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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Stages for acquisitions (Contd.)
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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Stages for acquisitions (Contd.)
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
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