Audit Investigation: Objects of Audit Investigation

Audit Investigation means an inquiry into accounts of a business for special purpose. It is an examination of the books of accounts of a business to know its actual financial position or earning capacity, etc.

Taylor and Perry have defined it thus: “Audit Investigation involves inquiry into facts behind the books and accounts, into the technical, financial and the economic position of the business or organization”.

It is a kind or special audit with a limited or extended scope according to the purpose for which it is conducted. Investigation is neither accountancy nor auditing as we shall see later on. Audit Investigation may be conducted with many objects which will be discussed below.

Points to be noted while conducting an audit investigation

Before dealing with the different classes of investigation, it is desirable to lay down here certain principles and rules to guide the investigator in drafting his report. His liability depends upon his report. To be on the safe side, he should keep in view the following conducting an audit investigation:

  1. Purpose of investigation

He must get in writing the object or the purpose of investigation and the period to be covered.

  1. Accounting system

He should chalk out a programme, taking into consideration the nature of the business, the method of keeping the books of account, system of internal check, etc. if the accounts have already been audited, very little work of checking regarding the verification etc. will have to be done though it has been held in the case of Sohat & Compton vs. Bracke (1908) that an auditor while investigating on behalf of an incoming partner is entitled to assume that the figures in the books of account are correct. Again it was held in the case of Mead vs. Ball, Baker & Co. (1911), that an auditor was not expected to check errors in the stock sheets and the omission of liabilities, if he was appointed by his client to act as an investigator in a limited company. But still he must enquire from his client whether he could rely upon the accuracy of the audited accounts or should he go through them again.

  1. Not to be influenced

He should be honest and must not be influenced by any interested party, e.g., the vendors or promoters of a company.

  1. Use of skill and diligence

He should show as much skill and diligence as is expected of such an investigator.

  1. Expert opinion

Where it is desired, he should get the opinion of the experts in case of valuation of stock and other assets.

  1. Consult the auditor of company

If the accounts had already been audited, he should consult the auditor of the company.

  1. Mention the facts

If he has relied upon the audited accounts without verification of assets, he must mention that fact in his report.

  1. Keep proper record

He should keep a proper record of inquiries, explanations given and so on for future reference, so that he may have a proof against any charge of negligence leveled against him in future. Such a record will be good documentary proof.

  1. His finding

The report should be simple, unambiguous and concise, but not at the cost of clarity.

  1. Drawing up the report

He should be very careful in drawing up the report. It should be absolutely correct; if it is not and his client relying upon such a report suffers any loss, he will be held liable for damages. Legal cases regarding his liability will be taken up at the end of his chapter.

Objects of Audit Investigation

Following are some of the particular purposes for which audit investigations are conducted:

  1. Purchase of running business

Investigation on behalf of an individual or a promoter of a Joint Stock company which wishes to purchase a private running business in order to ascertain the financial position and the earning capacity of the concern proposed to be taken over.

  1. On behalf of incoming partner

Investigation on behalf of an incoming partner, who wants to know the earning capacity of the firm, the financial position of the concern and whether it is advisable to become a partner.

  1. Client who wishes to lend money

Investigation on behalf of a client who wishes to lend money to a concern to know its financial position.

  1. Fraud is suspected

Investigation where fraud is suspected by the proprietor.

  1. Purchase the share

Investigation on behalf of a client who wishes to purchase the shares of a company.

  1. Compensation for compulsory removal

Investigation to ascertain the amount of compensation payable on the compulsory removal of business.

  1. Insurance claim

Investigation for claims under an insurance policy covering consequential losses, e.g., in the case of fire, burglary, etc.

  1. Negligence of auditor

Investigation on behalf of the company or an individual for alleged negligence or lack of skill by the Auditors.

  1. Suspected of fraud of misfeasance

Investigation on behalf of the liquidator of a company where the directors are suspected of fraud or misfeasance.

  1. Beneficiaries suspected fraud

Investigation on behalf of beneficiaries where trustees are suspected of fraud or misappropriation.

  1. Income tax authorities

Investigation on behalf of Income Tax authorities for tax liability or for detection of undisclosed income.

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