Week9-AuditInvestigation (1)

8/2/2019 Week9-AuditInvestigation (1)

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Audit Investigation

Week 9


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Introduction

A more specialised assignment

Usually undertaken for a specific purpose

Governed only by the terms of referencemutually agreed between the parties to the

contract


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Investigations

An enquiry commissioned by a client for a purpose

Not part of the work of an auditor as auditor

However, auditors are frequently asked to carry outinvestigations because auditors are trained in

investigative techniques and are know to be

independent and have integrity


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Types of investigations

Acquisition of companies Purchase of a business Prospective investment

Incoming partners Prospective lending Fraud Losses arising from systems breakdown

Investigations under Companies Act 1965 Back duty (tax evasion) Sponsorship of orchestral concerts The employment of a building contractor by a

local authority


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Clients

Companies

Individuals

Lending Institutions Local Authorities


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Stages of investigations

1. Obtain precise written instructions fromthe client (letter of engagement)

2. Professional etiquette3. Organising the investigation

4. Background information5. Preliminary information6 The report outline7. The investigation proper

8. Draft the report9. Discuss the report verbally10. Type or print the report and submit to client11. Further discussion or investigation


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Acquisitions

Client ask auditors to help him:

a. Whether to buy or not

b. If he is to buy, at what price and for

what consideration

detailed examination of accounts covering a

period of 1 or more years & the subsequentadjustment & interpretation of those accounts

in accordance with the purpose of the

investigation


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Stages for acquisitions

Examine the financial statements

- decide on number of years to be covered 3

years ideal, since it enables current position

(adjusted) to be studied in perspective- obtain copies of detailed accounts for each of

the years to be examined

- note any audit qualifications- consider any detailed info with supporting

schedules & working papers


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Stages for acquisitions (Contd.)

Redraft the financial statements (make

adjustments), taking into account:

- past income & expenditure not applicable in the

future/not relevant to the business- likely future income & expenditure

- correct amounts of assets & liabilities.

E.g. exclude intangibles.

- note: adjustments should only be made ifgrounds for doing so are reasonably certain

shortage of working capital, heavy reliance on

expensive external finance, loss-making

branches


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Establish the reliability of the accounts- consider possible manipulations to the

accounts to cause the business to appearmore profitable than true position- overstated stocks- overstated sales- understated purchases- deferred expenditure- overstated assets- understated liabilities


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Commercial considerations, futureprospects & miscellaneous matters

- analysis of sales success rate of diffproduct lines

- present mgt policy to assess futureimpact, e.g. selling off of loss-makingbranches

- tax position

- staff loyalty- customer goodwill- length of current leases- expiry dates of major contracts

- age/condition of physical stocks


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Prospective lending

Client may be asked to finance another company The borrower must have power to borrow Loan considerations:

- strength/profitability revealed by past analysis

of accounts- purpose of loan- adequacy of amount being sought to include

a profitable margin to allow for contingencies,

to allow for adequate working capital- nature/adequacy of underlying security (andease of realisation, if necessary), any priorcharges

- proposed interest payment arrangements- period of repayment of principal sum


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Prospective lending (Contd.)

Viability of business concern- size of existing market & likelihood of

success for new venture

- quality of service/commodities offered incomparison to what is already available,as well as comparison of prices

- availability of suitably located premises

Financial considerations- personal guarantees given by companyspromoters

- promoters past record of success


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Companies Act 1965

investigations

Declared companies - Minister may declare that acompany be investigated if:

- a prima facie case has been established for

public/shareholders /creditors protection- where allegations of fraud/misfeasance/misconduct

by persons connected with formation/management of

company for public interest

- any other reason for public interest- in the case of foreign country, appropriate authority

of another country has requested it


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Companies Act 1965

investigations

At direction of Minister under s.197:

- for a company having share capital

- on application of 1/5

in nominal value of debentures issued

- for a company not having share capital

- on application of >1/5 in number of persons onregister of members


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Companies Act 1965

investigations

Investigation by resolution of company (not a declaredcompany) inspector shall report his opinion in ageneral meeting

Appointment of Inspectors to investigate (usually

includes an accountant) Procedure of inquiry- may investigate into the affairs of related corporations

(with Ministers consent)

- every officer/agent of company shall be required toproduce all books/documents in his custody & shall giveall assistance to inspector

- officer/agent of company may be required to appear for

examination on oath or affirmation


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Companies Act 1965

investigations

Procedure of inquiry (Contd.)

- inspector may take possession of all books/documents

- non-compliance of officer/agent Court may inquire &

punish- no person who is/formerly was an officer/agent can

refuse to answer on the grounds that the answer will

incriminate him


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Back duty investigations

Occur if Citizens have been known to fail to

declare some income or to understate their

income from some particular source in making

their tax returns

IRB then will insist on a back duty

investigation

Investigators will be from the IRBtaxinvestigators will usually demand to view

audit files & tax payers accounts & records


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Back duty investigations (Contd.)

Special points which arise : The past period to be covered (years) The apparent cash available for living

compared with the taxpayers actual standard

of living. The accumulation of capital compared with

the known sources for such accumulation The existence of other sources of income and

capital must be investigated (gambling,legacies and gifts) The results of an investigation may be that

undeclared income comes to light such as

payment of tax on the income and negotiatedenalt

Week9-AuditInvestigation (1)

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