M5 -

SPECIAL AUDITS
AND INVESTIGATION

GOVERNMENT AUDIT
Government audit is undertaken for various government departments. It is mainly carried out to
ensure that all the expenditures have been duly authorised, before they are incurred. Under it, the
auditor has to see that all the payments have been classified into capital and revenue and have
been made to the right persons. Besides, he has to check all the necessary vouchers also.
The government audit is not done by professional auditors but by junior and senior auditors of
the department. The duties and liabilities of such auditors are not defined by statute. They are not
public auditors and so can not be appointed auditors for public concerns. They are meant for
Government departments. So they work according to departmental rules and instructions.
Objectives
The main objectives of government audit are as follows:
1. To see that whether there is a provision of fund for the expenditure.
2. To make sure that the expenditure is incurred out of the funds sanctioned by a competent
authority.
3. To see that the expenditure has been properly sanctioned according to the rules and
regulations.
4. To see whether the expenditure is not more than the occasion demands.

5. To see that the sanctioned expenditure has been incurred by a competent officer.
6. To see that the payments have been properly and correctly classified as capital and revenue.
7. To ensure that the payments have been made to the right person and they are duly entered in
the books of accounts.
8. To verify the existence and valuation of the stores and the stock.
9. To ensure that a proper system of stock-taking has been adopted.
10. To see that the amount of allowances like travelling allowance is permissible according to
the rules.
Classification
Government audit may be broadly classified into three as mentioned below:
a) Audit of Government Departments
The Government maintains a separate department in the name of Accounts and Audit
Department. This department is headed by the Comptroller and Auditor General of India. It
performs the audit of the different departments and offices of the Government.
b) Audit of Statutory Corporations
For the audit of statutory corporations, in most of the cases, the Comptroller and Auditor General
is required to audit the books of accounts. But in some cases like Life Insurance Corporation,
State Bank of India, Industrial Finance Corporation, etc. the accounts are audited by
professional Chartered Accountants.
c) Audit of Government Companies
According to the Companies Act, 2013, the auditor of a Government company is to be appointed
by the Company Law Board on the advice Of the Comptroller and Auditor General of India. The
auditor of a Government company shall submit a copy of his audit report to the Comptroller and
Auditor General of India (C & AG).

Procedure of Government Audit

The following are the procedures for government audit:
I. Audit of Expenditure
This includes five items as given below:
(a) Audit against Rules and Orders: The Comptroller and Auditor General shall examine
whether the rules, regulations and orders dealing with incurring, sanctioning and disbursement of
the expenditure have been followed.
(b) Audit of Sanctions: The financial powers of the sanctioning authority for incurring the
expenditure should be checked.
(c) Audit against provision of funds: This ensures that the expenditure incurred is well within
the amount provided for in this respect.
(d) Propriety audit: In propriety audit of expenditure the auditor sees that the expenditure is
incurred economically and for the common good.
(e) Performance audit: The performance of projects, activities or operations are critically
examined in this auditing aspect.
II. Audit of Receipts
Audit of receipts is done for ensuring:
(a) Whether all revenues due to the Government are fairly assessed, collected and credited to
relevant accounts.
(b) Whether adequate regulations and procedures have been framed to secure an effective
check on assessment, collection and proper allocation of receipts.
(c) Whether such regulations and procedures are actually being carried out.
(d) Whether there is a checking system to ensure the prompt detection and investigation of
irregularities, forged refunds etc. or other loss of revenue.
(e) Whether the system Of internal procedures are adequate, secure and correct or whether they
require any improvement.
III. Audit of Stores and Stocks
Audit of accounts of stores and stocks has been developed as a part of expenditure audit. This
is conducted to ascertain whether the regulations governing purchase, receipt and issue, custody,
sale and stock-taking of stores are well devised and properly carried out. It intends to bring to the
notice of the government any deficiencies in quantities of stores held or any defects in the system
of control.

