INVESTIGATIONS
INVESTIGATION AND AUDIT
Investigation implies systematic and critical examination of accounts and record of a business enterprise for a specific purpose. The specific purpose may be evaluation of state of affairs or establishing of a fact
STEPS IN INVESTIGATION
1. Determine scope/objectives of Investigation
2. Formulate Investigation programme.
3. Examine/Study various records.
4. Analysis, interpretation of finding
5. Preparation of report.
Special Issues in Investigation :
1. Whether investigator to undertake 100% / Selective verification :
It depends on circumstances. For cash defalcation (100%) / Profitability (selective basis).
2. Whether he can put reliance on audited statements :
It depends. If doubt in audited statement, then no reliance but for amount of g/w, he may rely for selective information.
3. For obtaining opinions of experts :
Get the written consent of client before referring.
4. Case arises out of dispute / conflicting claims :
He should be objective and professional.
5. Refrain from issuing speculative opinion.
6. Refuse to be futuristic.
7. Retain all working papers.
BUSINESS INVESTIGATIONS
C.A. may be requested to the study of financial statements and asked to report on them. Financial statements comprise of profit and loss account and balance sheet. He should take care to consider the following :
Profit and Loss Account – Study or profit and loss account should cover profit statements over a period of 5 – 7 years in order to cover all possible phases of business cycle. This will also enable the accountant to establish a trend between various related elements of profit statement.
1. Depreciation:
(i) Whether adequate depreciation has been provided on a consistent basis.
(ii) Incase of revaluation of assets, depreciation should be provided on revalued amount and over their estimated useful life.
(iii) For leasehold property, it should be ascertained whether an adequate provision has been made for the deterioration charge that may be payable at the end of lease period.
2. Turnover :
(i) Turnover of the company should be segregated between various products, types of customers, territory etc.
(ii) Order books should be examined to identify and eliminate fictitious entries.
(iii) Income and expenses should be broken proportionately between manufacturing and trading operations.
3. Wage Structure :
(i) Method of computing wages and rate of wages should be checked.
(ii) Any unusually high wage payment should be analysed.
(iii) If the business has suffered labour disturbance in the past then it should be checked whether a long lasting settlement has been reached.
4. Managerial remuneration:
(i) Check that remuneration payable is not excessive
(ii) It should be in accordance with the provisions of Companies Act, 1956.
(iii) Even if no or nominal remuneration has been paid, it should be adjusted to arrive at true profitability.
5. Exceptional and non-recurring items: These items disturb the trends of the profits. Therefore, the effect of these items along with their tax implications should be adjusted to arrive at maintainable profits.
6. Repairs and Maintenance:
(i) Major repairs and over hauling jobs are generally undertaken at any interval of 3 to 4 years. It should be ensured that these expenses have been systematically appropriated over a period of time. (However, take care of Accounting Standard – 26).
(ii) It should be correctly broken into capital and revenue expenses.
7. Unusual year: Investigating accountant should eliminate results of one or more years which disturbs the trend due to exceptional factors, while arriving at maintainable profits.
Balance Sheet:
The elements of Balance sheet may be studied as under –
1. Fixed Assets – Fixed assets may be studied as regards with
(i) Age of fixed assets in order to determine replacements that may be required in the future.
(ii) Incase proper repair and maintenance has not been ensured, a provision for heavy expenditure on repairs that may be required should be made in the value of the assets.
(iii) Incase of revaluation of fixed assets, depreciation should be provided on the revalued amount.
2. Investments –
(i) Current investments should be valued at market price.
(ii) Long term investments should be valued at cost. However, a permanent decline in value should be provided.
(iii) Pre-acquisition profits should be reduced from cost of investment.
3. Debtors –
(i) The bad debts should be adjusted in the year of sale unless the write off is on account of a slump or fall in international prices.
(ii) A study of credit period allowed by a business which shows rise in credit period over the period of investigation is indicative of diminishing sales.
(iii) Age – wise classification of debts helps in understanding the nature of customers and working capital requirement of business.
4. Stock and work in progress –
(i) These assets should be consistently valued as per generally accepted accounting policies.
(ii) Due allowance for damaged, obsolete and show moving items should be made.
5. Other liquid assets – These assets include cash in hand and readily realizable bank balances. It is prudent to insure cash in hand.
6. Idle assets – Idle assets may be in the form of unused plant, excessive cash holdings or obsolete stocks etc. The investigating accountant should ignore assets from the net worth of the business.
Liabilities:-
1. Taxation:
(i) It should be verified that adequate provision for tax has been made.
(ii) Incase there have been reopening of cases in the past, the final liability should ascertained from the order passed by the authority.
(iii) Any temporary tax benefit should be disregarded.
2. Capital
(i) The investigator should ascertain a proper balance between owners and debt capital. A disproportionate ratio can handicap the business.
(ii) It should be verified that the capital is reasonable as compared to fixed assets and working capital.
The underlying purpose of conducting such an investigation is to enable the accountant in predicting with reasonable accuracy the future positioning of the business. For example, he may be able to determine the allowance required for replacement of worm out fixed assets or the turnover as over the coming period or the working capital requirements etc.
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