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Saturday, May 10, 2014

Investigation: Meaning, Classes and Difference

INVESTIGATION:
When for a special purpose an inquiry is made into the accounts of the business it is called investigation. In other words, we may say that audit which is conducted for a particular object is called 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.

Classes of Investigation
There are many types of Investigation, but certain main classes can be identified. Following are some of the areas where the investigation is mostly called for:
1.       Investigation on behalf of a person or company who wants to purchase a running business.
2.       Investigation on behalf of a person who is interested to join as a partner in a partnership firm.

3.       Investigation on behalf of a person who wants to lend money to a business or interested to know its financial position.
4.       Investigation on behalf of the owner/shareholder of the business who suspects a fraud.
5.       Investigation on behalf of the tax authority for assessing actual tax liability.

Difference between Audit and Investigation

Basis
Audit
Investigation
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.
Objective
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.
Period
Audit is conducted on annual basis.
Investigation may be conducted for several years at a time, say three years.
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.
Documents used
Audit is not carried out of audited financial statements.
Investigation may be conducted even though the accounts have been audited.
Extent of work
Audit is normally conducted on test verification basis.
Investigation is a thorough examination of books of accounts.
Reporting Party
Audit report is addressed to shareholders (or proprietors or partners).
Investigation report is addressed to the party on whose instruction investigation was conducted.
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.
Person performing work
Audit is to be conducted by a chartered accountant.
Investigation may be undertaken even by a non-chartered accountant.