Within a company, there are often cases that require an investigative audit. Such as embezzlement of funds by one of the employees or internally, misuse of assets, and others.
An investigative audit is an in-depth examination to prove whether or not fraud (fraud) occurred in an organization, while also calculating the loss it caused. Unlike a routine audit, which assesses the fairness of the financial statements as a whole, an investigative audit starts from one specific suspicion and traces it through to completion.
An investigative audit enables an institution to maintain business integrity and transparency, and also helps in reviewing the possible causes of financial loss.
What Is An Investigative Audit?
An investigative Audit is a method of Investigation used to uncover indications of fraud or suspicious situations in an organization.
It aims to disclose evidence and facts that cause harm to related parties, both agencies and individuals.
As part of the activities internal audit, the evidence found must necessarily refer to the rules of procedural law and applicable law.
According to the technical guidelines for investigative audits of the Inspectorate General of the Ministry of Villages, Development of Disadvantaged Regions, and Transmigration (2021), an investigative audit is an audit with the specific purpose of identifying and uncovering fraud and/or crime using approaches, procedures, and techniques generally used in an inquiry or investigation. Its output is evidence of whether a violation occurred, not an opinion on the financial statements.
For the Supreme Audit Agency (BPK), Article 13 of Law Number 15 of 2004 provides for investigative examinations to uncover indications of state or regional losses and/or criminal elements.
What Does Investigation Mean in an Audit Context?
Investigation generally means a systematic inquiry to find out what actually happened. In an audit, investigation means gathering and testing evidence on a specific alleged irregularity, rather than assessing the financial statements as a whole.
In practice, the terms investigative audit, forensic audit, and fraud audit are often used interchangeably, and their boundaries vary between institutions and literature. An investigative audit emphasizes proving a single allegation to the end, a forensic audit emphasizes supporting evidence for legal proceedings, and a fraud audit emphasizes a focus on fraud.
See also:
- What is audit Fraud? Definition, types of fraud, and Prevention
- Forensic Audit is: Definition, 5 Functions, and Stages
In this audit process, an auditor must have sufficient knowledge so that he can carry out his work professionally and optimally.
Skills to master include investigative interviewing, document and data analysis, assessing the credibility of statements, handling digital evidence, and understanding the limits of legal authority. Wiretapping, for example, may only be carried out by law enforcement under the law and must not be done by auditors.
In addition to these capabilities, auditors can also utilize software CAAT (computer assisted audit tools) in the implementation of this audit.
Audit Investigasi or Audit Investigatif?
Both refer to the same thing. The difference is only in word form: investigasi is a noun, while investigatif is an adjective. That's why both are equally valid to use — “audit investigasi” means an audit that takes the form of an investigation, while “audit investigatif” means an audit that is investigative in nature.
The official term differs between institutions. BPK calls it an investigative examination, BPKP calls it an investigative audit, and some government internal supervisory apparatus (APIP), such as the Inspectorate General of the Ministry of Villages, call it an audit investigasi. The meaning is the same. The English equivalent is investigative audit.
Who Conducts an Investigative Audit?
The party that carries it out differs depending on who suffered the loss. In the public sector, BPK can carry out investigative examinations, and APIP such as inspectorates and BPKP carry out investigative audits within the scope of internal oversight, including at the request of law enforcement.
In the private sector, an investigative audit is generally carried out by the company's internal audit team — see the scope of internal audit for its limits of authority — a public accounting firm, or a certified forensic accountant such as a CFE (Certified Fraud Examiner). The greater the likelihood a case will proceed to the legal realm, the more important it is that the party carrying it out be independent from the party being examined.
See also:
- Fraud Investigation: Definition, Duties, and Salary of a Fraud Investigator
- What is the Fraud Triangle and how to identify it
What Is the Difference Between Investigative Audit and Regular Audit?