Distinction between Government Audit and Financial Audit

Basis of Government Audit Financial Audit
Distinction
1. Nature It is mainly an expenditure audit. It is both income and
expenditure audit.
2. Auditor It is undertaken by the staff of It is undertaken by practising
Accounts and Audit and professional Chartered
Department. Accountants.
3. Scope It is conducted in respect of It is conducted in respect of
government departments, commercial concerns owned
government companies and public by private individuals.
corporations.
4. Payment The Treasury Officer makes The cashier makes payment,
after scrutiny payment after proper scrutiny. but he does not undertake any
scrutiny.
5.Continuous It is a sort of continuous audit as it It may be conducted
audit is conducted continuously continuously but it is mainly
throughout the year. conducted after the end of the
financial year.
6. Internal It is like an internal audit. It is purely an external audit.
audit
7. Emphasis There is more emphasis on This is not required in financial
examining compliance with audit.
sanctions, rules and procedures.
8.Preparation The Accounts and Audit The auditor, who audits the
of accounts Department, which is responsible accounts, is not concerned
for the audit, prepares a part of with the preparation of
the accounts which it audits. accounts.
Comptroller and Auditor General of India (C & AG)

The Comptroller and Auditor General of India is an authority appointed under the constitution of
India. The constitution guarantees his independence. He shall be appointed by the President of
India. He shall not be removed from office except on the ground of proven misbehaviour or
incapacity. The approval of both the houses of Parliament signified by 2/3 majority of persons
present and voting is required to remove him. His salary, terms of service etc. are fixed by the
Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971.

Duties and Powers of Comptroller and Auditor General

The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971
defines the duties and powers of the C & AG in detail. According to Article 149, the C & AG
shall perform such duties and exercise such powers in relation to the accounts of the Union and
the States as may be prescribed by or under any law made by the Parliament. Article 150
specifies that his report shall be submitted to the President of India.
The following are the main duties of C & AG.
1. Duty to compile accounts of Union and States: The Comptroller and Auditor General shall
be responsible for compilation Of accounts, of the Union and the States. He may also provide
such information as may be necessary to the Union or the States in the preparation of the
financial statements.
2. Duty to audit the expenditure from the consolidated fund Of India: The C & AG shall
be responsible for making audit and submitting report on all expenditure from the Consolidated
Fund of India, Contingency Fund and Public Accounts.
3. Duty to audit the financial statements of Departmental Undertakings: The C & AG
shall also be responsible for auditing the trading, manufacturing, profit and loss account and
balance sheet of any department of the Union or State.
4. Duty to audit the accounts of body or authority substantially financed by Government:
Where any authority or body is substantially financed by grants or loans from the Consolidated
Fund of India or of any State, the C & AG, shall audit the receipts and expenditure of such
body or authority.
5. Duty to audit the Grants or Loans: Where any grants or loans are given from the
Consolidated Fund of India, the C & AG shall scrutinise the procedures subject to which such
loans or grants are given.
6. Duty to check Receipts into Consolidated Fund: The C & AG shall audit that the rules
and procedures are followed to secure an effective check on the assessment, collection and
proper allocation of revenue.
7. Duty to audit stores and stocks: The C & AG shall audit the accounts of stores and stocks
kept in any office or department of Union or State.
8. Duty to audit Government Companies and Corporations: The C & AG shall audit the
accounts of government companies and corporations in accordance with the provisions of the
Companies Act, 2013 or other relevant legislations.
9. Duty to audit the accounts of other bodies or authorities: The C & AG, shall audit the
accounts of certain other bodies or authorities at the request of the President/ Governor/
Administrator of a Union territory having a legislative assembly.
Miscellaneous Audits (Procedure only)
Miscellaneous audits refer to the audit of miscellaneous types of institutions like charitable
organisations, educational institutions, hospitals, clubs, hotels, theatres, circuses etc.
I. Audit of Charitable Organisations
Institutions which are established to perform social works or to help the disabled are known as
charitable institutions. ex. Scout, Red Cross, etc. Such institutions must make audit of books of
accounts every year. An auditor should perform following works while conducting the audit of
charitable institutions:
1. The auditor should examine the legal status of the organisation and ascertain whether it is a
private charity or a public charity.
2. In case of a public charity, he should study the relevant provisions of any legislation
concerning accounts and audit.
3. In case of a private charity, he should examine the trust deed and ascertain the objects of the
organisation.
4. The auditor should make sure that all expenses are in accordance with the rules contained in
the relevant document.
5. He should see that the funds for specific purposes have been dealt with according to the
rules.
6. He should vouch the receipts of donations and subscriptions as shown in the cash book with
the counterfoils of the receipt book, register of subscribers and any other documentary evidence
available.
7. He should vouch the income from investments from the Investments Register.

