THE ROLE OF AUDIT FOR THE PROPER ACCOUNTABILITY OF COMPANY’S FUNDS (A CASE STUDY OF DEPARTMENT OF PETROLEUM RESOURCES (DPR).
This chapter is expected to make an extensive and critical review of related literature, the literature, which had been written generally and specifically on the topic. The review will also be geared towards those factors, which enhance the efficient performance of an organization towards achieving an adequate and efficient management of funds and most importantly the role auditing plays towards achieving proper accounting records.
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Individuals, groups and experts have found the need for auditing as an instrument for keeping good accounting records. And many who have written in this field defined auditing in different ways.
According to Howard (1982), “Audit is designed to guarantee accuracy of the account in every detail and to bring to light fraud and misappropriation where they occur”. Except managers of company’s funds are able to satisfy the auditors, they cannot be considered to have effectively accounted for their stewardship.
Furthermore, professor settler added; “auditing is a managerial control which functions by measuring and evaluating the effectiveness of other controls”. This implies that the services of auditor to management involve going beyond financial records to ascertain whether the financial statement prepared by a company management are reliable and complete.
In their contribution, Walter B. Meigs and Robert F. Meigs says the owners of business entity, creditors government officials and other interested parties must rely upon the audits performed by individual.
In this definition of Auditing, Howard (1982) assets that Auditing is the examination of certain statements covering the transaction over a period of time and the financial position of an organization or a certain data in order that the auditor may issue a report on them.
The auditing Practices Board (APB) defines an audit as “an audit of financial statements as an exercise whose objectives is to enable auditors to express an opinion whether the financial statements give a true and fair view of the entity’s affairs at the period and of its profit or loss for the period then ended and have been properly prepared in accordance with the applicable reporting framework or whether statutory or other specific requirements prescribe the term present fairly”.
- INTERNAL AUDIT
Arthur W. Holms says” Internal Auditing is independent appraisal activity with an organization for the review of the accounting, financial and other operations”.
Millichamp (1984), “Internal Audit is a managerial control which functions by measuring and evaluating the effectiveness of other controls.
It is an independent appraisal of activities within an organization, for the review of operations as a service to management. How much the auditor will be able to take account of work of the internal auditor will depend on his assessment of the effectiveness of the internal audit function.
In another review, A. P. Chambers in his work titled “International Auditing Theory and practice” (London; Piton Books, 1981) described internal auditing as the eyes and ears of management.
One other important function of an internal audit department is to objectives report its finding to management and record correction actions where necessary. If an internal auditor cannot objectively report, communicate and follow up on his recommendation, then he is not assisting management in promoting the efficient attainment of the company objective.
- D. Chambers went on to relate auditing to internal control by using the definition of internal auditors of United States of America, which runs thus “internal auditing is an independent appraisal of activity within an organization for the review of accounting, financial and other operations as basis for service to management”. He attributed the definition to managerial control, which functions by measuring and evaluating the effectiveness of other controls.
According to Howard (1982), the system of the external audit is purely on independence assessment of financial operations.
- It is the objective examination of the account with the view to ascertaining whether or not it shows a true and fair state of affairs.
- It is an impartial investigation to confirm that the transactions are supported with relevant and reliable documentary evidences.
- It is a method of reviewing systems, conducting tests, comparing results and reporting the final opinion.
It is this, which makes auditing a social responsibility assessing the quality of utilizing resources in financial operation with a view to ensuring that the financial management of the unit is free form error and fraud.
- SYSTEM AUDITING
According to Howard (1982) “contemporary auditing has to be carried out with scientific and efficient methods whereby the auditor can give his report with confidence, while at the same time he can undertake his work on relations and time saving basis”. System based auditing has been born out of the necessity for the auditor to be able to give his report on his investigations into business which has now increased in both complexity and size.
The auditing standard requires an operational auditor’s guidelines to be carried out to achieve the objectives of the system, such operational procedures include:
(a) Planning, (b) controlling and (c) recording.
ACCOUNTING SYSTEMS: Books of Account: There is no statutory obligation upon sole traders or partners to keep books of account, but if they fail to do so, and subsequently become bankrupt, they are liable to imprisonment, if they have not kept and preserved proper books for the period of two years preceding the bankruptcy. The expression “proper books of account” in the case of a sole trader or a partnership is defined in a similar manner to that set out in section 331 of the companies Act, 1948 (see below).
Section 147 of the companies Act 1948 requires every company to keep proper book of account with respect to:.
- Moneys received and expended, and matters to which they relate i.e. a cashbook.
- Sales and purchases of goods i.e. Day Books.
- Assets and liabilities i.e. a ledger.
Proper books of account will not be deemed to be kept, however, unless they are such as are necessary to give a true and fair view of the state of the company’s affairs and explain its transaction.
The books of account are to be kept at the registered officer (or other suitable place) and there is a penalty of either imprisonment or a fine in respect of non-compliance with the provisions of this section.
