Auditing As An Instrument For Organizational Success

AUDITING AS AN INSTRUMENT FOR ORGANIZATIONAL SUCCESS (A CASE STUDY OF ANAMCO LTD. ENUGU)

DEFINITION OF AUDITING

Different people, at various times has given different definitions of auditing, here are some of them.

A renown author (Taylor 1982) in his book stated that “auditing is an investigation by an auditor into the evidence from which the final revenue accounts and balance sheet, or other statements, of an organisations have been prepared, in order to ascertain that they present a true and fair view of the summarised transactions for the period under review and of the financial state of the organisations at the end date so enabling the auditor to reports thereon”

Nwabueze PBC (2000), He defines auditing as an independent examination by an auditor of the evidence from which the final revenue accounts and balance sheet of an enterprise have been prepared in order to ascertain that they present a true and fair view of the sumarised transactions of the period under review and of the financial state of the organisation at the year end, thus enabling the auditor to report thereon. It is an investigation into books of accounts and the documents and vouchers from which the books have been written up, with the object of enabling the auditor to make a report on the balance sheet or other statements prepared from the books, to the person(s) to whom he has been appointed to report.

Santock (1974) stated that auditing may be described as “an examination and evaluation of the authenticity, and therefore the reliability, of a firms business documents and records; it also involves mating inquiries to ascertain that the financial statements on which the auditor is reporting and which have been prepared from these records display a true and fair view of the financial results for the year under review and a true and fair view of the state of affairs at the year end”.

Okolo J.U.T (1987), expressed that auditing could be a “conscientious and objective examination of and inquiry into, any statement of account relating to money or money worth the underlying documents, and the physical assets where possible, as will enable the auditor to form an opinion as to whether or not the statement of account presents a true and fair view of whatever it purports to represents, and to report accordingly”

Nwabueze C.C. (1997) stated that auditing is an exercise which is carried out in order to lend credence to statements prepared by directors of the company (who are not the owners) for use by the owners of business (shareholders), the creditors, the employees, the government, etc. whereby the auditor express his opinion as to the true and fair nature of the transactions he examined while carrying out the auditing.

Nwabueze went further to buttress that the main objective to these shareholders, creditors etc is to be convinced that the financial statement by the directors offer all information and explanations exacted by the auditor in his opinion to be genuine and believable. An auditing is an independent examination by a statutory appointed person called the auditor to investigate an organisation, its records and the financial statements prepared from them, and thus from an opinion on the accuracy and correctness of the financial statement. The primary aim of an audit is to enable the auditor to say “these accounts shows a true and view or of course, to say that they do not.

2.1     OBJECTIVE OF AUDITING

The primary objective of auditing is to produce a report by the auditor of his opinion of the truth and fairness of financial statements so that any person reading and using them can have belief in them.

The secondary objective is to:

–        To detect errors and fraud

–        To prevent errors and fraud by the deterrent and moral effect of the auditing.

–        To provide spin-off effects. The auditor will be able to assist his clients with accounting, systems, taxation, financial and other problems.

2.2     TYPES OF AUDITING

It may be useful at this stage to outline briefly some of the different types of auditing:

1. Financial Statement Auditing: This type of auditing is undertaking in order to determine and report whether the information contained in a set of financial statements is in accordance with certain criteria which have been set for that organisation, such as truth and fairness and compliance with accepted accounting standards. The auditing will usually cover the balance sheet, income statement, funds flow statement and the related notes. The subject of this type of auditing is therefore these reports, not the management or the organisation itself, or any particular aspect of its performance. The auditors focus is simply the correspondence between the relevant statements and the underlying performance, irrespective of its quality.
2. Regularity Auditing: A regularity, or compliance auditing is one where the principal objective is to establish whether particular policies, procedures or rules of operation laid down for an organisation have in fact been followed. For example, in a public sector organisation there may be established rules governing the way in which available contracts must be advertised, put out to tender and ultimately awarded. Part of the auditing of such an enterprise could involve checking that these procedures have been complied with during the period covered by the audit, or that the organisation’s activities have been regular in the sense of following the relevant regulations. The subject of the auditing in this case is principally the method of working of the enterprise and its personnel. In many situations this type of auditing will be carried out at the request of management itself, who will be the recipient of the auditing report. In other circumstances the auditing may be performed on behalf of a supervisory authority, perhaps that with responsibility for specifying the operating rules in the first place.
3. Management and Operational Auditing: While financial statement auditing are concerned primarily with the agreement between reported and actual performance and position and regularity auditings with the degree of observance of laid down rules and policies in the organisation being audited, management or operational auditing focus on performance in more qualitative terms. For example, the criteria of economy, efficiency and effectiveness, which are covered by the more general notion of value for money, are commonly applied in auditing assessments of the quality of performance of public sector enterprises. More generally, there are obviously very many types of criteria which could be applied in such performance based auditing. Equally there are many areas of management decision – making where agreed external standards may be difficult to identify and apply and where the auditing therefore involves a much more subjective review. The scope of activities which may be audited obviously goes beyond purely accounting functions.

