Investigation involves inquiry into facts behind the books and accounts, into the technical, financial and the economic position of the business or organisation.
Investigation is an examination of books and records preliminary of financing or for any specified purpose, sometimes differing in scope from the ordinary audit.
Investigation implies an examination of and record for some special purpose.
Audit and Investigation distinguished
1. Legal binding
- Audit of annual financial statements is compulsory under the Companies Ordinance, 1984.
- Investigation is not compulsory under Companies Ordinance but voluntary depending upon necessity.
2. Object in view
- Audit is conducted to ascertain whether the financial statements show a true and fair view.
- Investigation is conducted with a particular object in view, viz to know financial position, earning capacity, prove fraud, invest capital, etc.
3. Period covered
- Audit is conducted on annual basis.
- Investigation may be conducted for several years at a time, say three years.
4. Parties for whom conducted
- Audit is conducted on behalf of shareholders (or proprietor, or partners).
- Investigation is usually conducted on behalf of outsiders like prospective buyers, investors, lenders, etc.
5. Documents
- Audit is not carried out of audited financial statements.
- Investigation may be conducted even though the accounts have been audited.
6. Extent of work
- Audit is normally conducted on test verification basis.
- Investigation is a through examination of books of accounts.
7. Report
- Audit report is addressed to shareholders (or proprietors or partners).
- Investigation report is addressed to the party on whose instruction investigation was conducted.
8. Adjustment in net profit
- In case of audit net profit disclosed by audited accounts is final without further adjustments.
- In case of investigation in order to determine real earnings certain adjustments are always essential.
9. Person performing work
- Audit is to be conducted by a chartered accountant.
- Investigation may be undertaken even by a non-chartered accountant.
Nature of Investigation
Investigation is an enquiry into the financial statements of a number of past years with a view to know the real financial position or earning capacity. It is in fact a kind of special audit with predetermined scope depending upon the purpose to be achieved. Investigation is neither accounting nor auditing. Investigation is carried out not in substitution of audit, but in addition to audit. The investigating auditor may even have to investigate the audited accounts.
Scope of investigation
No general principle can be laid down with regard to the scope of every type of investigation. Scope of investigation, in each case, would be limited to the period or area to be covered by the investigator.
An investigation on behalf of a person intending to purchase running business of a sole trader will be restricted to the determination of value of assets, liabilities, reserves, existing potential and future prospects. An investigation to settle suspected irregularities in cash or stock would normally cover a period from three to six months.
Objectives of Investigation
The real objective of conducting an investigation by an auditor on behalf of his client is to provide him the desired information in the form of a report about the matter specified. Normally the objective of investigation is to collect, analyze and evaluate facts in respect of desired field of activity with a view on some special purpose as determined by the person on whose behalf the investigation is undertaken. In short investigation is to ascertain the financial position and earning capacity of a business on behalf of a certain person.
The common objectives of investigation are listed below:
1) Proposed purchase of business.
2) Proposed sale of business.
3) Reasons for low profitability.
4) Cause of high employee turn over.
5) Reliability of business data.
6) Proposed investment in particular securities.
7) Suspected fraud.
8) Joining in existing partnership business.
9) Borrowing funds.
10) Lending funds.
11) Proposed purchase of controlling shares in a company.
12) Suspected misfeasance against directors.
13) Detection of undisclosed income for tax purposes.
14) Suspected misappropriation by trustees.
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