There are a lot of differences between auditing and investigation and this article gives a full guide on that. Auditing is used to determine the extent to which an entity’s financial records are accurate and fair, whereas investigation is used to prove a specific fact. It is fairly common to confuse people because of a lack of education and comprehension between these two terminologies.
Auditing is the process of determining if accounting information is correct and conforms to established standards. An investigation, on the other hand, is a thorough analysis of certain records in order to highlight a fact. The purpose of this article is to clarify the differences between traditional auditing and investigation.
- Differences based on Definition
Auditing is a systematic review of a person’s financial statements in order to provide an opinion on whether they are accurate and fair. The term “person” is used here to refer to all groupings, whether they are profit-making or liberal institutions. The basic goal of auditing is to determine and report on the level of accuracy and consistency of any entity’s financial statements. It also checks whether the unit’s analytical records of accounts, booklets and receipts are accurate. The auditing procedure is completed by the auditor.
Auditing is a common method used by all organizations that do annual audits. Auditing is a technique used in accounting to verify the accuracy and consistency of data presented in reports. Auditing can be completed at any moment, and auditors keep a few key elements in mind when generating a report: first, the financial statement study is based on satisfactory accounting techniques, and it is a trustworthy presentation; second, relevant rules must be followed when preparing reports. The third point is that the financial statements freely reveal all significant truths.
The audit is conducted by the internal or external auditor in two ways The internal auditor is a company employee who is appointed by the company’s management, whereas the external auditor is chosen by the government from a certified public accounting (CPA) company. An audit spreads out all correct assertions in the financial accounts in order to determine their veracity. An auditing period usually corresponds to the client’s accounting year. The auditing results are also commonly used. Explained below are five different types of Auditing:
(a) Internal audit: the auditor also works in the same community within a corporation. In order to monitor the finances of the company and review operational processes to assure compliance, most companies utilize internal audits.
(b)External audit – is carried out by a non-company third-party entity and/or audited individual. The most typical foreign auditors belong to an independent accounting company, the IRS, or a tax authority.
(c) Financial Audit – Financial audit Is one of the most popular audit kinds. In order to confirm that corporate records and statements are correct, an external auditor is usually employed in a corporation to conduct a financial audit. The auditor inspects all financial matters, whether they are corporate transactions, creditors, or investors.
(d) Business audit — the same objective as internal auditing. Analyzes the goals, operations, techniques, and findings of the Company. Both internal and external auditors may be appointed.
Compliance audit – refers to the conformity of particular corporate operations and to rules that violate external legislation.
(e) Payroll Audit – A payroll audit is an internal audit undertaken by an auditor to guarantee payroll correctness. Auditing shall include wages, taxes, deductions from benefits, data on employees, and retention of employees.
(f) The IRS Tax Audit — to ensure that the tax returns submitted are accurate. Verify that the corporation does not overpay or underpay taxes or that there is no discrepancy.
(g) Information System Audit— An audit for software and IT organizations is known as an information system audit.
(h) Pay audit – Pay audit means identification of pay gaps within employees.
An investigation is a process of thoroughly inspecting acts in order to achieve certain goals. The act of research is the study of something in order to learn more about it. Investigating numerous cases and thoroughly documenting the process in order to generate a report on the situation is a major challenge in accounting. An investigation of any firm or commercial partnership entails a thorough, systematized, and necessary examination of the books of accounts, as well as an individual’s previous and present business dealings. It is displaying for a certain goal in order to illustrate a fact and introduce a reality through proof.
The investigation determines the plan of the party on behalf of which the inquiry is supposed to be carried out.
During the advancement of the research, employees, included in observation, investigation, insight, questioning, and evaluation, etc, are the most popular model. The investigation process is carried out by a professional team with verification of specific facts following the requirements of the association without regard to time. There is no legal requirement to reveal information during an inquiry. The investigation is uncommon; it is not routinely carried out in all businesses because it is not standard practice, and the investigation’s findings are solely useful to the client.
Managers appoint an investigator and this is not the natural procedure whereby the investigator carries out simply as the organization needs. They are professional experts. The investigation is not supported by such legal responsibilities. It can happen at any time, which is unusual.