Auditing firms have for many years provided management with comments on the efficiency and effectiveness of control systems as a by – product of the financial statement auditing. More recently a number of firms have sought to promote the idea of using the statutory audit as an opportunity to offer other operational reviews on a greater scale, looking at, for example, performance in investment appraisal or working capital management.

In theory there is no reason why the concept of a management audit should not extend to the highest levels of management, but in practice most operational reviews are undertaken over lower levels and reported to top management. The main exception to this situation is the public sector where, as already noted, assessing value for money is part of the external auditors responsibility.

1. Social Audits: A particular aspect of performance review which has developed into an identifiable separate form of auditing is that of social performance. In this area the ‘auditing’ generally involves the collection and publication of a considerable volume of ‘social accounting’ information which is not otherwise available, rather than simply commenting on the quality of information already provided by the organisations management. The aspects of performance included in a social auditing could include pollution and other environmental considerations, community activities and relationships, employment policies and consumer interests. Often social auditing are carried out by groups with a particular interest in an organisations activities rather than by an appointed independent auditor.
2. Internal Auditing and External Auditing: All of the above classes of auditing relate to differences in the subject of the auditing – information, procedure and performance. The financial classification point we shall recognise here concerns the groups being served by the auditing rather than its subject. The distinction between internal and external auditing is that the former takes place within an organisation at the request and initiation of top management, and on their behalf, whereas the latter involves responsibilities and reporting to groups outside the organisation. Additionally, the internal auditor is an employee of the organisation itself and so for at least some functions is less independent than the external auditor who is appointed from outside.

There may be some interaction between the internal and external auditing of an organisation. The presence of an internal auditing function may influence the direction and among of work undertaken by the external auditor, as it can provide evidence of the strength of management control over the organisations activities and the external auditor may be able to request or use work by the internal auditor, but it is unlikely to remove the need for an external auditing. Internal and external auditing are concerned essentially with different levels of accountability.

It is possible for both internal and external auditing to cover any of the subjects referred to already – the financial statements, compliance with procedures and rules, the efficiency of operations and management and even social performance. Traditionally, internal auditing was seen as involving mainly regularity and compliance type considerations, such as the detailed operations of controls and systems and the accuracy of processing of financial information. More recently, however, its role has expanded to involve much greater advisory and operational review type activities, where it is seen as contributing to general goals of management, efficiency and effectiveness rather than simply to control objectives.

2.3     RELIANCE OF INTERNAL AUDITING TO EXTERNAL AUDITORS

Many larger organisations have an internal auditing department. The personnel of this department will be employees of the organisation and their work will be directed by the management or to the auditing committee if there is one. However, they often have a degree of independence and may report to the board directly or, at least, to top management. The work they do may include work also done by the external auditor. Consequently, it is economic good sense for the external auditor to consider whether he can reduce his own work by placing reliance on the work of an internal auditor.

Internal auditing is an element of the internal control system established by management. Thus as external auditors are accustomed to place reliance on internal controls.

Some of the objectives of internal audit are same as those of the external auditor. For example, the internal auditor will perform work on the documentation and evaluation of accounting systems and internal controls and will carry out compliance and substantive tests. It makes economic sense to reduce the work of the external auditor by relying on work done by the internal auditor.

The external auditor can also utilize the work of the internal auditor by taking into account the work done by the internal auditor, and by agreeing with management that internal audit will render direct assistance to the external auditor.

