This article is written by Rimsha Riyaz, a student of BA LLB (Hons.) at Jagran Lakecity University, School of Law, Bhopal. This article shall give an overview of the major differences between the concepts of auditing and investigation in accounting.
It has been published by Rachit Garg.
In accountancy, both the terms ‘audit’ and ‘investigation’ are widely used and relate to examining data systematically. Though these terms are connected to the examination of data, they differ in meaning and definition and cannot be used interchangeably. The terms audit and investigation differ in scope, method, purpose, and the subject matter they deal with, making them unique concepts or methods of examining data in accountancy.
What is auditing
An audit is a term used for the examination and evaluation of the financial information of an association. This examination is done to check the accuracy and authenticity of the accounting records of an organization and to make sure that the financial statements of an organization comply with the relevant standards of accounting. It is the active verification and a critical assessment of the accounting system of an organisation.
The audits are conducted by third parties, and it is a complex activity that needs to be carried out by experts. It is a check on fraudulent activities inside the organization and hence is conducted by external entities like the government or the stakeholders. An audit involves the examination of financial statements, which are the records of the financial activities of a business or any other non-profit organization that include net profits, expenditure, investment activities, etc.
The main objective of auditing is to check for any errors in these statements and ensure an accurate representation of the financial position of an organization.
Laws related to auditing
Auditing is a mandatory requirement for all companies in India and is regulated by the Companies Act, 2013. Under this Act, any person who is a chartered accountant in practice registered under the Chartered Accountants Act, 1949 can be appointed as an auditor of a company according to Section 141 of the act. The Companies Act, 2013 provides for various types of audits conducted for a company. Audits can be conducted by auditors who are either appointed from among the company’s employees themselves according to Section 138 or auditors appointed from outside the company. These auditors are external or internal.
The Act provides for an internal audit which is conducted by the management itself as an independent service to check for the compliance of the internal departments to the norms and rules applicable to them. An internal auditor examines the controls, records, methods and practices inside a company. Such an audit is voluntary and conducted at the discretion of the management.
The Act also provides for a statutory audit, which checks the compliance of a particular statute applicable to companies and is conducted externally by an external auditor. Such an audit is mandatory for all companies and is instituted by the owners or shareholders of a company to whom he is accountable and reports. The statutory auditors are required to be independent and uninfluenced by the management of the company. The Companies Act gives various powers and duties to an external auditor.
Powers and duties of an auditor
The Companies Act, 2013 also provides the powers and duties of the external auditor of a company under Section 143 as follows:
- Right to access: The power of an auditor includes the right to access the books of accounts and vouchers of the company at all times. The auditor is entitled to obtain information as and when it is necessary for him to perform his duties.
- Right to inquire: The auditor also has the power to inquire into the matters of the company relating to the advancing of loans, any transactions, assets and liabilities, etc.
- Duty to report on financial matters: The auditor is required to make reports on the financial statements and accounts which are examined by him. The auditor in an audit report shall give information to the best of his knowledge and the true financial position of the company at the end of a financial year.
- Duty to comply with the auditing standards: The auditor is required to comply with the auditing standards which have been recommended by the Institute of Chartered Accountants.
- Duty to disclose fraud: The auditor, on examination, on finding some evidence or has a reason to believe that there have been instances of fraud on part of the company employees against the interests of the company in its financial matters, must disclose such fraud to the government. Such a disclosure needs to be done to the central government.
- Duty to sign audit reports: The auditor has to sign the audit report made by him and all such documents of the company.
All these powers given to the statutory auditors allow them to conduct audits independently and make unbiased reports. However, their independence came into question in the case Central Bureau of Investigation, Hyderabad v. Subramani Gopalakrishnan, 2011 as it was found that the auditors had aided the management to commit the accounting fraud that led to great losses to the company.
What is an investigation
An investigation is a form of an examination or inquiry into the accounts of a company which have to be analyzed for a specific purpose. The main objective of an investigation is to collect information or evidence about the financial activities of a business organization. The investigation involves finding out the facts of the activity and discovering the truth rather than verifying the accuracy of the accounts.
The process of investigation involves searching, observation, interrogation, inspection, etc. The investigation is similar to auditing and can be called a narrower form of auditing confined to one special purpose. Like auditing, an investigation is also conducted by experts according to the required standards of the organization. However, investigations in an organization are not commonplace, are not mandatory and hence, have no specific period.
An investigation, unlike an audit, is conducted at the request of a person who might be a part of the organization or the organization itself. The investigation thus has a predetermined scope and purpose and is conducted by an investigator on the behalf of the person who requires the information about the company.
An investigation can also be conducted on behalf of a person who is not a part of the organization yet but is willing to join the firm or seeks to purchase the shares of that business.
Laws related to investigations
The investigations conducted into the affairs of an organisation are regulated by the Companies Act, 2013. The investigations which are regulated by law are conducted by inspectors who are appointed by the Central government, which has the power to appoint any person as an inspector for investigation under Section 210 of the Act.
The Central government is also empowered to create a body named the Serious Fraud Investigation Office (SFIO) under Section 211 to appoint any number of inspectors for conducting investigations in matters of fraud.
Powers and procedure of an investigation
Section 217 of the Companies Act gives the procedure of the investigation. Once an inspector is appointed, he is empowered to start investigating any circumstances or arrangements which exist and are relevant to the purpose of the investigation. [Section 216]
It is within the power of the inspector to require the preservation and production of all or any papers or documents relating to the financial activities of the company, before him. Section 217 of the Act makes it a duty of every employee or officer of the company to provide any reasonable assistance to facilitate the conduction of the investigation.
