CHAPTER ONE
1.0 Introduction
1.1 Background
for the Study
Auditing is an important
professional task, carrying heavy responsibility and calling for commensurate
skill and judgment.
The original
skill required by the auditor was such that would enable him to carry out an
exhaustive examination of the document and books arising through the
transactions of the business, mainly with the objective of ensuring that all
was in other and no fraud was perpetrated by employees(Leslie, 1996). Today,
the main object is to ensure that the account reveals a true and fair view of
the business and its transactions. This
leads to greater emphasis being placed on ascertaining the reliability of the
records from which the accounts are drawn up and also, on verifying the assets,
liabilities and other transaction in the accounts. The reliability of the records is established
by first ascertaining the system of internal control within the business,
testing its operation through different techniques and gathering audit evidence
(Leslie, 1996).
An audit is basically an investigation by an auditor into the evidence
from which the final revenue accounts and balance sheets or other statement and
reports of an organization have been prepared, in order to ascertain that they
present a true and fair view of the summarized transaction for the period under
review and of the financial state of the organization at the end so as to
enable the auditor to report thereon. It
will be seen that an audit is first of all an investigation; that the
investigation involves the examination of records and accounts; and gathering
of audit evidence; and that the primary object of the investigation is to
enable the auditor to make a report on the accounts regarding the truth and
fairness of the accounts (Nnadi, 2006).
While the main
function of the investigation is to enable the auditor to report on the
financial statement presented to him, other specific functions are: The
detection of errors and fraud; the prevention of errors and fraud; Report on
internal control weaknesses; and giving constructive advice to management.
Accounts may be
falsified in order to deceive shareholders as to the position of affairs or
third parties, example is bankers and creditors. Mere checking of the entries in the financial
books will usually fail to disclose any fraud, but comparison with original
documents (example sales order) or statistical books (examples wages books,
stock books, goods inwards and outward books and others) will generally
disclose any existing fraud.
In regard to the
prevention of errors and frauds, the fact that the dishonest employees know
that their work will be independently checked for the purpose of the detection
of errors or fraud on their part, tends to make them more careful or to deter
them indulging in such fraudulent acts.
It is necessary
to draw a distinct line of demarcation between accountancy, the actual writing
up of books and the compilation of the accounts there from – and auditing,
which is the examination of the completed records and the subsequent submission
of a report thereon. This distinction is
important as the responsibilities arising can be far – reaching in their
consequences, and although, in practice, the auditor may be engaged on both
kinds of work on the same job, it is necessary to understand and maintain the
difference (Obaze, 2006).
Frequently, the
auditor is called upon to prepare the accounts of the business, and if he does
so, he is acting as accountant, and is entitled to charge a fee for this work
over and above the remuneration agreed upon for the audit. Sometimes an inclusive fee is paid to cover
both the preparation of the accounts and the audit thereof. Business can be classified according to size,
namely: small scale, medium scale and large scale. The definitions of small and medium
enterprises differ from country to country, and even from industry to
industry. The distinguishing feature of
enterprise generally is: one, the number
of employees; two, the total asset base.
It could also be turnover or profit.
In Nigeria, the official body that defines SMES (that is Small and
Medium Scale Enterprises) is the Federal Ministry of Industries. Even the official definition changes from
year to year. For small enterprise, the
number of employees must not be more than 40.
Then, for medium enterprises, it is between 41 and 100 people. In terms of asset base, that also
changes. For small scale enterprise,
asset base is between N10 million
and N40 million, while medium scale
is a maximum of N150 million. These figures keep changing because of the
fluctuation in foreign exchange rates.
This is why the above definition differs from country to country. For instance, what the United States of
America regards as small scale business on the basis of turnover will surely go
for a large scale business in Nigeria (Abugie, 2006).
The only
distinguishing definition of medium scale and small scale business is based on
functionality. For instance, in small
scale enterprises, one person can perform all the available functions of
management: director, purchasing manager, administrative manager, financial
controller and others, whereas in medium scale and large scale businesses,
different persons perform different functions.
A recent seminar organized by the Institute of Chartered Accountants of
Nigeria in Port Harcourt in July 2628, 2006 supports this last definition. To this effect, the Nigeria
Accounting
Standard Board (NASB) will soon develop a Statement of Accounting Standards on
Small and Medium Scale Enterprises not more than six months hence Osayande
(2006:4).
This research
work is therefore focused on medium scale business because of so many
reasons. After small scale businesses,
medium scale businesses form a large proportion of businesses in Nigeria.
Consequently,
their contribution to the Gross Domestic Product (GDP) is reasonably high. They are the future multi-national companies
of this country. A lot of human,
material and financial resources are trapped in this category and must be
properly guided to ensure efficiency and effectiveness. Where audit succeeds in adding value to the
growth and development of these companies, labour unemployment problems will be
solved; there will be improvement in the standard of living; and more profit
will increase government’s tax and value added tax (VAT) receipts as well as
Gross National Product (GNP).
