Know the difference between audit and investigation

Audit vs investigation

Audit and investigation both are concerned with making a critical and systematic examination of some data. The two terms may sound similar but they are not. In fact, they have different goals. In the below paragraphs, you will know the exact difference between these two.

What do an audit and investigation mean?

The term audit is defined as “an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate.”

Some features of auditing are:

  • An audit is a systematic examination of a company’s books of accounts.
  • An independent person or group of persons who are duly qualified for the job perform an audit.
  • It involves verifying the results shown by the Profit and Loss Account and the state of affairs as disclosed by the Balance Sheet.
  • An audit is carried out with the support of vouchers, documents, information, and explanations obtained from the clients.
  • In addition, it comprises a critical assessment of the system of accounting and internal control.
  • The duty of an auditor is to satisfy oneself that the financial statements are authentic and report any misstatements identified.

Conversely, investigation entails a systematic, critical, and focused examination of a company’s records for a specific purpose.

For a business organization, investigation refers to an organized and detailed examination of an entity’s books of accounts and transaction records (both past and present), conducted for a specific purpose or to reveal a truth or establish a fact using evidence. In this regard, the most common methods of investigation are search, observation, and interrogation.

Usually, the investigation process is carried out by an expert team to prove a specific fact and is performed in accordance with the requirements of a business.

How do audit and investigation differ?

The main difference between audit and investigation lies in their purpose.

An investigation is carried out when a lapse has already occurred and it is, therefore, pertinent to determine the cause and person responsible for the lapse. But an audit is done to find out any lapses in financial records. It is a process that checks whether the accounts are properly maintained as per required norms or whether all procedures have been followed, and to identify any lapses in this line. Thus, an investigation is done to know the causes of a specifically identified lapse, whereas auditing is done to identify any lapse or discrepancy.

Other points of distinction between audit and investigation are as follows:

The objective of audit and investigation

The primary aim of an audit is to verify the financial position as disclosed by the balance sheet and the profit and loss account of a company. It tests whether or not the financial statements give a true and fair view of the state of affairs of a company. Also, what flows from the primary aim is an incidental objective of detecting frauds or errors during the course of an audit. An auditor should be aware of the possibility of frauds or errors in the accounts, as these could cause the financial position to be misstated.

On the other side, the objective of an investigation is to ascertain a particular fact for some specific purpose that varies from assignment to assignment. For example, an investigation may be held on behalf of an incoming partner to review an existing partnership firm. The objective in such a case might be to know whether the terms offered to the proposed partner are reasonable having regard to the nature of the business, profit records, capital distribution, personal capability of the existing partners, etc.

Nature

An audit is mandatory for companies while for others like proprietors or partnership firms, it is voluntary. In contrast, an investigation is not mandatory and depends upon the requirements of an individual case.

Authority of execution

In the terms of law, an audit is to be carried out by a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949. On the contrary, any person may perform an investigation and may not necessarily be a chartered accountant.

Appointing agency

The first auditor of a company is appointed by the Board of Directors by passing a board resolution within 30 days from the date of the company’s incorporation. Moreover, all the subsequent auditors of a company are appointed by the owners or shareholders of the enterprise in an annual general meeting. (Section 139)

On the other hand, an investigator may be appointed by owners or management, or even third parties.

Conducted on behalf of whom

An audit is conducted to protect the interests of all stakeholders of a company, even though the power of appointment has been delegated to the Board of Directors. Therefore, the aim is to secure stakeholders’ interests in the company and to assure them that the company’s operations are valid.

Contrary to this, an investigation is conducted from the viewpoint of the appointing agency.

Coverage

An investigator seeks to answer only those questions as are laid down in the engagement letter. Thus, the scope is limited to a specific purpose for which examination is done. But the scope of an audit is somewhat wide and general. It seeks to form an overall opinion on the authenticity of financial statements.

Period

An audit generally covers a period of one financial year. However, an investigation may not necessarily be restricted to just one financial year. It could be extended to more than one year or may even be less than a year.

Pre-conceived notions

Normally, the essence of investigation is to approach the subject matter with some pre-conceived notion relevant to the objective. It thereafter collects evidence to either confirm or dispel that notion. But audits are not based on suspicion unless circumstances warrant it.

Evidence

An investigation is normally based on conclusive and corroborative evidence. The evidence obtained is such that it puts an end to all doubts or questions. However, this is not the case with an audit.

Auditors gather evidence that is persuasive rather than conclusive. An architect’s certificate of valuation for a newly constructed building of a client, for instance, cannot be conclusive proof of the correct value of the asset. But an auditor uses such valuation to assure himself about the building’s value as stated in books. Furthermore, an auditing exercise is mostly based on test checking. This means that rather than 100% checking all transactions, auditors usually test-check a small lot of transactions out of a set of similar ones to form their judgment. Inferring a result from a test check need not always be correct.

Manner of reporting

An auditor has to make a report to the members of a company on the accounts audited by him. Such report has to be made in a specified format and the matters to be covered in the audit report are prescribed by law under Section 143 of the Companies Act, 2013 and the Companies (Auditor’s Report) Order, 2020.

On the other hand, there is no statutory form of an investigation report.

Guiding principles

The conduct of statutory audit has to be done in accordance with some generally accepted “Standards on Auditing” as formulated by the Council of the Institute of Chartered Accountants of India (ICAI) in line with the International Standards issued by the International Auditing and Assurance Standards Board (IAASB).

However, the conduct of an investigation is not guided by such standards.

The table below summarizes the list of differences between audit and investigation:

Comparison table – Difference between audit and investigation

Basis of differenceAuditInvestigation
MeaningIndependent examination of financial records to express an opinion thereonA critical review of records of a business for a special purpose
ObjectiveTo find out frauds and errorsTo know the causes of fraud when such fraud has already been detected
Checking of which recordsIt is related to checking all financial records of a business.It is related to critical checking of particular records which are a matter of concern.
NatureMandatory for companiesVoluntary
Performed byChartered accountantsAny person
Appointed byOwners or shareholdersOwners/management/third party
Protects interests ofStakeholdersAppointing agency
CoverageWideSpecific
Period coveredA financial year (a routine exercise)No restriction (might be more than a year)
SuspicionNot based on suspicionSuspicion is normally the basis of investigation
EvidencePersuasive rather than conclusiveConclusive and corroborative evidence
ReportingStatutory reportNo statutory report
Conclusion

From the above discussion, it is clear that despite both of them having a fact-finding character, audit and investigation are distinct from each other. Unlike investigation, an audit is not done to review an alleged wrongful act. Accordingly, an auditor is not given specific legal powers, such as the power of search, which may be required for an investigation. An audit is more concerned with establishing the correctness of books of account.


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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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