2.4     AUDITING AS A MEASURE FOR CONTROLLING FRAUD

The incidence of fraud is controlled in an organisation when there is proper auditing especially when the underlisted tests and basic checks is applied:

1. a) TESTS:
2. i) Walk – Through tests: It is the tracing of one or more transactions through the accounting system and observing the application of relevant aspects of the internal control system. For example the auditor may observe at the purchases system in a commercial enterprise and trace a particular purchases from its initiation through to the purchases figure in the trading and profit and loss accounts. This involves looking at suppliers invoice, how the invoices are documented and recorded, debit control approval, how the goods are selected and packed, invoicing procedures, recording the invoice in the books of account etc. at each stage the controls applied are examined.
3. ii) Compliance Tests: Compliance tests are test designed to establish auditing evidence about the effective operations of the accounting and control systems – that is, that properly designed controls identified in the preliminary assessment of control risk exist in fact and have operated throughout the relevant period.

iii)     Substantive Tests: This is a tests carried out on transactions and balances, and other procedures such as analytical review, which seek to provide auditing evidence as to the completeness, accuracy and validity of the information contained in the accounting records or in the financial statements.

1. b) BASIC CHECKS:

Basic checks are the checks that involves the detailed vouching and verification of transactions. Examples of these type of checks are:

1. Each transaction must be vouched to ensure that there is sufficient evidence available to show its nature, reality and legality.
2. Each item of income and expenditure must be posted into its proper position in the account and in the correct period.

• The accounts must be properly and correctly balanced at specified intervals of time and the completeness of which must be tested and confirmed.

1. Every payment must be authorized by somebody who personally signs a payment order and who must be different from the one who hold the funds and pays it out.
2. Ordering, receiving and paying functions must be separated.
3. Each transaction must be ordered by an authorized person in accordance with known commitment, that the amount appear to be correct, that if payment is for supplies, they were properly received and if for services, they were actually performed.

• Each payment was made to the appropriate person who is authorized to receive it in appropriate form approved by the approving document.
• Each amount paid out must correspond to some generally accepted scale or ceiling for the supply or service or was agreed before hand and properly recorded.

2.5     THE FUTURE OF AUDITING

1. a) The legal framework of auditing is subject to periodic change as new companies Acts are promulgated. The theory and practice of auditing is being steadily developed by the professional bodies and now the auditing practices Board. New developments occur because of new situations and ever rising expectations and the need for higher standards.
2. b) Most developments in auditing have been evolutionary but currently more rapid change, which might be called revolutionary, is about to happen. This has primarily come about because of public attention on the whole way in which companies are run and governed. This is partly, but not wholly, due to scandals like the collapse of BCCI (Bank of Commerce and Credit International) and the Maxwell affair. The have been many listed companies which collapsed suddenly and many of these have been run in a dictatorial manner by one strong character.
3. c) As a response to these problems in the governance of companies, the Cadbury committee was set up and reported in late 1992 in the report of the committee on the Financial Aspects of Corporate Governance. This report recommended many changes in the Board rooms, reporting practices and auditing including a code of Best practice. The report is reviewed in this chapter. The ramifications of the Cadbury code on corporate governance are still being worked out and they have a substantial impact on the future of auditing in the short term.
4. d) The Auditing practices Board issued a paper on “The Future Development of Auditing” in November 1992. The purpose of this paper is to promote debate on the future of auditing in the UK and Ireland.

2.6     AUDITORS’ LIABILITY

Liability means the state of being liable, and liable means “Responsible according to Law”.

It is important that auditors should have fairly grasp of legal decisions, even though, they are not legal luminaries. For example, in company law where it is recognized that a business that has been incorporated is a separated legal entity, quite different from the original owners. Saloman V. Saloman.

It is also necessary that auditors acquaint themselves with certain legal decisions so as to be able to render useful and meaningful services to their clients and the wider public.

Auditors perform audits and sign audit reports. These reports are the auditors’ opinions on the truth and fairness etc of financial statements. Auditors are known to be competent and honest. So if the auditors’ say financial statements show a true and fair view users of the financial statements will have faith in them because they have faith in the auditors.

Once the auditors’ work is being relied upon by the client and other interested groups, the auditor clearly has a responsibility to do his work honestly and carefully. The judge in the London and General Bank case (1895) said: The auditor must be honest – that is he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that he certifies is true.

The question that arises is, what is reasonable care and skill? The answer depends on the nature and circumstances and is very difficult to assess in any given case. What is clear is that:

• An auditor may fail to exercise sufficient skill and care.
• As a consequence, some fraud or error may be undiscovered, or he may fail to discover that the accounts fail to show a true and fair view, or may contain a material misstatement.
• As a consequence, somebody who relies on the work of the auditor may loose money or money worth.
• This loss of money flows from the failure of the auditor to do his job properly.

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