Brief History of Organizations
A. Halden
Nigeria Limited
Halden Nigeria
Limited was incorporated on 8th May, 1992 with Registration Number RC
195773. It has over 11 years
experience as a big player in the oil and gas industry in Nigeria.
Products and Services
Products and services rendered include:
Engineering
design services, waste management services, laboratory services, logistic
support services and material procurement.
Major Clients
Halen’s major clients and present contracts include:
(a)
Shell Petroleum Development Co. Ltd: Provision of
Logistics Support Services; Laboratory Services and Engineering Services.
(b)
Elf Petroleum Nigeria Ltd: Provision of Logistic
Support Services (Decoding Services)
(c)
Mobile: Provision of Laboratory Services and Logistic
Support Services, Filtration and desludge Services.
(d)
AGIP: Material Procurement
(e)
NPDC: Waste Management Services.
Board and Ownership Structure
Halden is 100 percent owned by Nigerians. It has an authorized and called up share
capital of N5 million contributed as
follows:
Chris Umunna – Chairman
60%
Chris Emenike – Director
40%
100%
It has a
staff strength of 64
B. Cogipar
Nigeria Limited
Cogipar Nigeria Limited was incorporated on 21st March, 2009
with Registration No: RC 315154.
Principal Activities
The Company is
engaged in the business of civil engineering construction such as road,
building bridges pipe flow lines, dams, airports, dockyards, boreholes
drillings, water treatments and other related projects.
Major Clients
These include:
(1) River State
Government:
Building
and Maintenance of Roads, Secretariats, State House of
Assembly,
Bridges, Low-Cost Houses and others (2)Niger Delta Development Corporation
(NDDC): Building of Roads and Bridges
Board and Ownership Structure
Cogipar Nigeria
Limited started as a company with 40 percent foreign interest and 60 percent
Nigerians as follows:
Gitto Domenico (Italian) 400,000
Jonathan Smith (Nigeria) 75,000
Ben Mabe (Nigeria)
325,000
Dyzman Mcdemon (Nigeria) 200,000
1,000,000
It has an
authorized and fully paid capital of N1,00,000
as at 2003. In 2004, the authorized
share capital rose to N10,000,000
with a 100 percent Nigerian Ownership.
Employment
The company
employs about 85 staff and administration channels include the following:
Board of
Directors, Managing Director, Project Manager, Financial Controller, Purchasing
Manager, Material Manger, Public Relations Manager and Administration Manager.
1.2 Statement
of the Problem
The accounting
profession is presently at a cross road.
Confidence in corporate reporting has never been lower in recent
years. Stars of the profession in the
yesteryears, Arthur Andersen & Co, have been disgraced thoroughly in the
United States of America following the collapse of the energy giant,
Enron. Telecommunications giant,
Worldcom has filed for bankruptcy after admitting to improper accounting to the
tune of 3.8 billion dollars; another firm Qwest International has also admitted
guilt of improper accounting, while Xerox Company without denying or admitting
guilt has paid a fine of $10 million following its Securities and Exchange
Commissions investigation into its accounting practices. The loss of confidence resulting from these
accounting frauds has shaken the stock markets around the world to their very
foundations. The question on everybody’s
mind is what went wrong? Was it that
they were to rebuild the investors confidence in financial reporting in
particular and corporate governance in general?
(Nnadi, 2006). In Nigeria, many
banks crashed even after audit reports certified them healthy. This increases the challenge to audit
function and reports and professional negligence.
It has been observed that most of the problems
faced by medium scale businesses include organizational and managerial
incompetence, internal control inadequacy, poor accounting records, financial
mismanagement/corruption, inadequate knowledge of the importance of audit in
monitoring business performance and others. These problems have led to their high rate of
mortality. The use of audit which coves
both financial and managerial aspects is appropriate for managing this category
of businesses. Management sometime shows
apathy towards audit due to perceived cost to be incurred in audit fees.
Lack of
independence has helped also to reduce the quality of auditors report. Consequently, most auditors will not like to
loose an audit because of what they are currently benefiting and/or its
potential benefits.
Most auditors are
not properly equipped to face the challenges of globalization and improved
information technology thereby sometimes unable to audit properly. Auditing is no longer “rules based”, that is,
conformity with the law. It is now
“principles based”, that is, relevant to the circumstance. Nigeria is still using the Audit Act of
1956. This has limited the scope of the
auditors, therefore, with the present reformations being introduced by the
Nigeria Accounting Standards Board (NASB), the auditor needs to be equally
reformed to be able to tackle the challenges ahead in the business world.
