11 Differences between Auditing and Investigation

Prabhat Nigam

13 May, 2022

Both the processes of auditing and investigation look seemingly similar. However, essentially, they are very different from each other. The process of verifying the extent of truthfulness and fairness of the financial records of an entity is called auditing and investigation is an examination which is performed to ascertain a certain fact. This piece of writing discusses the 11 main differences between auditing and investigation.  

What Is Meant By Auditing?  

Auditing is a process where impartial and methodical examination of the financial statements is undertaken of an entity to give an opinion on the true and fair view of such statements. The objective of auditing is to check the financial accuracy and reliability of the financial statements and see to whether the statements are in conformity with the applicable laws, rules and regulations. An auditor while conducting the audit^[1] broadly focuses on the following three things:

• That the financial statements have been prepared in consonance with the acceptable accounting and reporting policies
• Whether the applicable rules and regulations have been followed while preparing the financial statements
• Whether all the material facts have been disclosed in the financial statements or not.

What Is Meant By Investigation?  

Investigation is a process which has been undertaken for a special purpose with the objective of discovering a truth or to ascertain a fact. In case of a business entity, investigation translates into critical examination of the books of accounts and transactions’ history of the company with the objective of revealing the truth or establishing facts with the help of evidence. Methods employed by the investigating party during investigation include search, observation, inquiry, inspection, interrogation etc.  

What Are the 11 Main Differences between Auditing and Investigation?  

Following are 11 main differences between auditing and investigation:

1. Meaning: The process of inspecting the books of accounts and reporting the financial practices of an entity is called auditing and Investigation on the other hand is the examination of the books of accounts for a special purpose.   

• Purpose or objective: In the case of auditing, the auditor checks the books of accounts of the entity in order to give an opinion on the financial reporting practices of the entity and investigation on the other hand examines the books of accounts with a specific purpose such as inspection, fraud etc.

• Nature: The general examination of the books of accounts is called auditing and investigation, on the other hand, is critical in nature.

• Mandatory practice: The procedure of auditing is conducted depending on the size of the organisation and type of the legal entity. Generally, for a certain class of companies, it is mandatory to conduct an audit whereas investigation is not a compulsory affair which needs to be done every time. Investigation is done only on the need-to-do basis.

• Duration and time: Auditing is done at the end of the every year to check the financial statements prepared throughout the year whereas investigation can be conducted at any time of the year depending on the special needs or necessity such as financial fraud etc. Auditing has a limited time and it usually gets completed within the time period decided whereas investigation may carry on for years depending the facts and circumstances of the case.

• Conduct of the procedures: Auditing is generally conducted on behalf of the owners of the company and investigation, on the other hand, is generally conducted on behalf of the outsiders such as financial regulators, investors, owners of the company etc as per the needs of the organisation.

• Scope of the procedures: Auditing usually has a limited and a defined scope. It has a specific objective and boundaries and checking of financial statements is done within the boundaries defined. In the case of investigation, there is no defined scope of examination. Investigation can extend to any limit depending on the complexity of the case and it can easily transcend its boundaries. The scope of auditing extends to the Standards of auditing and investigation’s scope extends to the terms of engagement of the investigator which is usually broader in scope compared to auditing.

• Appointment of the personnel: To successfully conduct an audit, the company itself, through its board members, appoint the auditor to undertaking the audit of the company and in few cases, auditor is appointed by the government itself. However, in the case of investigation, the investigator is appointed by the outsider so that any chance of impartiality does not exist.

• Contents of the report: The contents of the auditor’s report reveals the true and fair view of the final accounts of the entity whereas the contents of the investigation report provide the conclusion from the enquiries made. An audit report always contains the opinion of the auditor regarding reporting of the financial statements of an entity. This, however, is not the case of investigation report where the investigator does not need to provide its explanation. As a result, the evidence drawn from the audit is persuasive in nature and evidence drawn from investigation is conclusive in nature.

1. Qualification of the auditors: Only licensed and permitted personnel have been entrusted to undertake audit such as Chartered Accountants. In investigation, there is no specific qualification to undertake investigation proceedings. Therefore, any person can become an investigator.

1. Modus operandi: Generally, the investigated reports are not audited again during the audit. However, conversely, audited books of accounts are usually taken up for investigation.

Conclusion 

It can be concluded from the differences mentioned between auditing and investigation that auditing is a general process done annually by the organisations whereas investigation takes place on an ad hoc basis and on case-to-case basis. An expert team is brought to conduct the investigation and submits the investigation report to the party who organised the investigation.           

Read Our Article: All about Forensic Audit of a Company in India