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COMMON TYPES OF INVESTIGATIONS IN AUDIT

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An investigation can be defined as an enquiry commissioned by a client for some purpose of his. The scope of enquiry, the range of possible clients and the number of purposes can be very large. We shall therefore confine ourselves to the most common types of investigations that the professional accountant may be called upon to do.

Common types of investigations:

a) Acquisition of companies;

b) Purchase of business;

c) Prospective investments;

d) Admission of new partners;

e) Prospective lending;

f) Fraud;

g) Systems breakdown;

h) Company Acts investigations;

Under this heading we shall also consider, prospectuses and profit forecasts.

Investigations may be needed whenever facts are in doubt or in dispute or where knowledge is required. Anybody can commission an investigation and you will find that companies, individuals, financial institutions and banks, local authorities, the tax authorities can all commission various investigations.

Investigations: The Stages

All investigations are carried out in the same way, therefore the student must remember this section of this chapter.

Stage 1:

You must always obtain precise written instructions from the client. This must incorporate a very clear view of the aims of the investigation, the scope of the investigation, the degree of the detail required, the degree of secrecy to be observed, the person to whom the accountant must address his report. At this level, consideration must be given to the resources the client is ready to utilise and the cost of the job, both in terms of money and time.

Stage 2: Professional courtesies

Professional etiquette requires that if investigations are carried out in the affairs of organizations to which the accountant is not the auditor then the auditors must be communicated with. This is to observe the usual courtesies and to obtain their cooperation.

Stage 3: Organization of the investigations

This involves the accountant assessing the aims of the investigation, estimating the time to be taken and the likely costs and ensuring that the appropriate staff will be available.

Stage 4: Obtaining the background information

This is particularly important in investigations in acquisition of business. It involves gathering as much background information as possible about the object of the investigation, the size of the industry and its structure, history since commencement, the future prospects, the relevant legislation affecting that industry, investment information and relevant accounting ratios. This information is usually available from published sources such as government statistics, trade associations and the financial statements.

 Stage 5: Gathering preliminary information

This information has to be gathered on the subject to be investigated. This information includes the location of the subject, its products, its range of services and its share of the market, key personnel, major accounting control systems and past reports.

 Stage 6: Preparing the report outline

A report that meets the needs of many accounting investigations is as follows:

 Part A: Introduction whereby we have references to the instructions given. The object of the investigation must be apparent from the introduction.

Part B: A summary of the instructions must be given.

Part C: A statement of the precise objectives of the investigation and the report.

Part D: A statement of the scope of investigation stating the time period and the area covered.

Part E: A statement of the documents used. If it is necessary to reproduce any of these documents this is usually done in an appendix.

Part F: An outline of the work actually done, again it may be necessary to put some of this material in an appendix.

Part G: A summary of the information obtained.

Part H: Further information which could be of use to the client but does not flow from the investigation proper.

Stage I: Recommendations of the accountant. In giving recommendations, the accountant must always ensure that:

 a) He gives information from which the client can draw his own conclusions

b) Avoid presenting information in such a way that the clients’ judgement is influenced

c) If information is based upon assumptions, then the accountant must state the assumptions in full and substantiate them if possible

d) Make no forecasts

e) If you are giving opinions, estimates or forecasts, then the accountant must state who made them and what qualifications they had to making them

f) The recommendations are practical

g) The investigation has been comprehensively completed.

h) The report is drafted and discussed with the client

i) The final report is submitted

 

 

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