The terms auditing and investigation are often widely used in accounting with respect to a systematic examination of data. It may seem that auditing and investigation are one and the same things. Although both of them are used in relation to examining data in accountancy, they differ in meaning, scope, purpose, method and the subject matter that they are used in connection to. Even though they may be similar in a few aspects, there are significant differences between the two. The article aims to analyse the concepts on auditing and investigation and delineate the major differences between Auditing and Investigation.
What is Auditing and Investigation?
Let’s discuss the meaning of Auditing and Investigation:
Auditing
The process of auditing refers to the methodical and authentic examination of the financial statements of an entity with a view to testing the financial accuracy and reliability of the statements and to assess whether the financial statements conform to the applicable laws, regulations and rules. Auditing involves analysing the accuracy of the accounting information to ensure that they follow the required standards. It is the critical assessment and active verification of the accounting system of an entity. An audit is conducted by 3rd parties, which requires the involvement of experts. The audit helps in weeding out fraudulent activities in the organisation and is thus conducted by external parties like the stakeholders or the government. It involves the in-depth examination of the financial statements of the organisation, the records of the economic activities of an organisation that includes net profit records, investment activities, and expenditure, among other things. The primary purpose of conducting an audit is to look for any mistakes in the financial statements to ensure that they provide an apt representation of the financial position of the entity. An auditor generally looks to understand whether the arrangement of the financial information has been made in accordance with acceptable accounting approaches and their application, whether necessary regulations are being followed, and whether every aspect affecting the financials of an entity is unveiled in the financial statement.
The law that governs audits in India is the Companies Act of 2013. The Companies Act of 2013 makes it mandatory for all companies in India to conduct audits. Any person who is a practising chartered accountant and is duly registered under the Chartered Accountants Act of 1949 is eligible to be appointed as an auditor of a company as is provided in Section 141 of the Companies Act for 2013. It also provides for the different types of audits that are required to be conducted by a company. Audits can be carried out by auditors who are externally appointed from outside the company or can also be appointed from among the employees of the company as is provided under Section 138 of the Companies Act of 2013.
The Companies Act places the onus on the management of the company to conduct an internal audit as an independent service to assess compliance with rules and regulations applicable to various internal departments. An internal auditor shall examine the records, controls, methods and practices of a company. An internal audit is voluntary and is conducted at the discretion of the company’s management.
The Companies Act further provides for statutory audits which are conducted with the aim of checking the compliance of a particular company to specific statutes and are conducted by external auditors. Statutory audits are mandatory for companies and it is instituted by the shareholders, who are the owners of a company to whom the company reports to. Statutory auditors are required to be uninfluenced and independent of the management of the company.
Investigation
Investigation refers to a process that is undertaken for a particular purpose with the aim of ascertaining a fact or discovering the truth. For a business entity, investigation pertains to the examination of the book of accounts in the history of transactions undertaken by the company. Investigations are undertaken with the aim of revealing some truth or establishing facts with the help of evidence. An investigation is an enquiry for examination into the company’s accounts with the purpose of collecting information and evidence with respect to the financial activities of an entity. This involves finding out the truth and the facts of the activity rather than verifying how accurate the accounts are. There are various methods that are employed by an investigating party during investigations and it includes search, inquiry, observations, inspection, and interrogations, among other things. An investigation is often considered a narrower form of auditing as it is confined to one particular purpose. Just like auditing, investigations are also carried out by exports and in accordance with the requisite standards of the organisation. Investigations are not compulsory and are not required to be carried out by every organisation. An investigation has a predetermined purpose and scope and is often conducted by the investigator on behalf of any person who wants certain information about a company. Investigations can be conducted on behalf of any person who is not a part of the organisation yet but is seeking to join the same or is looking to purchase shares.
Investigations that are conducted in a business entity are governed by the Companies Act of 2013. Investigations regulated by law are carried out by inspectors that are appointed by the Central Government, which has the power to appoint such inspectors for investigation as is provided under Section 210 of the Companies Act of 2013. Section 211 empowers the central government to institute a body called the serious fraud investigation office or the SFIO to appoint a number of inspectors who shall conduct investigations with respect to fraud.
Section 217 of the Companies Act of 2013 provides for the procedure to conduct the investigation. After an inspector is appointed, she is empowered to conduct investigations into any arrangements or circumstances that are relevant to the purpose of performing the investigation. It is also within the power of the appointed inspectors to require the production and preservation of any or all documents or papers with respect to the financial activities of the company, belonging from either before or after her appointment. The inspector also has the power to conduct investigations along with search and seizures while investigating a company. An inspector is under the obligation to provide interim and final reports of the investigation that has been conducted by her to the central government once the investigation has been completed. These reports shall have evidentiary value, and any person who is found guilty of an offence on the basis of the report will be liable to be prosecuted in accordance with the law. The inspector should also have the power to examine any person for the purpose of investigation with the prior approval of the central government and also require such a person to appear before her personally. The inspector shall also have all the powers that are vested in a suitable quote under the code of Civil Procedure of 1908 for the purposes of investigation, including discovery introduction of books of accounts, summoning enforcing the attendance of persons being examined on earth along with inspection of registers books and other documents. Disobeying any of the directions issued by the inspector can lead to penalties which shall include imprisonment and a fine.