Lastly, the inspector must give final as well as interim reports of the investigations conducted to the central government after the investigation is completed. Such a report has evidentiary value and any person who is found guilty of any offence based on the report can be prosecuted. [Sections 223 and 224]
Difference between auditing and investigation
Though similar in concepts, audits and investigations differ in a lot of aspects making them unique to each other. The following are the broad differences between auditing and investigation:
- Meaning: An audit is the examination of the financial records of a company for verification. However, an investigation is the enquiry of the financial activities of a company for a special purpose.
- Objectives: The concepts of audits and investigation also differ in the object for which they are conducted. The object of conducting an audit is to check the accuracy of data and look for errors. The purpose of carrying out an investigation varies and is done to find out the cause of errors.
- Nature: The nature of an audit is that it is mandatory for every organisation and is done routinely by auditors. The investigations are not a mandatory requirement and are conducted only for special purposes and occasions.
- Subject matter: The audits cover the examination of all the financial records and statements of a company. On the other hand, investigations cover only the examination of those records which are relevant to the purpose and object of the investigation.
- Scope: The audits can be said to have a wide scope as the examination has a general-purpose and covers all sorts of affairs of the company. Investigations, however, have a limited scope and are confined to their specific purposes and cover only related matters.
- True position: Audits are conducted to ascertain the true position of the company in terms of profits and losses, cash flow, investment rates etc. and its value in the market. The investigation does not pertain to the true financial position of a company but only to the aspects which are required for fulfilling the purpose for which it was conducted.
- Conducting Authority: The audits are conducted only by chartered accountants appointed under the Chartered Accountants Act, 1949. The investigations are conducted by inspectors, who may be any private person or government employee, and need not be Chartered Accountants.
- Period: An audit is conducted for one financial year and hence has a fixed period. The period for which an investigation is conducted varies with the purpose and may be more or even less than one financial year.
- Predetermined findings: An audit is conducted without any predetermined findings or suspicion of finding some error or fraud. An investigation, however, is conducted based on some preconceived notion or only on suspicion of a lapse or error.
- Evidence: An audit does not gather foolproof or conclusive evidence. Instead, it only gathers persuasive evidence and hence is not 100 per cent accurate. The investigations gather conclusive evidence and concrete hence, an investigation report is admissible as evidence in a court of law.
- Guiding Standards: An audit is to be conducted in compliance with the set standards of those recommended by the Institute of Chartered Accountants. The investigation is
not guided by any set of standards.
Summary of differences
|Meaning||Examination of the financial records of a company for verification||Enquiry of the financial activities of a company for a special purpose|
|Objectives||Check accuracy and find errors||Find the cause of errors|
|Nature||Mandatory routine||Only for special purposes, occasionally|
|Subject matter||Examination of all the financial records of a company||Examination of only relevant records|
|Scope||Wide coverage of records||Narrow coverage of records|
|True position||Ascertains the true financial position of the company||Does not give the true financial position of the company|
|Conducting Authority||Only by Chartered Accountants||Any inspector appointed|
|Period||One financial year||No fixed period|
|Predetermined findings||Conducted without any predetermined findings||Based on some preconceived notion|
|Evidence||Gathers only persuasive evidence||Gathers conclusive evidence|
|Guiding Standards||Guided by standards set by the Institute of Chartered Accountants||No set of standards|
Therefore, it can be concluded that the concepts of auditing and investigation have manifold differences. Although both the concepts involve the examination of facts and checking on fraud, they are different, with one being a form of the other. Both audits and investigations are regulated by the Companies Act in India and are hence equally significant for the affairs and position of companies in India. Despite their differences, both are statutorily regulated and are subject to the laws of the country. Different aspects of each are individually covered in the law and hence highlight their importance in the detection of and tackling growing financial crimes. Because of the growth of companies with a startup culture, there are ever-growing instances and risks of company fraud.
Frequently Asked Questions (FAQs)
Is investigation a constituent of the auditing process?
Yes, though different concepts, auditing involves investigation, which is the enquiry of facts for conduction of the audit. An investigation forms a part of an audit but differs from it in that an investigation can be carried out for different purposes by an expert team, but an audit is only conducted by chartered accountants to find the overall position of the company as a mandatory requirement.
What is meant by investigative auditing?
When learning the differences between an audit and an investigation, the term investigative audit may sound confusing and a mingling of the two terms of audit and investigation. This term in accounting is a type or form of auditing and is also known as forensic auditing. This type of auditing involves a combination of both the processes of auditing and investigation, and under it, the accountants who have specialised knowledge of both accounting as well as investigation, and is conducted to disclose instances of fraud, negligence, malfeasance, and money missing. Such accountants are known as investigative auditors who are required to testify in any cases of disclosure of fraud.
What is the difference between general and investigative auditing?
The difference between general and investigative auditing lies in their purpose. General audits are conducted for the overall ascertainment of the position of a company and are mandatory. Investigative auditing is only conducted customarily and for specific purposes.
What are the common types of investigations in auditing?
The common types of investigations carried out in auditing are investigations for the acquisition of companies, purchase of shares, prospective investments, cases of fraud, breakdown of systems, prospective loan advances, and admission of new partners. All these types of investigations are guided by the same procedures and methods.
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