Many people equate an investigative audit with a regular financial statement audit. In fact, the starting point, scope of examination, and end result are very different:
| Aspect | Regular audit (financial statements) | Investigative audit |
|---|---|---|
| Trigger | Scheduled, routine every period | A suspicion or report of fraud |
| Purpose | Assessing the fairness of the financial statements | Proving whether or not fraud occurred and calculating the loss |
| Scope of evidence | Sampling of the transaction population | The entire population of evidence related to the allegation, without sampling (according to the 2021 technical guidelines for investigative audits of the Inspectorate General of the Ministry of Villages) |
| Reference standard | Audit standards (SA) | Auditing standards plus rules of legal procedure |
| End result | Audit opinion | An investigation report that can serve as legal evidence |
As a consequence, the results of an investigative audit must be able to withstand scrutiny in court. That's why audit working papers and evidence storage in an investigative audit are kept far stricter than in a routine audit.
When Is an Investigative Audit Needed?
Under the guidelines of the Inspectorate General of the Ministry of Villages, an investigative audit assignment must rest on sufficient grounds, among them:
- development of the results of another audit or oversight activity that found indications of irregularities;
- a report or complaint that has been reviewed and meets the information sufficiency criteria;
- an order from leadership; and
- a request from the auditee's superior.
In a company, the trigger is usually a whistleblower report, an internal audit finding, a cost surge that is out of proportion to volume, repeated transactions with a vendor without a contract, or a gap between invoices and the goods or services received.
Before an assignment begins, the guidelines require the auditor to ensure sufficient information. In government, the conditions are that there is an alleged irregularity, there is an indication of financial loss to the state, and there is a causal link between the two. For a company, an indication of state loss is read as an indication of loss to the company. Information completeness is assessed with the 5W+1H elements (what, who, where, when, why, how), and if not all are met, a complaint can still be followed up if at least what, where, and when are met and it is worthwhile in professional judgment.
What Are the Stages of an Investigative Audit?
The framework below refers to the 2021 technical guidelines of the Inspectorate General of the Ministry of Villages and is adapted for general readers.
| Stage | Main content | Results |
|---|---|---|
| 1. Pre-planning and preliminary research | Reviewing the complaint or finding, assessing information sufficiency, and carrying out preliminary research if needed | A conclusion on whether to follow up, and a hypothesis of the irregularity |
| 2. Planning | Setting the objectives, scope, and resources; preparing the Investigative Audit Work Program (PKAI) | The PKAI |
| 3. Implementation | Gathering and evaluating evidence across the entire related population, then testing the hypothesis | Evidence that supports the conclusions and findings |
| 4. Reporting | Preparing the Investigative Audit Report (LHAI) | The facts of the irregularity and how it happened, causes, impact, and conclusions and recommendations |
| 5. Follow-up monitoring | Monitoring the implementation of recommendations | Follow-up status |
In the private sector, the stages are the same but without government-specific terms. The decision to pursue legal action rests with the company's management or owners. The Ministry of Villages guidelines also note that if law enforcement raises the status from inquiry to investigation while the audit is under way, the investigative audit is stopped with a report in the form of a letter.
See also:
- Complete Guide to the stages of Internal and external Audit
- Audit Program (Internal Audit Work Program): Definition, Types, Examples, and How to Prepare One
- Audit Finding Follow-Up: Causes of Overlooked Issues and Their Solutions
What Are the Techniques of Investigative Audit?
In addition to maintaining the company's reputation, this audit is also used to ensure its compliance with the law. In carrying out the process to the maximum, investigative audits generally go through the procedures of Investigation, confirmation, observation, and others.
Here are some technical audit investigation and explanation:
1. Request for information and confirmation
Formal and informal inquiry by the auditor to auditee and these other parties are generally carried out to collect evidence orally and in writing.
In addition, this confirmation step to other parties also allows auditors to corroborate the truth and error of information obtained about transactions of an agency.
A number of third parties who are questioned certainly have an interest in this audit process, such as suppliers, customers and others, because their recognition can reinforce existing data.
And the information can also be corroborated by third parties or other external sources, so the information obtained will certainly be more credible.
2. Physical examination and observation
In this case, the auditor will equate the view of direct process inspection and physical observation by using all his senses to receive information.
Physical observation is done by examining cash, property, important documents, and other tangible materials to serve as evidence.