The central government can also present to the tribunal petition for the winding up of a corporate body or the company based on the investigation report on the ground that it is equitable and just that it should be wound up. The central government can also bring any proceedings, based on the investigation report, against anybody corporate or any company either for the recovery of damages in case of any fraud or misconduct or misfeasance in relation to the formation or promotion or management of affairs of a company or can also bring proceedings for the recovery of property of the body corporate or company which has been wrongfully retained or misapplied.
The Companies Act makes it obligatory for any officer or employee of the company to provide any required assistance to the inspector to facilitate the smooth conduction of the investigation.
Powers and Duties of Auditors as per the Companies Act, 2013
Section 143 of the Companies Act of 2013 provides for the powers and duties of an external auditor. Below mentioned are some of the powers and rights that an external auditor is equipped with to duly fulfil her duties:
- Right To Access
The external auditor has the right and power to access the vouchers and the books of accounts of a company at any time, regardless of whether they are kept at the registered office of the company or at any other place. The auditor shall be entitled to obtain any necessary information that is required to perform the duties as an auditor, as and when needed.
The auditor of a holding company shall have the right to access the records of associate companies and subsidiary companies with respect to the consolidated financial statements of all the entities.
- Right to Inquire
The external auditor shall also have the right and the power to inquire into the matters of a company with respect to its transactions, advancing of loans, assets and liabilities among other things.
The below mentioned are the duties that an auditor is expected to fulfil as per the Companies Act:
- The auditor shall be required to assess whether the loans and advances that have been made by a company on the basis of security have been secured properly and that the terms on which they have been made are not prejudicial to the interests of the company and its members.
- The auditor shall check whether the transactions of the company that are represented only by book entries are prejudicial to the company’s interests.
- In situations where the company is not a banking company or an investment company, the auditor shall check whether the assets of the company, which consists of debentures, shares and securities, have been sold at a price that is less than what the cost was when they were purchased by the company.
- The auditor shall also check whether the advances and loans that are made by the company have been shown as deposits.
- The auditors are also required to check whether any personal expenses have been charged to the revenue account of the company.
- In cases where it is stated in the documents and books of the company that shares have been allotted for cash, then the auditor shall check whether the money for such allotment has actually been received and, if no cash has been received, whether the exact position husband stated the balance sheet and the book of accounts and no misleading entries had been recorded or entered.
- The auditor has a duty to make a report on the accounts and the financial statements that are examined by her. The auditor shall give an accurate and complete report regarding the financial position of the company to the members of the company.
- The auditor is also placed under a duty to comply with the auditing standards data recommended by the Institute of Chartered Accountants.
- The auditor has a duty to disclose instances of fraud on the part of the employees of the company that have come to her notice on examination or on finding some evidence. The auditors disclose cases of fraud to the Central Government.
- The auditor is also placed under the duty to sign audit reports that are made by her and other documents of the company.
Auditing and Investigation – Differences
In the first instance, it may seem that auditing and investigation and one and the same things. However, even though they may be similar and out in aspects, there are significant differences between Auditing and Investigation. Some of the differences between Auditing and Investigation are mentioned below:
- Meaning
An investigation is the inquiry of the financial activities for a specific purpose of a company.
An audit is a critical examination of the financial records of a business entity for the purpose of verifying it and assessing its accuracy.
- Guiding Principles
An investigation is not guided by any particular standards that are specifically prescribed under the law. However, a statutory audit is required to be done as per the generally accepted “standards on accounting,” which have been formulated by the Council of the ICAI or The Institute of Chartered Accountants of India in accordance with the international students that have been issued by the IAASB or the International Auditing and Assurance Standards Board.
- Scope:
Investigations generally have a limited scope as they are confined subject matter of investigation on a specific purpose for which it is being conducted and is confined to the matters related to the subject matter itself. Investigations are generally conducted on behalf of 3rd parties like financial regulators or investors, or the owners of the company for the purposes of the investigation.
However, the scope of audits is more comprehensive as it is conducted with the general purpose of forming an opinion on the financial activities of the company by analysing and examining the financial records and statements of a company. An audit was just conducted on behalf of the owners of the company.
- Objectives
An investigation is conducted with the purpose of ascertaining a particular fact for a specific purpose and it can vary from assignment to assignment. For a business entity, it can include the examination of the affairs or financial records of a company to find out errors or instances of fraud or malpractice or for any other specific purpose. Investigations are not conducted to ascertain the overall financial position of the company. It is limited to the aspects that are required to be looked into in order to fulfil the purpose for which the investigation is being conducted.