1.3 Objectives
of the Study
Audit as a
management tool and statutory requirement is vital for sustained health of the
companies and renewed confidence by the shareholders. The objectives of the study are therefore:
(i)
To determine the need for the conduct of audit in the
management of medium scale companies
(ii)
To examine the effectiveness of auditors in the
performances of their duties.
(iii)
To ascertain the relevance and adequacy of accounting
standards as well as its application by the auditors.
(iv)
Ascertain the disposition of management to audit fees
and the general notion of the impact of audit.
(v)
Determine if management and corporate objectives
influence the result of the audit.
(vi)
To make recommendations based on the findings of this
research work.
(vii)
To suggest areas of possible further research work on
audit of medium scale companies.
1.4 Research
Questions
In order to
achieve the objectives of this study, the following research questions will be
considered.
(1)
What is the need of audit in medium scale businesses?
(2)
What are the problems facing the conduct of audit in
medium scale companies?
(3)
What is the role of audit in the prevention of frauds
and irregularities?
(4)
In what ways are the auditors report useful to
shareholders and board of directors?
(5)
What are the current audit practices applied in
business organizations and their perception on medium scale companies?
(6)
Is their any significant relationship existing between
accounting standards as they relate to valuing inventory and realization of
corporate objectives?
(7)
What are your recommendations as regards to the subject
matter?
1.5 Formulation
of Research Hypotheses
For the purpose
of this study, three hypotheses have been developed with the Ho
representing the Null hypothesis and the H1 representing Alternative
hypothesis. Alternative hypothesis is
accepted when the Null (H0) is rejected. This will help in proving the objectives and
solving the problem of the study. This
Null hypothesis (H0) was formulated to negate certain factual statement
and attempt has been made to prove them wrong.
Where the null hypothesis actually proves wrong, the alternative
hypotheses are accepted.
1.
H0: There
is no significance relationship between audit and cost reduction
in medium scale companies.
H1:
There is a significant relationship between audit and cost reduction in medium
scale companies.
2.
H0: There are no significant problems facing
the conduct of audit in medium scale
businesses.
H1:
There are significant problems facing the conduct of audit in medium scale
companies.
H0: Audit reports are of no significance to the user of
accounting information in Medium scale companies.
H1: Audit reports are of significance to the user of
accounting information in Medium scale companies.
1.6 Significance
of the Study
The importance of
audit has not been fully appreciated in most medium scale businesses in
Nigeria. It is anticipated that the
results of this study will serve as a practical tool to guide the shareholders
in their assessment of the usefulness of audit in medium scale companies in
Nigeria, most especially in Port Harcourt.
The study will
not only enable the shareholders make possible changes in both their internal
and external control system but it will also guide them as to whether to spend
on audit or not.
Users of
financial statements will gain from the statement that shows true and fair view
of their interest in the enterprise.
They stand in a position to make useful investment decisions. The true and fair view of the statement will
also enable them make correct prediction about enterprises earning power.
Government
depends on accounting reports for its political and economic planning. This study will help government evaluate the
various reports of medium scale companies in the industrial sectors. Intelligent evaluations will in turn help in
the assessment of sectorial performances which are used in planning and control
of the economy towards achieving the most needed economic growth and
development. The research is a very
significant tool in guiding future researchers on this area and other related
subjects and therefore enables them to contribute to knowledge on existing
auditing and accounting literature in general.
1.7 Scope
of the Study
The scope of the study will be confined to
Port Harcourt, the capital of Rivers State.
The choice of Port Harcourt is influenced by the fact that Prot Harcourt
has large concentration of Medium Scale Companies. A sample of two companies is used for this
study namely: Halden Nigeria Limited and Cogipar Nigeria Limited.
The Study will
focus on various types of audit and their significance in the operations of the
companies.
1.8 Limitations
of the Study
This study was
prone to a number of limitations. Due to
economic downturn in Nigeria, the researcher faced financial constraints in
relation to transportation, administration, collection and procurement of
research materials.
Time was another constraint as there was a time frame to conclude the
research.
1.9 Definition
of Terms
The following need to be explained as they apply to this
study.
Audit:
An audit is the
independent examination of financial statements or related financial
information of an entity, whether profit oriented or not and irrespective of
its size, or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.
Financial Statements:
This is a
structured representation of the financial information, which ordinarily
includes accompanying notes, derived from accounting records and intended to
communicate an entity’s economic and resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial
reporting framework.
Error:
This refers to
unintentional misstatement in financial statements, including the omission of
an amount or a disclosure.
Management:
Management is the
use of professional skills for identifying and achieving organizational
objectives through the deployment of appropriate resources.
Medium Scale Companies:
These are
companies that employ “between” 41 to 100 staff and have functionality.
Accounts:
This is the
process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by the users of the information.