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AUDITING & INVESTIGATIONS
INVESTIGATIONS
This is independent inquiry commissioned by a client for his own purpose.
TYPES OF INVESTIGATIONS
i)
Acquisition of company
ii)
Purchase of a business
iii)
Prospective investments
iv)
Fraud investigation
v)
Companys Act investigation
vi)
Tax Investigations e.t.c
The range of clients who can commission investigations include:
Companies
Individuals
Government departments e.g. KRA, department of Trade and industry
Lending institutions such as banks and Local authorities.
STAGES OF INVESTIGATION
Types of investigations are carried out through the following stages.
1. Obtain precise written instructions from the client.
2. Professional courtesy.
3. Organizing the investigation.
4. Obtaining background information
5. Preliminary information.
6. Report outline.
7. Investigation proper.
8. Draft the report.
9. Discuss the report verbally with client.
10. Type the report and submit it to the client and be available for further
investigation.
Stages of Investigations.
1. Obtain written precise instructions from the client.
This involves the auditor obtaining the following information from the client.
A clear view of the objective of the investigation.
Scope of the investigation particularly the past time to be covered, the
person or section of the company to be investigated.
Degree of detail required e.g. fraud investigations involve examining
million of documents so that one can be able to prepare a case for
prosecution.
The person or group to whom the accountant must address his report.
2. PROFESSIONAL COURTESY
Professional courtesy requires that if the investigations are carried out in
the affairs of the organization which have their own auditors then these
auditors must be communicated with to observe the usual courtesy and
obtain their cooperation.
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Financial procedures
The bank wants to know the extent to which the promoter can match with their
own resources.
The past success or failure in business ventures.
The personal names of the guarantors and the security given.
Reliability, honesty and integrity of the client in business dealings.
Schedules to be included in the presentation:
1. Cash flow budget for the proposed concern.
2. Estimate set out month by month of income and expenditure incurred in
earning revenue.
3. Estimate once again set out month by month of fixed and set up costs likely
to be incurred from the inception of the enterprise. Such expense will cover
advertising costs, cost of acquiring computer and furniture administrative
expenses such as installation of telephone, rent, light and heat.
All this information will help the lender to assess the risk they will be
undertaking if they have to lend their money to you.
Investigations involving incoming partners
i.
An agreement in writing of the work to be done including the scope of
investigations, the period to be covered and the date of the report should
be considered.
ii.
Obtain permission to approach the other partners and the auditors of the
partnership since these people will supply the relevant information.
iii.
Obtain documentary evidence of the partnership deed including the
previous year accounts and if possible the supporting schedules.
iv.
Redraft the accounts for the last three years ensuring that in each year
adjustment is done for the trends and ratios to be easily identified.
v.
Prepare a forecast of the future results based on the trends and making
adjustments for any known differences such as rent and interest.
vi.
Seek a professional valuation of the properties of the partnership in an
attempt to determine their fair values.
vii.
Examine any proposed valuation of the goodwill.
viii. Examines and review the partnership agreements both the proposed one
and the current ones and ensure that the proposed terms are reasonable
in terms of the profit share.
ix.
Enquire into any partnership debts particularly the long-term liabilities.
x.
Ensure that agreements can be reached on matters such as audit, book
keeping and financial statements preparation.
xi.
Prepare the report and discuss it with the client.
xii.
If the report is agreed upon, it should be submitted to the client for
action.
Investigations for Tax purposes
Revenue Authorities carry out investigations to determine whether the
enterprise has reported its taxable income properly. Examination of the
accounts of the entity is done to ensure proper and complete returns are filed.
Procedure adopted
1. The objective of investigations is to check the internal consistency of the
data recorded in the books or statements presented by the enterprise. This
is done by the use of checks e.g. the budgets of other ratios to enable
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2.
3.
4.
5.
6.
establish whether the accounting records and the statements are basically
consistent and correct.
Gross profit ratio is worked out to establish the credibility of the trading
accounts.
Valuation of stocks should be examined in depth. Reference to the sales
and purchases close to the financial year could disclose the material
omissions or falsifications.
Check on the expenses claimed against the revenues earned and no
personal expenses should be charged to the business income.
The bank statements should be properly scrutinized to ensure that all the
deposits are properly accounted for as well as the payments made
Where the individual does not keep proper books of accounts, estimate of
the total payments made during the year should be reconciled with the
declared sources of income to assess the tax liability.
ii.
iii.
Profit forecasts
Cash flow forecasts
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