8. He should make sure that any taxes paid on revenues exempted from taxes are reimbursed.
9. He should also vouch the receipt of rents from the properties of the charitable organisations,
with the rent roll, agreements with the tenants, etc.
10. He should ascertain that the organisation has strictly applied procedures for receiving and
acknowledging all gifts, donations, grants, etc.
11. The auditor should ascertain whether all expenses have been incurred according to the
relevant rules.
12. He should vouch all expenses in the usual manner.
13. He should verify all fixed assets in the usual way and make sure that proper provision has
been made for depreciation.
14. He should verify the cash in hand and balance with the bank in the usual way.
15. He should inspect the relevant minute books in order to confirm all important matters
concerning the accounts.
16. He should also ascertain whether the final accounts have been prepared in accordance with
the regulations.
17. If any special Act has been passed by any State relating to the charitable organisations, he
should see that the form of accounts and the auditor report are drawn up according to the special
laws.

II. Educational Institutions (Colleges)

Educational institutions include schools, colleges, training centres and universities. The main
activities of these types of institutions are more or less similar. As a result, the types of problems
the auditor usually faces in conducting audit of these types of institutions are also the same.
However, the audit procedure of colleges has been discussed in detail here. On the basis of
financial support and affiliation from the government and the university, colleges can be divided
into five types. They are:
1. Government colleges,
2. Government aided colleges,
3. Self-financing colleges,
4. Autonomous colleges, and
5. Private colleges.
On the basis of the nature of colleges, the activities and mode of maintaining the books of
accounts and records may also differ. The auditor should consider these deviations at the time of
audit. The auditor should pay attention to the following points, while auditing the accounts of
colleges:

General Matters
1. The auditor should examine the rules, statutes and regulations of the University Grants
Commission (UGC), the Government, and the University to which the college is affiliated. He
should note all the provisions affecting the accounts and audit.
2. He should study the minute books of the executive body or the managing committee of the
college for sanctions and confirmations of transactions affecting the accounts.
3. He should examine the internal check system and ensure how far it is satisfactory.
Income
The main sources of income of a college are fees from students, Government grants,
subscriptions and donations, income from investments, etc. The auditor should note the
following points:
4. He should check the fees received with the register of students and carbon copies of the
receipt books.
5. He should see that fees received in advance and fees outstanding are accounted for and
adjusted.
6. He should also verify that extra fees for laboratory, examination, sports, etc. are properly
accounted.
7. He should also see that irrecoverable fees, fines and other charges are written off by the
person authorized by the Managing Committee.
8. For free studentship and concessions, he should see that they are duly authorized by a
responsible officer.
9. The admission fees should be checked with the register of new entrants.
10. He should verify the government's grants by examining correspondence, etc.
11. Receipts on account of caution money or securities should be shown on the liability side of
the balance sheet.
12. He should also verify the income from the landed property' endowments and securities, etc.
13. Receipts from donations and subscriptions, etc should be verified with the cash book and
counterfoils of receipt book.
14. Any other income should similarly be vouched with the help Of proper vouchers.

