A spokesman said that the organisation was satisfied there were "reasonable grounds to suspect an offence or offences may have occurred."
He added: “We have been in contact with the Conservative Party since late March and have conducted an assessment of the information they have provided to us.
“We are now satisfied that there are reasonable grounds to suspect that an offence or offences may have occurred. We will therefore continue this work as a formal investigation to establish whether this is the case.
“The investigation will determine whether any transactions relating to the works at 11 Downing Street fall within the regime regulated by the Commission and whether such funding was reported as required.
“We will provide an update once the investigation is complete. We will not be commenting further until that point.”
The investigation comes after Mr Johnson’s former chief adviser Dominic Cummings claimed that the Prime Minister intended to have Tory donors “secretly pay” for the refurbishment of the official Downing Street flat.
In his first blog post since leaving No 10 at the end of last year, Mr Cummings described the handling of payments for the redecoration as "unethical, foolish and possibly illegal – and almost certainly broke the rules on proper disclosure of political donations if conducted in the way he intended".
The government has denied the claims and said the "costs of wider refurbishment in this year have been met by the prime minister personally".
A Conservative Party spokesperson is reported to have responded to the news of the investigation saying: “We believe all reportable donations have been transparently and correctly declared and published by the Electoral Commission. We’ll continue to work constructively with Commission on this matter.
“While an investigation is ongoing we’ll not be commenting further.”
A leaked email in the Daily Mail suggested that the Tories had used £58,000 of donated party funds for the redecoration, yet no such donation had been declared to the Electoral Commission.
Every prime minister receives an annual allowance of up to £30,000 a year of taxpayers’ money to go towards "the costs associated with maintaining and furnishing of the residency within the Downing Street estate".