Pre-investigations are aimed at gathering relevant facts quickly and effectively to decide whether a certain topic must be pursued or not, e.g., in response to tip-offs or fraud allegations.
For new audit topics, a pre-investigation may also help auditors prepare for the actual audit.
Pre-investigations should only be conducted by experienced auditors, with sup- port from Internal Audit management.
The results of a pre-investigation related to fraud allegations should be communicated to the Board immediately, even during the investigation if necessary.
The result is normally presented in the form of a memorandum which details the content of the investigation and the steps that need to be taken.
The importance of pre-investigations will likely increase in the future due to the possibly increasing amounts of anonymous tip-offs in day-to-day business and the protection of whistleblowers resulting from SOX .
Objective of a Pre-investigation
Sometimes an audit or review is preceded by a pre-investigation with the aim of clarifying the facts ahead of other audit services by collecting appropriate data and information. On the basis of the insight gained during the pre-investigation, measures are recommended and/or taken directly in order to conclude the case, or Internal Audit may follow it up with further activities, such as an audit or a review.
Distinction from Audit
One difference between a pre-investigation and a regular audit is the initial uncertainty regarding the extent of the investigation. moreover, it is not clear from the outset whether the investigation falls under Internal Audit’s responsibility at all, or whether a different department should be responsible, e.g., the legal department to make use of the attorney-client privilege. However, the general audit principles continue to apply in full.
Reasons for a Pre-investigation
The main reason for conducting a pre-investigation is to analyze and evaluate the necessity of an audit engagement mostly in response to an ad-hoc request. A pre-investigation may also be triggered by other audits, or may be the result of a whistleblower’s tip-off, report, or allegation. In addition, pre-investigations can also be conducted as part of the annual audit plan with the aim of clarifying the audit content in detail before the actual audit starts.
Importance of Pre-investigations
Pre-investigations are likely to become increasingly important to the day-to-day work of Internal Audit as a result of the whistleblower provision included in SOX. This provision (section 806) protects employees’ right to reveal irregularities or weak points in the company’s accounting system and internal controls without risk of being fired or experiencing discrimination. SOX has also made employees more aware of the importance of compliance. The public’s expectations, which are height- ended due to greater media exposure, also play a major role. rapid organizational changes in the company and the introduction of new strategies and initiatives at a global level are also driving the need for pre-investigations. Even if it does not change the importance of the other audit services of Internal Audit, a pre-investigation forms a link between these and other audit disciplines.