Investigation

Q. 1 What do you understand by investigation? How it differs from audit?
Ans Investigation is an intensive examination of books and depth of transactions for a specific purpose. Its objective is to expose actual facts in such a way that party/person for whom investigation is done may draw conclusions and take decisions on that basis. It can be conducted on behalf of creditors, financial institutions etc. Even central Government can also order investigation under section 235 of companies Act when there is a suspicion of fraudulent or on lawful activities carried on by a company and this person so appointed is called inspection. Investigation is also different from special audit ordered by central Govt. as special auditor submits the report to the Govt. and is a middle course. Investigation on the other hand is more damaging to the company than special audit.

Difference between Audit & Investigation

Audit on the other hand Investigation
1.Compulsory under companies Act on the other hand Not compulsory
2.Done by Chartered Accountant on the other hand By any person
3.Appointed by share holders in AGM on the other hand By creditors incoming partners
4.Period covered is one year on the other hand My be less than a year or may be even 2-3 years
5.Purpose is to ascertain true & fair view on the other hand Purpose may vary from case to case
6.Conducted on behalf of share holders on the other hand Conducted on behalf of Creditors/ incoming partner
7.Generally relate to books & accounts on the other hand May be beyond books
8.Test checking is generally resorted on the other hand Thorough checking is done
9. Format of report is specified under Section 227 on the other hand No specific format
10.Addressed to share holders on the other hand Addressed to those who have appointed investigator
Nature of Investigation


1. Private and Statutory - Normally private but statutory when resorted under companies Act
2. External or Internal
3. Optional or compulsory – Normally optional but compulsory when resorted under companies Act.
4. Normal or Intensive checking – It is intensive checking keeping in view objectives


Q. 2 What are key objectives of investigation for different interest Groups?
Ans Following are interested in getting investigation done and each has different interest behind this investigation.
(i) Person intending to purchase business: - He would like to know earning capacity, price to be paid is reasonable and position of P & L & Balance Sheet.
(ii) New partner willing to join: - He would be interested in knowing earning capacity, position of shares in market, shares to be purchased, goodwill and other relevant information.
(iii) For a prospective lender: - A lender would like to assess credit worthiness by knowing assets to be pledged, general financial position, purpose of loan, earning capacity, nature of business and goodwill of management.
(iv) For proprietors for suspected fraud: - They would be interested in knowing points of fraud, internal control system, area of fraud such as fraud of cash, goods, manipulation of accounts, the method used for such fraud.
(v) For directors to know decline/fall in percentage of gross profit to sales: - They would be interested to know reasons for such decline such as increase in the cost of purchases, direct expenses, increase in wages, selling price, omission of sales, valuation of closing stock etc.
(vi) For intending investor: - He would be interested in knowing financial status, earning capacity, security against investment trends of business. In case of a company, position of loans and debentures, preferences and equity shares etc.

(vii) For valuation of shares of company: - Investor may be interested in knowing trend of business, dividend rates of last 3-5 years, position of Money Market, provision for bad/doubtful debts future prospects of dividend.
(viii) Investigation by Govt. under section 235 of companies Act: - Person is known as inspectors-he is having all those powers which are enjoyed by a statutory auditor. Even statutory auditors are supposed to help inspector by providing him information so required. He would particularly like to examine assets and liabilities of company and subsidiary companies. Based on the investigation reports, govt. may file suit for criminal liability, recommend for liquidation of company or start recovery proceeding from erring persons.
(ix) Investigation for reporting in prospectus: - Many facts are incorporated in the prospectus on the basis of:
(a) Audit Report: - Facts such as P & L A/c, B/S, details of dividend paid, details of subsidiary companies.
(b) Accountants Report: - P & L & B/S for preceding 5 years, assets and liabilities for the last financial year, funds received on shares, debentures etc.
Investigation officer has to submit the report to those who have appointed him.