored both types of audits in detail, let’s look at the key differences between a financial audit and a secretarial audit.

1. Focus

  • Financial Audit: Focuses on the accuracy of financial statements and compliance with accounting standards.

  • Secretarial Audit: Focuses on compliance with corporate governance laws, regulations, and internal policies.

2. Objective

  • Financial Audit: To ensure the financial records accurately represent the company's financial position.

  • Secretarial Audit: To ensure the company is complying with all legal and procedural requirements.

3. Who Conducts It?

  • Financial Audit: Conducted by an external auditor or an internal auditing team.

  • Secretarial Audit: Conducted by a Company Secretary (CS) in practice.

4. Outcome

  • Financial Audit: Results in an auditor’s opinion on the company’s financial health.

  • Secretarial Audit: Results in a compliance report, identifying any legal or regulatory issues.

5. Applicability

  • Financial Audit: Required for all companies, especially public and large private companies.

  • Secretarial Audit: Required for specific companies, such as listed companies and public companies with a significant paid-up capital or turnover.
     

Why Choose Corpzo?

Whether you're a growing startup or an established business, navigating the complexities of audits—both financial and secretarial—can be overwhelming. This is where Corpzo steps in. With our team of experts, we ensure that your business remains compliant with all regulatory requirements while maintaining transparency and trust with your stakeholders. Let us handle the complexities while you focus on growing your business.

Call +91 9999 139 391 or WhatsApp for a free consultation today!
 

Conclusion: The Importance of Both Audits

In today’s regulatory environment, both financial audits and secretarial audits play vital roles in maintaining the health and integrity of your business. Financial audits provide a transparent view of your company’s financial position, while secretarial audits ensure you’re complying with the laws that govern corporate governance.

While these audits have different focuses, together, they create a solid foundation for your business to thrive—financially and legally. And with companies like Corpzo offering expert guidance and support, you can ensure that you’re always on the right side of the law, building a business that stakeholders can trust.