Statutory audit: the questions founders dread and how to make them routine

Every founder who has been through a statutory audit remembers the moment the auditors asked for something that did not exist in the form they wanted it. Revenue reconciled to contracts, not just bank deposits. A fixed-asset register that tied out to the depreciation schedule. Related-party transactions documented with board approvals and market-rate justifications. The ask was not unreasonable. The company just had not kept the paper.

The dread is not really about the auditors. It is about the gap between how the company actually ran its books during the year and what Ind-AS and the Companies Act require those books to look like at year-end. Most of the gap is closeable in a week if you know where to look. The founders who spend three days in fire drills are the ones who find out what the auditors need only after the fieldwork starts.

Abhishek leads the audit and assurance practice at Nucleus. Over six years across statutory audits, IFC reviews, and Ind-AS implementations, he has seen the same four asks surface in nearly every engagement. This is what those asks actually mean, what auditors want to see, and what simple preparation looks like for each.

Why the dread is predictable

Statutory auditors in India are required to give an opinion on whether the financial statements present a true and fair view under Ind-AS, whether the company has adequate internal financial controls, and whether specific disclosures required by Schedule III and other regulations are complete. These are not optional checks.

Four areas concentrate most of the difficulty. Revenue recognition under Ind-AS 115. Related-party transactions under Ind-AS 24 and Section 188 of the Companies Act. Fixed-asset register reconciliation. Lease accounting under Ind-AS 116. A fifth, key managerial personnel compensation disclosures, tends to create a different kind of problem: it is usually not missing, it is just wrong.

None of these require new systems. They require documentation discipline during the year, not just at year-end.

Revenue recognition under Ind-AS 115

Ind-AS 115 requires you to recognize revenue when, or as, performance obligations are satisfied. That sounds simple. In practice it means the auditors need to see the link between your contracts, your invoicing, and your revenue line.

What auditors actually want: a sample of contracts from your top customers, matched to the invoices raised against them, matched to the revenue recognized. For a SaaS company, they want to understand whether you are recognizing revenue monthly as the service is provided or upfront at the point of invoicing. For a services company, they want to understand the milestone structure in the contract and confirm that the revenue recognized matches milestones actually completed, not milestones billed.

The three situations that slow audits down most are: contracts with multiple deliverables where the company treated the whole thing as one performance obligation; deferred revenue that was recognized early because the invoice was raised before the service period started; and variable consideration, discounts, refunds, or rebates, that were not accounted for when recognizing the revenue.

What simple preparation looks like

Before fieldwork starts, pull your top 20 customers by revenue. For each one, have the signed contract, the invoices raised during the year, and a one-line memo explaining how you identified the performance obligations and when you recognize revenue. If you have deferred revenue on the balance sheet, have the schedule showing the opening balance, additions, and releases, tied to specific contracts. This is two days of work for a CFO or controller. It turns a week of auditor queries into a 45-minute walkthrough.

Related-party transactions

Related-party disclosures under Ind-AS 24 require you to disclose all transactions with directors, key managerial personnel, their relatives, and entities they control or significantly influence. Section 188 of the Companies Act adds an approval requirement for transactions above prescribed thresholds: board approval for smaller amounts, shareholder approval for larger ones.

What auditors actually want: a complete list of all related parties, every transaction with each of them during the year, confirmation that transactions above thresholds were approved at the right level, and evidence that the terms were at arm's length.

The most common gap is not the transactions. It is the documentation. A company lends money to a director's other entity. The loan exists. The interest is being charged. But there is no board resolution authorizing the loan, no loan agreement signed between the two parties, and no documented basis for the interest rate being at market. The auditors are not surprised that the transaction exists. They need to see that the board knew about it and approved it.

Building the RPT register

Keep a related-party transaction register from the start of the financial year, not the end. Every transaction with a related party goes in as it happens: date, counterparty, nature of transaction, amount, whether board or shareholder approval was obtained, and where the approval resolution can be found. The register takes 30 minutes a quarter to maintain if you do it live. It takes three days to reconstruct from a year of bank statements at year-end.