Expenditure
15. The auditor should vouch the payment of salaries to the staff by reference to the salary
register, the cash book, and the pass book. He should also refer to the copies of letters of
appointment or agreements.
16. Sanction of increases in the salary of the staff should be checked by reference to the
minutes of the Managing Committee.
17. Capital expenditure should be vouched as usual but see that the necessary sanction is there.
18. He should verify the efficiency of the internal check system regarding the purchase of
provisions, linen, etc. for the boarders.
19. He should verify the stock of provisions, furniture, stationary, etc and see that it is properly
preserved.
20. He should confirm that an adequate reserve is being maintained for contingencies.
21. He should see that a donation for a particular purpose is spent accordingly.
22. Distinction should clearly be made between capital and revenue income and expenditure.
23. He should verify the cash in hand and the balance at bank as usual.
24. He should see that the outstanding assets and liabilities are taken into account.
Miscellaneous
25. He should see that investments representing prize endowment funds are kept apart and that
they are not mixed up with ordinary investments.
26. He should further see that the provident fund money is invested outside in securities. Such
fund is to appear separately on the liabilities side and investment on the asset side of the balance
sheet.
27. He should also see that all taxes deducted at source are properly refunded. Educational
institutions are usually exempted from income-tax payment.
III. Hospitals
On the basis of ownership, hospitals may be grouped as follows:
a. Government hospitals,
b. Private hospitals, and
c. Public-private partnership hospitals
The auditor should pay attention to the following points, while auditing the accounts of a
hospital.
General Matters
1. The auditor should see relevant documents to ascertain the legal status of the hospital.
2. He should examine the constitution of the management and provisions for governing the
hospital.
3. He should inspect the minutes of the meetings of Managing Committee in order to note
decisions concerning financial matters.
4. He should examine the internal check system in operation.
5. He should identify the activities of the hospital and ensure that they are actually performed.
Income
6. He should check the cash collections with the counterfoils and other evidences.
7. He should also check the bill registers of patients to see that the bills have been correctly
prepared.
8. He should also ensure that free bed facilities were extended to the patients only as per the
hospital regulations.
9. He should compare the bills with the attendance register Of patients.
10. He should vouch the receipt of rent, interest, dividends, etc.
11. He should also ascertain that legacies and donations received for a specific purpose have
been so utilised.
12. The auditor should verify that grants received, if any, have been duly accounted for.
13. He should also verify the income of the hospital from other sources, like, X-ray, lab, scan,
etc.
Expenditure
14. The auditor should vouch all the payments with relevant vouchers.
15. He should also vouch the payment of salaries to the staff and other expenses as usual.
16. He should see that the expenditure under different heads does not exceed the budgeted
amounts.
17. He should also see that proper distinction has been made in the accounts between capital
and revenue expenditure.
18. Purchase and sale of movable and immovable properties should be verified with the help of
relevant documents.
19. He should see that appropriate depreciation has been written off against all the fixed assets.
20. The auditor should see that all fixed assets have been acquired under proper authority and
that proper registers are maintained to record their particulars.
21. He should verify the closing stock and stores like medicines, test tubes, cleaning material,
etc.
22. Finally, the auditor should examine the financial statements and see whether they give a
true and fair view of the financial position of the hospital.

IV. Clubs
Clubs are associations of groups of persons with common interest. They are basically established
with non-profit motive. The main activities of the clubs include provision for amusement and
recreation and constructive work for the welfare of the society. From the legal point of view,
clubs can be of two types. Govt. registered and nonregistered clubs.
The auditor should pay attention to the following points, while conducting audit of accounts of a
club:
1. Examine the constitution and bye-laws of the club inorder to ascertain its legal status and the
power of the managing committee.

2. Examine the minute books of the club.

3. Vouch the admission fees and annual subscriptions with the counterfoils in the receipt books
and the list of members.
4. Make sure that proper appropriation is made of life membership fees.
5. See that the subscription received in advance or outstanding is properly vouched.
6. Vouch the income from sale of refreshments, wines, cigars, billiard and swimming, etc.
7. See that proper stock records of wines, cigars, etc. are maintained. 8. See that the sale
proceeds of periodicals are properly accounted for.
9. If a canteen is running under the club, its receipts should be vouched.
10. Vouch cash received from social functions, hire of the facilities of the club, etc. and make
sure that there is proper control over such cash receipts.
11. Where some special donation is received, ensure that it is utilized for the specified purpose.
12. Ensure that all purchases of the club are duly sanctioned.
13. See that the heavy expenses are spread over a number of years.
14. Ensure that expenditure is properly allocated between capital and revenue.
15. Verify the assets, particularly stock in hand, in the usual manner.