Section 331 of the Act imposes liabilities to imprisonment upon every director or other officer who “was knowingly a party to or connived at the default” of not keeping proper book of account throughout the period of two years immediately preceding the commencement of liquidation or since the incorporation of the company if less than two years, unless he can show that he acted honestly and that default was excusable.
For the purposes of section 331, proper books account will be deemed not to have been kept unless the company has kept such records as are necessary to exhibit and explain the transactions and financial position of the trade or business of the company, including books containing entries from day-to-day in sufficient detail of all cash received and paid, and where the business has involved dealings in goods, statement of the annual stock takings and (except in the case of goods sold by way of ordinary retail trade) of all goods and the buyers and sellers thereof, in such a way as to enable those goods and those buyers and sellers to be identified.
SINGLE AND DOUBLE ENTRIES
Single Entry
This is a system of book-keeping which does not provide for the two fold aspect of transactions, because it invariably ignores the impersonal aspect.
This system adopted mainly by the smaller types of private business is not only incomplete but also most unsatisfactory from the auditor viewpoint.
Double Entry
This is a system of book-keeping, which records each transaction both from a personal and an impersonal point of view. This is the recognized system adopted in this country and the proper maintenance of accounting records or double entry lines assists the work of an auditor.
Obviously, the accounting system will, in a large measure, determine the nature of the work to be done by an auditor, particularly when planning his audit programme. Where single entry is in operation the auditor will have to rely to a very great extent upon the original records and upon the record of cash transaction. In most cases under this system he would have to act as accountant for the purpose of preparing the final accounts. On the other hand, under double entry, the auditor’s routine is much more clearly defined. He knows what records to expect and he knows precisely what information will be available from the books.
SLIP SYSTEMS OF POSTING
In certain businesses where it is essential that the position of a personal account should be known practically from hour to hour, a system known as the slip system of positing is introduced. By this method the original entry is made on a slip, which is carbon copied to the extent required, and one of these slips is immediately given to the ledger clerk, who make the necessary entries therefrom. The effect is that the ledger entry is made before that in the subsidiary books. One of the sets of slips is included in a binder similar to that used in connection with loose-leaf books, and by this means the subsidiary journal is practically composed of original documents.
The auditor should determine that the system of check in force for this method is such that it does not leaves any loopholes for fraud or unauthorized manipulation, and he should see that the various postings are frequently agreed with the subsidiary records.
LOOSE-LEAF AND CARD LEDGERS
Loose-leaf ledgers consist of specially ruled sheets which are fixed in binders usually provided with a locking device so that the leaves are firmly held and can be removed only by or with the authority of the person who has charge of the ledger.
CARD LEDGERS
This consists of a separate card for each ledger account, the cards being kept in strict alphabetical or numerical order in special cabinets, in such a way that a locking rod may be passed through the circular holes in the cares so that they cannot be removed without the authority of a responsible official.
The advantages of these systems from the point of view of an auditor are as follows.
- The ledgers are continuous, and are confined to current account. Thus the work of checking the balance is facilitated.
- The ledgers may be readily subdivided, so that the work of checking the entries may be divided between a number of audit clerks.
Although these types of ledgers have often been objected to by auditors on account of the possibility of the substitution of sheets or cards by unauthorized persons, there should not be any great risk of fraud provided the system of internal control as regards the independent compilation of control accounts and the insertion and extraction of sheet or cards is adequate and is properly supervised. It is advisable to number all the leaves or cards consecutively, and to keep a register so that all leaves and cards may be readily accounted for. The auditor should satisfy himself that the system of control is sufficiently stringent to prevent the fraudulent substitution of one sheet or card for another.
- Audit Evidence: Relevant, adequate, reliable and sufficient evidence should be collected in the course of auditing.
- Internal Controls: The internal control system should be checked before reliance is placed on it.
- Review of audit: Review of audit will explore relevant activities within the system of organizations, thus ensuring that all information are gathered to enhance prudent judgment of the organization.
- ACCOUNTABILITY
One Time student accountant journal (1980) said, “Management of company’s funds involves company accountability and that if it is delegation of authority as a means of social trust, this form of financial discipline is more or less a statutory responsibility”. This is the reason why company law expects those who have been entrusted with collection and administration of company money and assets to maintain proper record of account. Attah (1996) states “managers of company funds may decide to acquaint the company with information they may claim represent”. This claim would not satisfy the envious shareholders who will insist on adequate verification, which will be conducted by auditors after an impartial examination.
Social interests are protected by the accounting system or proper account in respect of transactions of company fund. This accenting itself is governed by the system of auditing as an attempt to verify its correctness.
In view of the above variables, accountability cannot be deemed satisfactory except through the act of examination and confirmation known as auditing.
Thus auditing is the only instrument which determine proper company accountability and ensures that there is an adequate verification, examination and evaluation of performance and other state of affairs.
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