One more point. Remuneration to directors and key managerial personnel is itself a related-party transaction requiring disclosure. If your board has not formally approved the KMP remuneration through a compensation committee or board resolution, that is both a disclosure gap and a Companies Act compliance gap. Fix it before the auditors ask.

Fixed-asset register reconciliation

The fixed-asset register is supposed to be the single source of truth for every capitalized asset: what it is, when it was purchased, what it cost, how it is being depreciated, and what its net book value is. In practice, the FAR in most growing companies is a spreadsheet that was last updated six months ago and does not match the depreciation schedule in the accounting software.

What auditors actually want: the FAR tied out to the gross block and accumulated depreciation figures on the balance sheet, with additions and disposals during the year documented and physically verified. For companies above a certain size, they will do a physical verification, picking a sample of assets from the register and checking they exist, and picking a sample of assets from the floor and checking they are on the register.

The two gaps that slow this down most are unrecorded disposals and assets under construction that were never capitalized. A laptop was written off but remains in the FAR. A leasehold improvement completed eight months ago is still sitting under capital work-in-progress. Both require adjustment entries that will show up in the audit report if not dealt with.

Keeping the FAR current

The FAR should be updated in the same month as the purchase or disposal, not at year-end. Assign ownership: whoever approves the purchase order signs off on the FAR entry. For physical verification, do an internal round in December rather than waiting for the auditors to do it in March. Find your own gaps first.

Lease accounting under Ind-AS 116

Ind-AS 116 applies to most leases of one year or more. It requires you to recognize a right-of-use asset and a corresponding lease liability on the balance sheet, then charge depreciation on the asset and interest on the liability through the P&L. Most companies got comfortable with this for office leases. The gaps tend to be in equipment leases, vehicle leases, and arrangements that look like service contracts but meet the definition of a lease.

What auditors actually want: a complete list of all arrangements that meet the Ind-AS 116 definition of a lease, the calculation of the right-of-use asset and lease liability at inception and at year-end using the incremental borrowing rate, and the disclosure note broken down by maturity.

The incremental borrowing rate is where most companies get challenged. The rate used to discount the lease liability should reflect what the company would pay to borrow on secured terms over a similar tenor. Using the SBI base rate because it is convenient is not the right answer and auditors will ask for the basis.

KMP compensation disclosures

Schedule III of the Companies Act requires disclosure of remuneration paid to directors and key managerial personnel, broken down by components. The Companies Act also sets ceilings on managerial remuneration as a percentage of net profits for listed companies and requires specific disclosures for private companies above prescribed thresholds.

The gap here is almost never the remuneration itself. It is the breakdown. The company paid its MD Rs. 1.2 crore. The auditors ask for it split into salary, performance bonus, perquisites valued under Income Tax rules, and any commission component. The HR team has the payslips. The perquisite valuation is sitting in a drawer. The commission approval is in a board resolution from eighteen months ago. None of it is wrong, but it takes two days to pull together.

Do this reconciliation once a year, in January, before fieldwork begins. Pull every component of compensation for each KMP, value perquisites using Income Tax rules, confirm the total ties to what was expensed in the books, and verify you have a board or shareholder resolution authorizing the aggregate. Then it is a 10-minute conversation with the auditors.

What the preparation window actually looks like

The audit preparation that makes fieldwork smooth takes about five working days, spread across January and February for companies with a March year-end.

Day one and two: revenue walkthrough. Pull the top-customer sample, write the performance-obligation memos, reconcile deferred revenue.

Day three: RPT register. Reconcile all related-party transactions against approvals, update the register, confirm KMP compensation breakdown.

Day four: FAR and CWIP. Reconcile the register to the balance sheet, flag unrecorded disposals, move completed CWIP to the FAR.

Day five: lease schedule and KMP disclosures. Confirm all leases are captured, verify the IBR basis, complete the compensation reconciliation.

That is it. Five days of focused preparation replaces three weeks of fire drills. The auditors arrive, fieldwork runs on schedule, and the audit report lands on time. For a company planning a fundraise or an exit in the same year, that matters more than most founders realize. Investors asking for audited financials do not want to hear that the audit is delayed because the FAR does not tie out.