AUDITING IN COMPUTERIZED ENVIRONMENT

Business organisations are now increasingly using computers for data processing. This is known
as Electronic Data Processing or EDP. Computer technology has a profound impact on society in
general' and on accounting and auditing in particular. Many firms are using electronic data
processing (EDP) equipments for their accounting. The auditor has to adapt himself to this new
revolution. The area of EDP auditing offers a great challenge to auditors.
EDP Environment
EDP environment signifies computerisation of the accounting system in an office instead of
manual accounting system. In an EDP environment, it is the computer which performs the
arithmetic operations. The computer also manipulates symbols and processes information by
receiving, storing and operating on and outputing data. EDP system can be profitably applied in
business situations. In short, EDP environment can exist where a computer of any type or size is
involved in the processing of financial information.
Under EDP environment, there is virtual elimination of errors like calculation mistakes, posting
errors, totalling etc. However, any error in programming may result in serious errors and produce
incorrect result.
Features of EDP Environment
The following are the basic features of EDP environment:
a) EDP infrastructure
This includes hardware, operating systems and application software. Hardware consists of
central processing unit, monitor, printer, mouse and keyboard. Operation systems include
window, microsoft office, disc operating system, etc. Application software is a set of computer
programmes such as TALLY, MYOB etc.
b) Lack of documents and transaction trail
In manual accounting, there is a transaction trail. First, a document originates a transaction.
Then, there is entry of the transaction in the books of accounts. Thereafter, there is posting of the
transaction in the ledger. On the other hand, in electronic data processing there are often no
transaction documents and no visible transaction trail. For example, a sale person may directly
feed sale transactions in the computer without any supporting documents.

c) Concentration of processing of information in few hands

In EDP environment, only a small number of persons process the entire information. So, they
may use their exclusive control over electronic data processing systems to commit fraud by
changing data or the programme itself.

d) Possibility of Errors
While EDP reduces the risk of human errors like calculation mistakes, any error in programming
may result in incorrect processing of all transactions. Moreover, in the absence of continuous
check, errors in EDP may remain hidden for long.
Auditing in EDP Environment
EDP auditing has been defined by Weber as "the process of collecting and evaluating evidence to
determine whether a computer system safeguards assets, maintains data integrity, achieves
organisational goals effectively, and consumes resources efficiently." Thus, EDP auditing
encompasses the traditional audit objectives of attesting the stated facts with efficiency and
effectiveness.
Auditing in a computerized environment can be classified into two:
1. "Auditing around the computer" or Black Box Approach
This is a type of approach adopted by some auditors for the audit of computerised accounts. This
approach to computer auditing is known as "auditing around the computers, or the black box
approach." Under this, the audit work is carried out in the same way as it is done where the
manual system of accounting is followed. It means the carrying out of audit in a traditional
manner by comparing the print-outs generated in the system.
Advantages
The following are some of the advantages of this approach:
1. This is less expensive.
2. It requires limited computer knowledge.
Disadvantages
1. It is time consuming.
2. It may be expensive as printing a lot of data is required.
1 3. It ignores the huge potential of the computers to help the auditor•
4. Large data cannot be examined by this approach.

"Auditing through the computer"

In an EDP environment, this is the best approach to auditing. This approach enables the auditor
to have a proper evaluation of the internal control relating to the EDP system in force in the
concern. Under this, the auditor has to make an extensive use of computer in the conduct of his
audit work. He should have sufficient knowledge of computer to plan, direct, supervise and
review the work performed at each stage of audit.
Advantages
The following are some of the advantages of this approach:
1. The auditor reviews and tests general and application controls and determines their
effectiveness.
2. He focuses upon all phases of CIS activities, viz. input, processing and output.
3. This approach requires that the auditor should have sufficient knowledge of computers, its
programmes, process and controls.
Internal Control in EDP Environment
Introduction of computer does not guard against the errors and omissions in accounting. The
chances for grave errors are more in computer accounting than in manual accounting. The only
remedy is an effective internal control system on which depends the reliability and efficiency of
the programmed data. The auditor should find out the exact design of the internal control system
and compare it with the plan designed to understand the weaknesses. An efficient internal control
system ensures that the inter-relationship among the organisational elements is in accordance
with the management policies.
Problems faced by an Auditor in Computerised Accounts
1. There is no adequate scope for evaluating the internal control system relation to computers
under "auditing around the computer" approach. The auditor has to spend more time on certain
audit procedures.
2. Where "auditing through the computer" approach is followed, the auditor has to make an
extensive use of computer. He needs specialised computer skills which he often lacks.
3. In the absence of specialised skill and knowledge, audit of computerised accounts is more
risky than audit of accounts under manual system.
4. In manual accounting, alterations and overwriting can be easily detected; but in
computerised accounting this is not easily possible.
5. There is a chance of changing the programme without auditor's knowledge.