This allows the auditor to identify possible fraud or abuse as well as ascertain whether the asset is impaired in use, damaged, or otherwise.
This observation itself becomes a procedure used to ascertain every aspect of the business, starting from the mechanism of internal activities and how these processes affect the course of business.
3. Analytical Review
Is a method used by auditors in reviewing data from possible discrepancies. This certainly begins with understanding the picture that has been obtained from the audit process.
This reasonable conclusion will be obtained after conducting an analysis based on comparative benchmarks such as the existence of error reports or errors in formulating fraud.
The comparison is reviewed by tracing the relationship of one data with another data, both from financial data and non-financial data.
4. Back Document Check
In this case, the investigative audit will cover the entire document, ranging from physical documents to documents stored by relying on technology.
That is why the examination of documents also relies on Computer Forensics in its application, so that the information processed and stored in the device can be observed optimally.
Document inspection is done by the process vouching and tracing in collecting and checking transactions through written data.
Vouching is an examination of the details of the document to prove the correctness of the transaction records manually. While tracing is a transaction check of the connection of documents related to the source.
5. Recalculation and Reperformance
The audit process in rechecking allows auditors to recalculate and compare the company's initial financial statements.
From this step, the auditor can review the data and can be immediately identified when discrepancies are found in it.
Reperformance is the independent re-execution by the auditor of procedures or controls originally carried out by the audited party.
The Auditor will collect evidence with various techniques to corroborate the results of the investigative audit carried out in order to identify possible errors.
6. Net Worth Method
This is an examination technique for verifying the truth of possibly unlawful or non-compliant income. The logic is simple: if a person's increase in wealth far exceeds their legitimate income for the same period, that difference is what deserves to be traced to its origin.
This examination is carried out by identifying the tax results reported and paid annually, such as in a report on official property that includes assets, income, financial resources, and others.
A gap that cannot be explained by lawful income is an indicator that needs further tracing and a request for clarification from the audited party.
7. Follow The Money
This technique enables the auditor to identify potential perpetrators of fraud by following the flow of money from its origin to where that flow finally stops.
That way gradually the auditor can find out where the last position of the fund is located. This will effectively prevent audit cycle from the irresponsible party.
How Is Investigative Audit Evidence Gathered and Preserved?
According to the Ministry of Villages guidelines, auditors must gather evidence that is relevant, competent, and sufficient. Competent evidence is evidence that is valid and reliable, and valid evidence is evidence that meets legal requirements and statutory regulations. Because evidence is very likely to be followed up in law enforcement proceedings, its quality determines the quality of the audit results.
For electronic documents, the same guidelines set out the following basic principles:
- do nothing that changes data on the computer or storage media;
- access to the original data only by an expert and competent person who can explain the actions and the reasons for them;
- maintain an audit trail showing the assignment proceeded continuously and can be accounted for; and
- ensure no violation of law or other rules occurs.
See also:
- Audit Evidence: Definition, Types, Characteristics, and Examples
- Audit Working Papers: Definition, Function, Purpose, and Types
What Is the Purpose of Investigative Audit?
The existence of investigative audits is very important in identifying ethical violations, fraud, misappropriation of funds, violation of the law, and other situations that harm the company.
However, what is the purpose of an investigative audit is also explained in the following points:
- Avoiding financial losses, which allows companies to uncover possible irregularities by identifying them early.
- Maintain agency reputation, by imposing transparency on problem solving that can reduce the potential for good name and trust to be maintained.
- Avoiding cheating, which allows the investigation to prevent the occurrence of internal discrepancies in the company that are detrimental.
- Ensuring legal compliance, which makes the company able to take measures to conduct business in accordance with applicable laws and legislation.
Examples Of Investigative Audits
The following two cases are officially documented by BPK. Both were investigative examinations carried out at the request of the Attorney General's Office to calculate state losses.
| Aspect | PT Asuransi Jiwasraya (Persero) | PT ASABRI (Persero) |
|---|---|---|
| Type of examination | Investigative examination to calculate state losses | Investigative examination on the calculation of state losses |
| Request from the Attorney General's Office | 30 December 2019 | 15 January 2021 |
| Report handed over | 9 March 2020 | 27 May 2021 |
| Period examined | 2008 to 2018 | 2012 to 2019 |
| State loss | IDR 16.81 trillion | IDR 22.78 trillion |
In the Asabri case, BPK concluded there were deviations from statutory regulations in the management of share and mutual fund investments. The figures above are BPK's calculation at the request of law enforcement, not a court ruling. The source is the BPK press release for each case.
