What is Investigation? Distinguish between Audit and Investigation, define the scope and objectives of investigation.
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.
- 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.
- 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.
Classification of investigation:
1. Evaluation investigation
2. Review investigation
3. Survey investigation
4. Analysis investigation
5. Special audit
6. Statutory investigation
1. Evaluation Investigation:
Evaluation investigation is conducted to determine the real worth of business proposed to be purchased or sold, or to determine the performance of machinery or efficiency of the personnel of an organization. In case of proposed purchase of business, the investigation relates to valuating the assets and liabilities and ascertaining the present earning potential and future prospects. In case of sale of business, net worth of business is determined. In case of evaluation of machinery and personnel, the performance of machinery and efficiency of personnel is determined.
2. Review Investigation:
Review investigation is usually conducted to determine the reliability of business data, or to ascertain the compliance with the terms of a contract. Where payment of commission, royalty, subsidy or similar items is based on output or turnover, investigation shall be conducted to determine the correctness of data provided by the party. The secured creditors may desire to know that the borrower has, in fact created a charge, as agreed, on the assets in their favor.
3. Survey Investigation:
Survey investigation is conducted to determine the accounting system, costing methods, manpower efficiency and similar matters. A survey of accounting system, may be carried out to overcome the weaknesses pointed out in audit report, to introduce a budgetary control system, or necessity of strengthening internal check or introduction of internal audit. A survey of cost system may be with a view to improve existing procedures. A survey of manpower may be undertaken to determine the real number of employees required, surplus staff, inefficient workers, etc.
4. Analysis Investigation:
Analysis investigation is conducted with a view to facilitate the decision making by top management in areas of vital importance like price fixation, cost of products or services, reasons for increase in price, ways to control them.
5. Special Purpose Audit:
Special purpose audit is in fact an investigation conducted with a view to determine fraud, losses caused by fire, loss of production due to machinery breakdown, loss of profit as a consequence of fire.
6. Statutory Investigation:
Companies Ordinance provides for statutory investigation in section 263 to 282. Such an investigation may be made on:
a. The report of register of companies.
b. The application of members of the company.
c. In other cases like special resolution of company or under court order.
a. On report of register section 263 (1):
The Securities and Exchange Commission upon a report by the registrar of companies, under section 261 (6) appoint inspector to investigate the affairs of the company and to report thereon, (Section 163(1)).
If the company does not furnish the information required by the registrar, under section 261 (1) within the time allowed or if the information submitted disclose an unsatisfactory position or does not disclose full and fair position, the registrar shall report the position to commission whereupon the commission may order investigation.
b. On application of member section 263 (1) & 264:
Securities and Exchange Commission may appoint inspector to investigate the affairs of any company and to report thereon in such manner as Commission may direct:
Such appointment shall be made as under:
i. In case of company having share capital on the application of members holding at least one-tenth voting powers.
ii. In case of company not having share capital on the application of at least 1/10th of members.
The application by members must be supported by such evidence as the Commission may require, supporting their claim for investigation. The applicant shall also give security for the payment of cost of investigation, section 264.
c. Investigation in other cases section 263 (1):
Securities and Exchange Commission may order investigation, according to section 265, in the following two circumstances:
a. When company passes a resolution in general meeting required investigation.
b. When investigation is ordered by the court.
- When investigation is mandatory section 265 (a)
The shareholders, by a resolution, desire the commission to appoint inspector to investigate the affairs of the company. They need not specify the circumstances in the resolution due to which they desire investigation. This right can be exercised in whosoever hand the company may be i.e. director, receiver appointed by debentures holders, administrator appointed by the court.
- When investigation is discretionary section 265 (b)
Securities and Exchange Commission may appoint inspector to investigate company’s affairs if in its opinion there are circumstances suggesting.
a. That the business is conducted with intention to defraud creditors, members or any other person.
b. Company was formed fraudulent or unlawful purpose.
c. Person involved in formation or management is guilty of fraud, misfeasance or other misconduct.
d. Members have not been given full information.
Powers of Inspector
1. Investigate affairs of any other company in the same group.
2. Require officer to produce books, etc, and to assist.
3. Require anybody corporate to give information.
4. Keep books and papers in custody.
5. Examine officers on oath.
6. Seize books and papers.
Inspectors report section 269
The inspector may make interim report, or on the conclusion of investigation shall make a final report to the Commission.