INVESTIGATION
Generally an auditor is appointed to audit the books of accounts of a business concern to ensure
the correctness of accounts. He may also be appointed to perform certain non-audit services also.
For example, he may be asked to advise the client on tax planning, internal control system etc.
Now a days, an auditor is required to carry out examination of the accounts and records of past
several years to meet certain special ends from time to time. Under such circumstances,
investigation of accounts is carried on.
Meaning
Investigation means an enquiry into the accounts and records of a business concern for a special
purpose. In most cases, the purpose of such enquiry is to ascertain the true financial position of
the concern or its normal profit-earning capacity or the extent of fraud, if any. Thus, it is a kind
of special audit with a particular object in view. Investigation is neither accountancy nor
auditing.
Definition
1. Spicer and Pegler: "The term investigation implies an examination of accounts and records
for some special purpose."
2. Taylor and Perry : "Investigation involves enquiry into facts behind the books of accounts,
into the technical, financial and economic position of the business or organization."
3. L.R. Dicksee : "Investigation is an examination of accounting records undertaken for a
special purpose. Its object is usually to discover and display the facts in such a manner as will
enable the parties tor whom it is undertaken to draw conclusion and make their decision
accordingly."
Characteristics of Investigation
On an analysis of the above definitions, we can draw the following characteristics of
investigation:
1. It involves critical examination and verification of specific records.
2. It is undertaken with certain suspicion, depending on the case.
3. It involves personal examination of individuals like directors, auditors and other officers
also.
4. It is not confined to examination of financial aspects alone, but also the policy matters.
5. The investigation is normally conducted with certain specific objects.
6. The scope of investigation may be limited or extended, as the case may be.
7. The investigator submits his investigation report only to his client who appointed him.
8. In the report, the factual information is given in analytical and descriptive manner.
9. Investigation is voluntary and contractual in nature, except in case of companies. There are
no statutory provisions or rules prescribed for it.
10. An investigator can seek the help of experts during the course of investigation, if necessary.
Scope of Investigation
The scope of investigation is quite different from that of audit. It depends much upon the terms
of investigation. Thus, its scope may be more extensive or limited depending upon the
circumstances of the case. The enquiry may go beyond the books of accounts of a concern. It
may cover matters of technical and financial nature.
When an investigator is appointed by his client, he should obtain all the necessary instructions in
writing from the client. If any limitations are placed on his work, he should obtain them in
writing. This will help him to determine exactly the scope and nature of his duties.

Distinction between Auditing and Investigation

Investigation of accounts should not be considered synonymous with the audit of accounts. It
may be considered to be a special kind 184 Auditing and Assurance of audit done with a
special purpose. The following differences between them are notable:

Basis of Auditing Investigation

Difference
1. Nature of work Audit includes an examination of Investigation is not only an
books of accounts of a business. examination of accounts but also an
inquiry into other factors affecting
the business.
2. Conducted on It is conducted on behalf of It is carried out on behalf of
behalf of shareholders or proprietors. outsiders for some special purpose.

3. Compulsory It is legally compulsory, It is not compulsory; and is

especially in the case of joint conducted only where need arises.
stock companies.
 4. Evidence It concerns itself with only prima It looks for substantive and
facie evidence. conclusive evidence.

5. Time It is generally conducted at the It may be Conducted at any time

end of the financial year. during a year.
6. Duration It is conducted usually for a year It covers a period extending over
or six months. three to seven years.
7. Auditing of Audited accounts are not audited It may be conducted even though
accounts again. the accounts have been audited.
8. Adjustment in There is no adjustment in the net There is adjustment in the net profit
profit profit in audited accounting. for finding out the actual earning
capacity of the concern.
9. Nature of It is a kind of test checking. It is a thorough examination of the
examination books of accounts for a year or
number of years.
10. Report The report of the auditor is sent to The report of the investigator is
the Managing Director/ Chairman sent to the party which appointed
of the company. him.

11. Nature of Auditor's report is generally in Investigative report is descriptive

report short term and some what and positive.
negative as it refers to the short
comings.

12. Qualification An auditor of a company must be An investigator is not necessarily

a practising Chartered be a CharteredAccountant.
Accountant.

