Investigation is an examination of financial statements or other financial information to evaluate one or more specified situations. Investigation involves ascertaining objective for investigating the particular situation, period to be covered, deciding upon investigation approach, examining relevant records, gathering evidence and reporting the findings of investigation.

Audit involves determining that the financial statement have been prepared in accordance with International accounting Standards and local laws.·
Audit of financial statements Investigation usually covers a period normally covers a period of one of over one year. year. Compliance of disclosure requirements is not covered.


Usual matters where investigations are carried out are as under:

Where it is intended to acquire a running business, the auditor is generally asked to evaluate net worth. The amount or net worth per balance sheet prepared by the client staff may reflect the need for recording certain significant adjustments in order to ascertain fair
value of the business. For example, some of the assets may have been overvalued or there could be unrecorded liabilities.

Significant steps involved are:

1. Ascertain net assets per books, i.e., total assets less total liabilities. The first step involves obtaining financial statements from the client and ascertaining net assets per balance sheet without recording any adjustments.
Net assets are equal to total assets (excluding any “fictitious assets”) less all liabilities. Alternatively, owners.’ equity i.e., capital plus retained earnings and capital reserves would represent assets.
2. Ensure that recognized accounting policies have been used to prepare financial statements.
The net worth on the basis of balance sheet carmot be determined fairly if ~ropriate accounting policies have been used. In
appropriAteaccounting policies that distort the financial position are:
(a) quate depreciation
(b) Permanently idle assets
(c) Inadequate allowance for doubtful accounts
(d) Overvaluation of investments
(e) Inadequate provision for obsolete inventories
(t) Write off deferred costs
(g) Write off intangible assets.
(h) Inadequate accruals
(i) Unrecorded liabilities for goods and services received
(j) Contingent liabilities where it is probable that such liabilities will materialize.
(k) Report fair value of net assets after incorporating necessary adjustments. Alternatively, the valuation of net assets may be made on the basis of current costs, e.g., the fixed assets, inventories, and investments are valued at net realizable values.


Frauds may involve:
• Manipulation of records
• Misappropriation of assets of an entity
• Omission of certain transactions and events
• Deliberate misapplication of accounting policies
• Examples of frauds relating to specific accounts are:

(a) Cash

• Use of same invoices to claim several payments
• Concealment of sales and receipts
• Unauthorized use of pre-signed cheques
• Teaming and lading
• Embezzlement

(b) Purchases

• Unauthorized purchases
• Inferior quality of goods accepted
• Short supplies
• Recording of invoices for goods or services which have been ordered but never received.

(c) Revenues and receivables
• Goods delivered to customers but not charged
• Goods Returned, Credit Note issued without actually receiving back the goods
• Unauthorized write off of receivables
• Pilferage of goods
• Unauthorized discounts

(d) Payroll
• Dummy workers included on payroll
• Continuation on payroll those employees who have left the services.
• Inflated hours worked
• Manipulation of payroll records

(e) Fixed Assets

• Unauthorized acquisitions
• Acquisitions at inflated prices
• Dispositions at prices lower than the fair value
• Unrecorded dispositions Ii Use of enterprise’s assets for personal gains
• Theft of assets or spare parts

Investigation Procedures for Detection of Fraud

The evidence to be obtained and techniques for collection of such evidence would depend upon the nature of fraud suspected. Generally, the investigation against fraud would include following procedures:
a) Study the complaint made by the defrauded party.
b) Determine’ terms of reference
5. Ascertain number of vessels available.
6. Obtain details of territories covered by each vessels during the accounting period.
7. Investigate reasons for gaps between various voyages.
8. Ascertain capacity of each vessel.
9. Verify adequacy of deprecation on vessels.
10. If the vessels have been taken on lease, ensure that the vessels have not been capitalized beyond their present values of minimum lease payments.
11. On a test basis verify certain voyage accounts. Vouch revenues and expenses of each voyage with supporting documents.
12. Verify proper treatment of transactions in foreign currencies.
13. Check cut off for incomplete voyages at end of accounting period.


1. Keep in mind volatility of the construction industries. In boom periods the entities may be confronted with excessive construction work and consequent inadequate working capital, In recession, entities may be subject to going concern problem.
2. Ascertain general level of competence of management.
3. Discuss with management future prospects.
4. Ascertain accounting and internal control system.
5. Assess inherent and control risk and set materiality level.
6. Obtain a list of contracts awarded during the year and a list of incomplete contracts end of last year.
7. Verify major contract accounts
8. Check contract price with signed contracts.
9. Ensure that variations in contract work, claims and incentive payments are recognized only to the extent that is probable that they will result in revenues and they re capable of being reliably measured.

c) Prepare initial strategy with limited information available
d) Ascertain nature of fraud
e) Determine nature of loss suffered
f) Determine causes of loss
g) Determine nature of evidence to be collected
h) Collect sufficient and appropriate evidence.

• Make verbal inquiries from those persons who are responsible for the loss.
• Inspect relevant documents.
• Obtain appropriate written representations from client personnel.
• Carry out analytical review procedures

i) Evaluate the evidence and formulate preliminary assessment of the causes of fraud.
j) Discuss the preliminary findings with the parties involved.
k) If necessary, extend the investigation scope.
I) Consider modifying the nature and extent of investigation procedures.
m) Communicate the results of investigation to the client.

Posted on November 3, 2015 in Investigation

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