Quick answer: A statutory audit is a legally mandated, independent examination of financial statements; an internal audit is an ongoing, management-commissioned review of controls, processes and risk; and physical verification is the counting and inspection of assets or inventory to confirm they exist and match the records.
Businesses, PSUs and institutions often need all three. They complement each other, but they serve different purposes and are reported to different people.
Statutory audit
- Required by law — for example, for companies under the Companies Act and for tax audit cases under the Income-tax law
- Auditor appointed by shareholders (or as prescribed)
- Opinion on whether financial statements give a true and fair view
- Report addressed to members/stakeholders
Internal audit
- Commissioned by management or the audit committee; mandatory for certain classes of companies
- Reviews internal controls, processes, risk and efficiency
- Scope is set by management and can change each year
- Findings reported to management and the audit committee
Physical verification
- Counting and inspecting fixed assets and inventory
- Confirms existence, condition and location of assets
- Identifies shortages, surpluses, obsolete or idle assets
- Often part of internal audit assignments for PSUs and large enterprises
Frequently asked questions
Can the statutory auditor also be the internal auditor?
No. To maintain independence, the statutory auditor of a company cannot be appointed as its internal auditor.
Which companies must have an internal audit?
The Companies Act requires internal audit for specified classes of companies based on thresholds such as turnover and borrowings.
How often should physical verification be done?
Inventory is usually verified at reasonable intervals during the year, and fixed assets under a programme that covers all assets over a period.
Related: Audit & Assurance · Stock audit guide