Objects of Investigation
The following are some of the objects of investigation:
1. To assess the true worth of a business when a running business is to be acquired.
2. To ascertain the solvency and financial soudness of an enterprise which has applied for a
loan.
3. To ascertain the earning capacity of a firm on behalf of an incorning partner.
4. To ascertain the profitability and the correct value of the assets and liabilities of a going
concern.
5. To ascertain the nature and extent of fraud, when fraud is suspected or known to have taken
place.
Types of Investigation
I. Investigation on Acquisition of Running Business
Sometimes, a person may intend to purchase an existing business as a going concern. Then, he
will be interested in its earning capacity, the value of assets and liabilities to be taken over, and
the probable future prospects of the business. The investigator should fully Understand his
responsibility in this respect. The client's decision to PUrchase or not to purchase the business
depends on the facts mentioned in the report of the investigator. The investigator should take the
following points into consideration:
1. To make a thorough enquiry into the reasons for the sale of business by the present owner.
2. To find out whether the business requires any particular skill or influence.
3.To make sure that the assets and liabilities are properly valued.
4.To see that the assets and liabilities are shown in the balance sheet at their correct values.
5.To ensure that proper provision for bad and doubtful debts and depreciation has been made.
6.To see that the goodwill of the concern is properly valued.
7.To examine the present conditions of plant and machinery, so as to estimate the future life of
asset.
8. To examine the previous year's audit report.
9. To ascertain the true earning capacity of a business. In order to form a correct estimate of the
profit earning capacity, the investigator should do the following:
a) To make a careful examination of its profit and loss account for the period covered by the
investigation.
b) To re-draft the profit and loss account in a tabular form to enable the comparison of figures.
c) To make a careful examination of the accounts of the previous years.
d) To undertake a detailed examination and vouching of the books of accounts, particularly of
capital and revenue expenditure accounts.
10. To find out the amount of working capital and ensure that it is sufficient to carry on the
business.
11. To see the terms of contract with the existing employees.
12. To examine the conditions of stock-in-trade.
13. To conduct a thorough enquiry regarding the verification and valuation of stock-in-trade as
this item is often subject to greater manipulation.
14. To examine thoroughly the accounts of debtors and creditors to be taken over.
15. To make a careful scrutiny to ensure that all the outstanding liabilities and contingent
liabilities are taken into account.
Purchase of a Company
Incase, the client is intending to purchase a limited company, the investigator should do the
following:
a) To examine the Memorandum of Association, Articles of Association and Prospectus of the
company.
b) To find out the amount of authorised, issued, called up and paid up capitals of the company
as well as the amount of uncalled capital and calls in arrears.
c)To make a scrutiny of the rights of different classes of shareholders,
d) To find out the rate of dividend paid in the past three to five years.
e) To enquire into the present value of shares from the stock exchange. To make a correct
valuation of all the assets and liabilities of the company.
g) To collect information regarding the price to be paid for the shares of the company.
h) To ascertain the accurate net profit of the company with the help of Profit and Loss Account.
The Investigator should make the following deductions and additions to the figure of net profit as
shown by the Profit & Loss Account of the business.
Deductions from Profits
1. Capital profits i.e. profits on sale of investments or other fixed assets.
2. Income from assets not taken over by the buyer.
3. Expenses incurred after the purchase of the business.
4. Business expenses, if they are paid from private resources.
5. Exceptional profits which are not earned in the ordinary course of business. ie. speculation
profits.
6. Rent, if the buyer does not purchase the premises owned by the vendor.
Additions to Profits
1. Capital losses ie., loss on sale of fixed assets.
2.Capital expenditure items if wrongly charged to revenue.
3. Exceptional losses not resulting from business ie., loss arising from under-insurance or from
speculation or from litigation.
4. Excessive reserve for doubtful debts or depreciation or contigencies.
5. Interest on loans or overdrafts when the purchaser does not take them.
6. Interest on partner's, capital and current accounts.
7. Discount on purchases.
8. Any other charges not connected with the business
After having investigated all these matters, the investigator should prepare and submit a report to
his client. The report should contain all the relevant information so that the client can get a
complete idea regarding the business he is intending to purchase.
II. Investigation when fraud is suspected
Fraud means either misappropriation of cash or goods or manipulation of accounts. The former
type involves defalcations while the latter does not. When the proprietors of a business concern
suspect fraud in accounts, they may appoint an investigator to investigate the suspected fraud.
Fraud is usually committed when the internal check system is weak and inefficient. Fraud may