The following is an illustration, not a real case. A manufacturing company sees raw material purchasing costs rise even though production volume is unchanged. A preliminary review finds repeated transactions with a single vendor without a contract, and invoices that exceed the goods received. The hypothesis is price inflation or fictitious procurement, which is then tested by examining all of that vendor's transactions.
FAQ About Investigative Audits
What is an investigative audit?
An investigative audit is an investigation method for uncovering indications of fraud or suspicious situations in an organization. Its aim is to find evidence and facts of losses suffered by the parties involved, with evidence that must refer to procedural law and applicable legislation.
What is the difference between audit investigasi and audit investigatif?
There is no difference in meaning. Both are terms for the same thing, differing only in word form. The official term differs between institutions: BPK says investigative examination, BPKP says investigative audit, and some APIP say audit investigasi. The English equivalent is investigative audit.
What is the difference between an investigative audit and a regular audit?
A regular audit runs routinely and assesses the fairness of the financial statements through sampling, with the result being an audit opinion. An investigative audit is only carried out when there is a suspicion of fraud, examines all related documents without sampling, and its result is an investigation report that can serve as legal evidence.
Who is authorized to conduct an investigative audit?
In the public sector: BPK through investigative examinations, and APIP such as inspectorates and BPKP within the scope of internal oversight. In the private sector: internal audit teams, public accounting firms, or certified forensic accountants such as the CFE (Certified Fraud Examiner).
What is the purpose of an investigative audit?
Four objectives: avoiding financial losses by identifying irregularities early, safeguarding the institution's reputation through transparent problem resolution, preventing fraud within the company, and ensuring compliance with applicable laws and legislation.
What are the techniques of an investigative audit?
Seven techniques: information requests and confirmation, physical examination and observation, analytical review, document re-examination, recalculation and the reperformance, net worth method, as well as follow the money to trace the flow of funds to its final position.
What is the difference between a vouching and tracing?
Vouching is an examination of document details to prove the correctness of transaction records manually. Tracing is an examination of transactions against the connection of related documents to their source. Both are used during document re-examination.
What skills must an investigative auditor have?
Investigative interviewing, document and data analysis, assessing the credibility of statements, handling digital evidence, and understanding the limits of legal authority. Wiretapping may only be carried out by law enforcement. Auditors can also use CAAT (computer assisted audit tools) software.
How is an investigative audit related to a fraud audit and a forensic audit?
The three terms are often used interchangeably and their boundaries vary. An investigative audit emphasizes proving a specific allegation to the end, a forensic audit emphasizes supporting evidence for legal proceedings, and a fraud audit emphasizes a focus on fraud.
What are the stages of an investigative audit?
Five stages: pre-planning and preliminary research, planning, execution, reporting, and follow-up monitoring.
When Is an Investigative Audit Needed?
When there is an alleged irregularity with sufficient information, for example from a complaint, another audit finding, or an order from leadership. In a company, signs include a cost surge out of proportion to volume and repeated transactions with a vendor without a contract.
Does an investigative audit use sampling?
According to the 2021 technical guidelines for investigative audits of the Inspectorate General of the Ministry of Villages, investigative audit evidence is gathered across the whole population, not by sampling.
Conclusion
An investigative audit establishes whether fraud occurred on one specific allegation, with evidence that must withstand scrutiny up to legal proceedings. Care in the stages, in evidence handling, and in the limits of authority determines the quality of the result.
An investigative audit is carried out by competent auditors, investigators, or experts; Audithink is not a provider of such services. Audithink is internal audit management software that can be customized. For assignments at your company, teams can use it for audit planning, work program templates, deadline notifications, follow-up monitoring of recommendations, and automated reports. If you are interested, please request a demo.