- Differences based on Objectives
The main objective of an audit is to assess the financial situation revealed in the balance sheet and a company’s profit and loss statement. It evaluates if an accurate and fair image of a company’s status is given by the financial statements. In addition, a secondary goal of finding frauds or errors during the course of an audit comes from the primary goal. The possibility for fraud or mistakes in the accounts should be known to the auditors, as these can misinterpret the financial condition.
On the other hand, an investigation’s goal is to discover a specific fact for a specified reason that differs from task to task. An investigation might be conducted on account of a prospective partner to assess an existing partnership firm, for example. In such an instance, the objective might be to determine whether the terms presented to the prospective partner are appropriate in light of the nature of the firm, capital distribution, profit records, existing partners’ personal capabilities, and so on.
- Differences based on Nature
An audit is required for businesses although it is voluntary for others, such as proprietors and partnerships. An investigation, on the other hand, is optional and is dependent on the circumstances of each case.
- Differences based on Execution Authority
An audit is required by law to be performed by a Chartered Accountant as defined by the Chartered Accountants Act, 1949. On the contrary, anyone can conduct an investigation, and they don’t have to be a qualified accountant to do so.
- Differences based on Appointment
In 30 days following the date of incorporation of the company, the first auditor of a company will be selected by the Board of Directors. Furthermore, in an annual general meeting, the company’s owners or shareholders appoint all subsequent auditors. On the other hand, owners or directors, or even third parties may nominate an investigator.
Although the power of appointment has been delegated to the board of directors, the audit is done to protect the interests of all stakeholders in a firm. The purpose is therefore to safeguard the interest of stakeholders in the firm and ensure that the operations of the organization are valid. An investigation, on the other hand, is done from the perspective of the appointing agency.
- Differences based on Coverage
The scope of the audit is established by the Standards on Auditing, whereas the scope of the investigation is governed by the engagement conditions.
An investigator is only interested in answering the questions posed in the engagement letter. As a result, the scope of the inspection is constrained to a certain objective. However, an audit’s scope is broad and general. Its goal is to create an overall assessment of the financial statements’ validity.
- Differences based on Period
An audit usually lasts for a single financial year. An investigation, on the other hand, may not be limited to a single fiscal year. It could be for a longer period or perhaps for a shorter period.
- Differences based on Preconceived notions
In most cases, the goal of an investigation is to approach the issue with some preconceived notions about the goal. It then gathers evidence to either confirm or reject that hypothesis. Audits, on the other hand, are not conducted solely on suspicion unless the situations warrant them.
- Differences based on Evidence
In most cases, an investigation is based on solid and corroborated evidence. The evidence gathered is sufficient to dispel any doubts or uncertainties. An audit, on the other hand, is not like that.
Auditors gather evidence that is persuasive rather than conclusive. An architect’s certificate of valuation for a newly constructed building of a client, for instance, cannot be conclusive proof of the correct value of the asset. But an auditor uses such valuation to assure himself about the building’s value as stated in books. Furthermore, an auditing exercise is mostly based on test checking. This means that rather than 100% checking all transactions, auditors usually test-check a small lot of transactions out of a set of similar ones to form their judgment. Inferring a result from a test check need not always be correct.
- Differences based on Manner of reporting Guiding principles
An auditor must report the accounts audited by him to the members of a firm. Under Section 143 of the Companies Act, 2013 and the Companies (Auditor’s Report) Order, 2020, such a report must be prepared in a specific format, and the topics to be addressed in the audit report are outlined by law. An investigation report, on the other hand, does not have a statutory format.
Statutory audits must be performed following some widely acknowledged “Standards on Auditing” published by the Council of the Institute of Chartered Accountants of India (ICAI) in compliance with International Standards released by the International Auditing and Assurance Standards Board (IAASB). However, the conduct of an investigation is not guided by such standards.
Auditing is a general procedure that is followed by all organizations on a yearly basis. The internal auditor or external auditor can be done. The Internal Auditor is a management employee of the organization and the Government assigns the external auditor the management.
The investigation is very uncommon because it isn’t usually conducted in any organization. The organization will be led by an expert team to report on the corresponding facts. The audit report is provided to stakeholders like as government, suppliers, shareholders, creditors, administration, etc. while the investigation report is forwarded to the party that organized the investigation.