be committed in any of the following ways :
a) Misappropriation of cash --- (committed by the employees)
b) Misappropriation of goods — (committed by the employees)
c) Manipulation of accounts (committed by persons at the helm of affairs)
Preliminary Steps
Before commencing investigation, the investigator should take the following preliminary steps:
1. Make himself familiar with the nature of suspected fraud.
2. Make an appraisal of the system of internal control in force in the organisation and make
note of its weak points.
3. Make an assessment of the nature of authority and duties exercised by the defaulting
officials.
4. Obtain a complete list of books of accounts maintained by the concern.
After having done this, the investigator should chalk out an investigation plan suited to the
particular case in hand.
(a) Misappropriation of Cash
Cash may be misappropriated in any one of the following ways: (i) Omitting to enter the receipt
of cash.
(ii) Entering less amount in the cash book than what has actually been received.
(iii) Entering fictitious payments.
(iv) Entering more amount than what has actually been paid. (v) By teeming and lading.
When misappropriation of cash is suspected, the investigator should do the following:
1. To make himself familiar with the nature of fraud fully. The employees involved in receipt
and payment of cash should be closely questioned to secure all necessary information regarding
possible ways in which fraud may be committed.
2. To secure a complete list of books of accounts maintained by the concern.
3. To examine the method of recording cash transactions.
4. To examine the system of internal check in operation regarding cash receipts and payments.
5. To enquire the extent of control the cashier has over the different books of accounts.
6. To check the casts and carry forwards of cash book carefully.
7. To count and check the cash in hand and obtain certificate from the banks regarding the
opening and closing balances of cash at bank.
8. To verify the cash transactions with the bank with the help of pass book.
9. To compare the entries in pay-in-slip with the corresponding entries in the bank pass book.
10. To examine the system of cash sales thoroughly.
11. To check clearly alterations in the cash memos, if any, and ask for proper explanation.
12. To verify thoroughly the payment of salaries and wages with the help of appointment letters,
time and piece wage records, etc.
13. To examine all the vouchers and to take special care in the case of missing and duplicate
vouchers.
14. To pay particular attention to misappropriation by teeming and lading.
15. To vouch cash receipts from debtors with the help of counter foils of receipt book. He
should see that the corresponding credits are recorded in the customer's account.
16. To examine the list of bad and doubtful debts.
17. To obtain the names of persons responsible for signing and enclosing the cheques.
18. To examine the petty cash book.
(b) Misappropriation of Goods
Misappropriation usually takes place in the case of goods which are small in size but very costly.
As regards misappropriation of goods, the investigator should do the following:
1. He should appraise the procedure followed in the matter of receipt and despatch of goods.
2. He should see whether stock accounts are maintained in business. If not, the reasons should
be enquired into.
3. He should ensure that all the returns of goods are properly recorded in the concerned books.
4. He should compare purchases and opening stock with sales and closing stock.
5. He should compare the orders received book, sales book, store keeper's book, gate keeper's
book, invoices etc. to find out discrepancies, if any.
(c) Manipulation of Accounts
Manipulation of accounts is done by responsible and senior officers owners and directors of the
business with some ulterior motives. The motive behind the manipulation may be to reduce tax
liability by showing less profit or to earn more commission by showing higher profits. In order to
detect such manipulation of accounts, the investigator should:
1. Study the internal check system in operation.
2. Check thoroughly the purchases and sales relating to the close of the financial year.
3. Vouch fully the expenses and incomes at the end of the year.
4. Check the valuation of opening and closing stocks.
5. Carry out the verification of different assets and liabilities.
Thus, the investigator should completely go through the records to ascertain the above details
and prepare a report showing the amount of fraud committed and the persons responsible for it.
He is also required to suggest in his report the ways and means to prevent such manipulation of
accounts in future.
Investigation Report
The investigator, on completion of the investigation, gives an account of his findings in the form
of a report. This report is called investigation report. He submits his investigation report only to
his client, who appoints him. It is a very important document and also must be genuine. Hence,
he should take much care in drafting his report. It should be drafted in a simple and brief manner
mentioning all the relevant matters.
The investigation report should contain the following:
1. The object of the investigation,
2. The scope of the investigation,
3. A brief history of the business unit and its organisation structure,
4. Major findings of the investigation with supporting documentary evidences,
5. The conclusion derived from the major findings, and
6. The recommendations, if any.
The report should be submitted to the client without any unnecessary delay.