Chapter 14 – Investigation

by • 27/08/2011 • B.com part 2 AuditingComments (0)724

Meaning of Investigation

Investigation implies an inquiry into the accounts and records of a business concern. It is an examination of accounts and records of an undertaking with some special purpose in view.

The main purpose of such inquiry is to ascertain the true financial position of the business concern or its normal profit earning capacity or the extent of fraud, if any or to inquire about the suspected mismanagement etc. So, the investigation is a sort of special audit with a particular job in view.

Kinds of Investigation

Following are the important kinds of investigation.

A. Statutory

1. Prospectus

The statutory investment is made for the sake of prospectus. The government can issue investigation order in case of misstatement in the prospectus. The authority can appoint investigator to examine the matters of the company relating to prospectus.


2. Security Ordinance 1969

The statutory enquiry may be made by the federal government relating to the dealing, business or transaction in security by any broker, member, director or officer of stock exchange. The enquiry is to make by any person appointed in this behalf.


3. Inspection

Inspectors may make the statutory or legal investigator. The corporate law authority can appoint investigators to look into the matters of any company. The company management is responsible to provide assistance for the purpose of investigation.


4. Liquidation

The statutory investigation may be made on behalf of liquidator. When the company is being liquidated there is need to protect the right of creditor and owners. The facts and figures may be disclosed by investigation. There is a legal right of the liquidator to ask for investigation.


5. Trustee

The trustee may ask the independent person o examine the affairs of the trust. The trust act is applicable for checking the books and records of the business. The weakness can be brought to light in order to manage the affairs properly.


6. Beneficiaries

Beneficiaries may allow the statutory investigation when trustees are not doing their job properly. These may be negligence, misfeasance or fraud on the part of trustees. The beneficiaries can protect their right through investigation.

B. Voluntary

7. Owners

Owners may allows the voluntary investigation. They are interested in reasonable profit stability and growth of business. The sales and profits may change from year to year. The investigator can look in to matter to determine the real course of concern.


8. Managers

The voluntary investigation may be conducted on behalf of managers. They are interested in business performance. The stock turnover, debtor’s turnover, assets turnover and reasonable rate of return are desirable for effective management.


9. Lenders

The lender and banks can ask for voluntary investigation. The lenders are interested in their principle amounts and interest there on. The investigator can check the debt-equity ratio and further investigation against liquidity position. Moreover, the earning capacity can be judged to grant loan to the applicant.


10. Creditors

The voluntary investigation can be made for the creditors. The investigator can check the credit-worthiness of debtors. The inspection of business site, examination of financial statements and enquiry from banks and other parties can provide sufficient information to decide against the reliable of any concern.


11. Investigators

The voluntary investigator can be made for the investors. They want to purchase shares and debentures from the stock markets. The investors can analyze the information in order to make investment decision. The investigator may check market price per share earning yield, dividend yield, price earning ratio dividend payout and capacity gearing.


12. Insurers

The insurers can ask for voluntary investigation. The claims for compensation may be filed with the insurance company. The investigator can determine the exact amounts of loss.


13. Compulsory Business Removal

The owner can appoint investigator to find out the charge of removing business place. There may be compulsory removal of business by local government. The owners on the basis of such investigation report can claim the amounts of compensation.


14. Bidders

The voluntary investigation can be made for the bidders. They may be interested in the purchase of business or report of it. The bid price is settled through demand and supply forces. The real price is the basis of bid price. The bidders can decide to determine the maximum price.


15. Share Voluntary

The voluntary investigation may be made for voluntary of shares. The investigator can analysis the financial statements in order to determine the share prices. The prices at stock exchange may also be considered. The earning per share and dividend per share can be used to note the price level.


16. Frauds

The voluntary investigation may be made to locate fraud. There may be misappropriation of stock, investment and cash. There may be manipulation of accounts matters. There is a need to fix the responsibility of the employees concerned.


17. Partners

The voluntary investigation may be made for partners. The fluctuations in profits, analysis of sales, frogery and fraud or any other reason may be the cause of investigation. The investigator can go through the process of investigation to draw some conclusion.


18. Importers

The voluntary investigation may be made for importers. The importers may be interested in profits, sales, customers or products. The investigator can look in to the matter by going through the business records. In this way the weakness can be removed for earning reasonable profit.


19. Assessee

The voluntary investigation may be about the assessee. The tax issue can be settled after calculating the true income of the assessee. The investigation is helpful for the tax department. The exact liability of tax can be determined through investigation.

Objects of Investigation

1. Detection of Concealed Income

To detect the undisclosed income investigation is made on behalf of income tax authorities for the tax liabilities.


2. Purchase of Business

When any buyer wants to purchase any business can make the investigation to find the position of the business.


3. Credit Purpose

Sometimes bank or client wants to grand the loan to a business. So investigation is made on his behalf to know the financial position of the firm.


4. Admission of a New Partner

When a new partner wants to join the business he can also make the investigation to know the financial position of the existing business.


5. Purchase of Shares

If any client wants to purchase the shares of the company, investigation can be conducted on his behalf to know the real position of the company.


6. Doubt of Fraud

If proprietor of a business is doubtful, investigation may be conducted on his behalf.


7. Business Removal

In case of a compulsory removal of business, investigation is conducted to find out the amount of compensation payable.


8. Case of Misappropriation

On behalf of the beneficiaries investigation may conduct where the trustees are suspected of fraud or misappropriation.


9. Auditors Negligence

If there is a charge of negligence on auditor then investigation may be conducted on behalf of the company or any person.


10. Detection of Fraud

The investigation can also be made to find out the fraud if committed by any person in the stock funds, cash or investigation etc.


11. Insurance Claim

Sometimes the company has to suffer the losses from the flood, fire or an accident etc. In this case he can file claim with the insurance company. Then also the insurance company can make the investigation to find the correct points.


12. Making Investment

When any investor wants to make the investment in any business he can make the investment to know the real position of the business concern.


13. Granting Loans

Sometime due to shortage of money the management can apply for loan. The also the lender can investigate the business matter. He wants to know the true position of the business matter. He wants to know the true position of the business or its credit worthiness.


14. Business Promotion

The purpose of investigation may be promotion of business. The investigator can collect the date from inside and outside the business. He can guide the management for promotion of sales and expansion of business activities.


15. Merger

The investigation can also be used to merger of two or more business concern. The rights of the shareholders can be protected on the basis of investigation report.


16. Profits Fluctuations

The investigation can also be made for finding the fluctuation in the profit from year to year, which is a cause of concern for the owners as well as the management.


17. Employees Negligence

The investigation can be used also for the finding of negligence if committed by any employee. So, it is issued to fixed the responsibility of such person.


18. Taxation Settlement

The income tax department can also make the investigation of the certain business for which he wants to find the correct amount of income.

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