Article explains What is a Legal Audit, Procedure of Legal Audit, Is Legal Audit Mandatory, Legal Audit vs Tax Audit, Company Audit and Financial Audit and Significance of Legal Audit.
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What is a Legal Audit?
The word legal audit is made from two words ‘legal’ and ‘audit’. Legal audit is the process of verification of the documents and records of the company. The auditor checks whether the figures, documents and other financial statements released by the company are reliable and true. The job of the auditor is to make sure that the bill credited to the company is true to its value or not.
Procedure of Legal Audit
Step 1 – The first step of legal audit in any company is to determine the type of audit requirements of that particular company. The audit requirements of all companies are different. The manufacturing company has different requirements than that of an insurance company. Hence the audit procedure is also different for every company.
Step 2 – The second step in any legal audit is to gather the documents required for the audit. Mainly documents are divided into six categories but the auditor can further categorize them according to his convenience. Types of Documents
Corporate Documents: All the legal documents of the company like minutes, stockholders, administrators, etc. It also includes permits, registrations, licenses, etc.
Contractual Documents: All contractual documents like lease, purchasing, partnership, warranty, sales, etc.
Labour Documents: It includes all the documents related to labour like training, applications, terminations, employment agreements, etc.
Taxation Documents: It contains all documents related to assets, loans, debts, etc.
Government Documents: It includes documents of daily requirement, internal manuals, etc.
Publicity Documents: It includes documents related to trademarks, promotions, copyrights, etc.
Step 3 – In the third step the auditor meets some employees and some management personnel to understand the working procedure of the daily day to day business. The meeting and analyzing the procedure helps during the fifth step of the audit.
Step 4 – The fourth step of the audit is to verify the documents form the first and second step according to the current procedures and provisions of government. The errors are spotted and treated before starting the audit.
Step 5 – The fifth step of the audit is to record the errors found like payments without authorization, posting problems, etc.
Step 6 – The sixth step of the audit is to share the error report with the management for any issues from the company. The auditor and management discusses the report for further assistance.
Is Legal Audit Mandatory?
The completion of a legal audit is necessary for the company to save themselves from the legal consequences that might be faced by the company. The consequences can be a fine, some penalty, getting sued and prosecuted, and others. In the absence of the ausit, the documents and financial statement of the company will not be checked. The company may record something wrong by mistake in the documents and may attract legal consequences if caught. The discrepancies can be of any kind and can happen to any firm whether a company, an individual, a partnership firm or some other. To be safe from such consequences, it is suggested to conduct a legal audit of your business.
Legal Audit vs Tax Audit, Company Audit and Financial Audit
The legal audit is started with the start of the project whereas the audits like tax audit, company audit are conducted at the end of the financial year. So legal audits are often called as pre-audit. The legal audits are conducted to check the present issues in the company like voucher mismatches, missing payment invoices, check the flexibility of company’s plans and strategies, etc. The sole purpose of the legal audit is to figure out the weak links in the day to day business of the company.
Significance of Legal Audit
A huge load of legal provisions, procedures, rules, norms are present for all the firms. A number of cases are dealt with in the consumer courts regarding the discrepancies, frauds committed by companies, firms, and other institutions. To be safe from such situations, it is necessary to conduct legal audits regularly. This might seem expensive, but it isn’t. It might look like the efforts are not worth it, but in reality it is way better than the consequences that might be faced by the company.
Legal audits helps in effective and efficient growth of the company. Legal audits help in making sure that the records of the company are accurate. It also helps in achieving targets. Audits make sure that the company complies with the rules and procedures of various government authorities. It helps the company form any future damages that might have been faced by the company in the long run.
Legal Audits help to ensure regular and correct payments to the creditors. It also helps in maximizing the profits by ensuring correct payments from the clients.
Legal audit will always help you. You should get your accounts and statements audited to be safe from the legal consequences that might get attracted because of non-compliance of the rules set by the government authorities.
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