An audit is conducted with the purpose of expressing an opinion on the financial situation of an entity. It is basically conducted to test whether the financial statements showcase an accurate and fair view of the financial state of affairs of an entity. It also helps in achieving the incidental objective of detecting errors or frauds during the course of an audit. Auditors are generally wary of the possibility of errors or fraud in the financial statements or books of accounts, as this can cause the financial position of the entity to be misstated. The auditor checks the books of accounts to assess the accuracy of the data and to look for errors. It is conducted to ascertain the true financial position of a company, the cash flow profit and losses, investment rates or the value in the market.
- Subject Matter
An investigation covers only the examination of requisite records that are relevant to the object and purpose for which the investigation is being conducted.
An audit covers the examination of all the financial statements and the records of a company.
- Nature
The investigation is not mandatory in nature and is conducted at the discretion of the person seeking information through the investigation.
However, the nature of audits a compulsory in nature and every company is required to conduct routine audits as per the Companies Act of 2013.
- Duration and Time Period
There is no specified duration or time period during which an investigation is required to be conducted or completed. It only depends on the information that is required to be found out from the investigation or the complexity of the case. Investigations can take at any time of the year, depending upon the requirements of the investigation.
Audits are required to be conducted annually at the end of every year to assess the financial statements of the company that was prepared throughout the year and have to be completed limited time frame.
- Personnel for Execution
Investigations are conducted by inspectors appointed by the owners or management or any other 3rd party or the central government in accordance with the applicable provisions of the Companies Act of 2013[1]. Inspectors can either be government employees or a private person. An audit can only be conducted by a chartered accountant in practice who is appointed under the Chartered Accountants Act of 1949.
- Appointment Of Personnel
Investigations are conducted by inspectors who may be appointed by the owners or management or the central government, or any other 3rd party.
Auditors are appointed by the company itself by its board members. The first auditor of a company is required to be appointed by the board of directors through a board resolution which is required to be passed before the expiry of 30 days from the date of incorporation of the company. All the subsequent auditors of a company are appointed either by the owners are the shareholders of an entity in its annual general meeting. The company can appoint either an internal auditor or an external 3rd party auditor.
- Procedure
There is no defined scope are the process examination that is conducted during investigations. Investigations can extend to any limit, depending upon the complexity of the case. An investigation is conducted on the existence of a preconceived suspicion or notion of a lapse or an error. An investigation gathers concrete and conclusive evidence, and the investigation report is acceptable evidence in a court of law. There are no set standards for conducting an investigation.
An audit is conducted without the existence of any preconceived suspicion or findings with respect to fraud or error. An audit does not gather conclusive or fool proof evidence. It only gathers persuasive evidence. An audit is to be conducted in accordance with the standards that are set by the Institute of Chartered Accountants.
- Evidence
Investigation reports generally are based on corporate and claim conclusive evidence. The evidence obtained as such directions to fulfil the purpose for which the investigation was being conducted. Auditors gather persuasive evidence rather than conclusive evidence. Auditing is mainly based on test checking. This essentially means that rather than checking all the transactions, auditors will test-check a small part of transactions out of a setup similar ones and form their judgement. Their opinions are generally based on inference from the test check.
- Report
An investigation report provides information with respect to the results or conclusions that are drawn from the enquiries made. The investigation report consists of contract and hard evidence and not the opinion of the investigator, and it has evidentiary value and is conclusive in nature. Generally, investigation reports are not audited again during an audit.
An Audit report showcases an accurate and fair account of the financial condition of the entity, along with the opinion of the auditor regarding the reporting of the financial statements. The evidence drawn from an audit report is persuasive in nature.
- Manner of Reporting
There is no statutory form or the specific manner in which the investigation report is to be created. On the other hand, an auditor is required to make a report of the accounts edited by her to the members of the company. The information has to be made in a particular format, and the matters that are to be mentioned in the audit report are provided by the law under Section 143 of The Companies Act of 2013, read with The Companies (Auditor’s Report) Order of 2020.
Conclusion
Auditing and investigation are often widely used in accounting with respect to a systematic examination of data. The process of auditing refers to the methodical and authentic assessment of the financial statements of an entity with a view to testing the financial accuracy and reliability of the statements and to assess whether the financial statements conform with the applicable laws, regulations, and rules. Investigation refers to a process that is undertaken for a particular purpose with the aim of ascertaining a fact or discovering the truth. For a business entity, investigation pertains to the examination of the book of accounts in the history of transactions undertaken by the company. Investigations are undertaken with the aim of revealing some truth or establishing facts with the help of evidence. Although Auditing and Investigation are used in relation to examining data in accountancy, they differ in meaning, scope, purpose, method and the subject matter that they are used in connection to.
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