If an overseas company establishes a subsidiary in India, it is important to understand the corporate and compliance requirements that apply to the Indian entity. The first question that comes to mind is if there is a statutory audit requirement for Indian subsidiaries. In most cases, the answer is yes. An Indian subsidiary incorporated as a company is generally required to have its financial statements audited under applicable Indian corporate law, regardless of whether its parent company is Indian or foreign.
Audit assurance services can help businesses increase their confidence in the financial statements’ accuracy and the relevance associated with statutory requirements that are being met, when general relationships exist throughout their borders.
What Is a Foreign Subsidiary?
A foreign subsidiary is an Indian company controlled or substantially owned by a foreign company. Its parent entity is overseas, but the Indian entity is a separate legal entity and is subject to Indian laws and regulations.
This is significant as the financial reporting and compliance requirements of the subsidiary are, in general, defined by its status under Indian law.
Is a Statutory Audit Required for a Foreign Subsidiary?
As per the Companies Act, 2013, a financial statement of a company incorporated in India is required to be audited by a competent statutory auditor, in most cases. This obligation extends to foreign corporations’ subsidiaries.
The audit offers a third-party review of the company’s financial statements and enables the stakeholders to evaluate whether they give a true and fair picture of the company’s financial position.
Hence, a company having foreign parent does not mean that the Indian subsidiary is not subject to statutory audit.
The Purpose of the Statutory Audit
A statutory audit generally involves reviewing the company’s financial statements, transactions, and relevant internal controls to assess compliance with applicable requirements.
Auditors will examine:
- Financial records, including income and outgo.
- Assets and liabilities
- Bank transaction and bank reconciliation
- Related-party transactions
- Tax and statutory charges
- Internal controls and accounting procedures
- Financial statement disclosures
The auditor then issues a report of audit which is an independent audit report based on examination conducted.
Why Effective Audit Procedures Matter for Foreign Subsidiaries
Reliable financial information from the Indian subsidiary is important to the foreign parent company. There may be other complexities due to differences in accounting and reporting requirements and regulations.
The foreign-owned firm will be able to use the objective review of financial data through audit assurance service provided by professionals to help detect any problem areas related to controls and reporting.
An effective audit process might help give more visibility to the financial and compliance status of the Indian subsidiary for the parent company.
Additional Compliance Requirements to Consider:
Take statutory audit just as one aspect of the compliance program of the Indian subsidiary. The firm may have to consider the following compliance requirements as well:
- GST, Income Tax
- Transfer pricing
- Related party transactions
- Foreign exchange laws
- Filing annual returns with the Registrar of Companies
- Accounting & Financial Reporting
Specific obligations may vary according to the type of company, business operations, and industry and regulatory requirements.
Conclusion
A foreign company that has a subsidiary in India, and conducts its audit through its parent company, typically cannot rely on the audit arrangements of its parent company to comply with Indian laws. The Indian subsidiary is a legal entity and is required to comply with the Indian corporate and financial reporting requirements, including statutory audit requirements.
Businesses can gain from audit assurance services to enhance the reliability of financial reporting and uncover control weaknesses and to achieve statutory compliance in a more systematic manner. A structured audit process for foreign subsidiaries can help ensure regulatory compliance in India, while also offering improved financial transparency for foreign investors.
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Frequently Asked Questions
Q: Does a foreign subsidiary need a statutory audit in India?
Yes, in most cases. An Indian subsidiary incorporated as a company is generally required to have its financial statements audited in accordance with applicable Indian corporate law, even when its parent company is based outside India.
Q: Why is a statutory audit required for a foreign subsidiary in India?
A statutory audit provides an independent review of the subsidiary’s financial statements. It helps stakeholders assess whether the financial statements present a true and fair view of the company’s financial position and whether relevant statutory requirements are being addressed.
Q: Who can conduct the statutory audit of a foreign subsidiary in India?
The article states that the financial statements of a company incorporated in India are generally required to be audited by a competent statutory auditor in accordance with applicable statutory provisions.
Q: What is the role of internal controls in a statutory audit?
Internal controls and accounting procedures are among the areas auditors may examine during a statutory audit. Reviewing these areas can help identify control weaknesses and issues that may affect financial reporting.
Q: What happens after a statutory audit or examines the financial statements?
After conducting the examination, the statutory auditor issues an independent audit report based on the audit procedures performed.
Also Read: Is Your Business Ready for an Internal Audit? Key Signs to Watch
