Special Investigations | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

"Dive into the complexities of Special Audits – targeted examinations critical for businesses. Explore the reasons behind their conduction and examine various categories, including Compliance, Construction, Internal, Cost, Fraud, and more. Gain insight into how these audits concentrate on specific areas, ensuring financial clarity and adherence to legal requirements." A special audit, which has a specific focus and investigates a particular aspect of an organization's operations, can be initiated by a government entity or authorized by any entity, including internal measures within the organization. This article delves into the definition and various types of special audits.

Need for special audit

• In cases where there is suspicion of violations of laws or regulations in the financial management and administration of an organization, the need for a special audit arises.
• The primary purpose of this special audit is to identify the extent and reasons behind the suspected violations.
• Additionally, audits may be carried out concerning duties, authorizations, responsibilities, and internal control policies, alongside the investigation of potential violations.
• Special audits are also applicable in situations involving bankruptcy or business reorganization.

Who initiates a special audit?

• Most special audits are instigated by external entities. For instance, a tax authority might require a company to perform a designated audit to verify the accuracy of income categories and tax computations.
• The purpose of such audits is to enhance confidence in the accuracy of the figures and the efficacy of the processes involved in generating financial reports.
• Internally, a company may initiate a special audit to thoroughly examine a particular area that has drawn attention or where discrepancies are suspected.
• As mentioned earlier, these internal audits could pertain to authorizations, internal controls, business processes, or other relevant aspects.

Types of special audit

Generally, a special audit is performed to accomplish a specific goal or to check certain facts. Understanding what audit processes are relevant for a given assignment or a given situation would entirely depend on the type of special audit. Each type of audit serves a distinct purpose.
Given below are some examples:

• Reviewing employee salary, bonuses, incentives, and stock options annually is known as a compensation audit, aiming to assess their effectiveness, competitiveness, and legal adherence.
• A compliance audit evaluates whether an organization adheres to contract terms or regulations. Regulatory agencies use it to determine a business's compliance with operating license requirements. Compliance audits in India examining adherence to the Companies Act are termed secretarial audits.
• A construction audit evaluates the costs of a construction project, verifying expenses recorded in books against actual documents, including payments to suppliers and contractors.
• Internal audits assess organizational performance against standards, policies, or guidelines, examining internal controls in corporate governance, accounting, financial reporting, and IT.
• Cost audits focus on verifying cost records related to material, labor, overheads, and other production costs, ensuring the accuracy of the cost accounting system.
• Fraud audits investigate financial statements to identify fraudulent activities like falsifying records, misusing assets, or creating fictitious entries, particularly if management is suspected of involvement.
• Information systems audits ensure proper functioning and absence of errors in information systems, assessing controls related to software development, data processing, software applications, and IT infrastructure.
• Royalty audits verify whether licensees are paying the correct fees agreed upon in agreements for using patents, licenses, or franchises.
• Income Tax audits validate taxpayers' income tax computations and compliance with tax laws, requiring examination by a professional Chartered Accountant.
• GST audits, under Indian indirect tax regulations, can be initiated by the Assistant Commissioner of CGST/SGST to assess the accuracy of disclosed taxable supplies or claimed input tax credit during scrutiny or investigation stages.

Wrapping up

Usually, an audit is conducted annually to assess a company’s financial statements by an independent auditor (statutory audit). Besides this audit, some special audits can also be conducted to determine the genuineness of any specific area of operations. It could be to verify compliance with laws, computation of tax, cost records, etc. Although mostly it is ordered by a government authority or third party, it may be initiated internally too.