CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
A critical element of all
research work is the review of literature it is so important that
Asolabi (1992) noted that its omission, represents a void or absence of
a major element in research. The literature review, a recording to
Bruce (1994) has 6 key elements which include a list, a search a
survey, a vehicle for learning, a research facilitator and lastly, a
report. On account of the above submissions, the researcher shall
review relevant, related literature on Auditing with a view to improving
the overall quality (content) of the research work.
2.1.1 CONCEPTUAL FRAMEWORK OF AUDITING
Ecaterina (2007) observed
that auditing plays on Essential role in serving the public interest in
order to strengthen accountability and reinforce trust and confident
in financial report. Re-occurring causes like Enron and would come in
the USA, African petroleum plc in Nigeria have give the audit
profession a lot of publicity, some of which is negative. What then is
auditing? And what are the key concepts surrounding this intricate
practice.
Clement (2012) defined auditing as a means of evaluating the
effectiveness of a company’s internal control, maintaining an effective
system of internal control, the notes is vital for achieving a
company’s business objectives obtaining reliable financial reporting on
its objectives, preventing fraud and misappropriation of its assets
and minimizing its cost of capital. Inasimilan tone, auditing is an
independent examination of and expression of opinion on the financial
statements of an enterprise, by an appointed auditor in pursuance of
that appointment and in compliance with any relevant statutory
obligation (Okezie, 2008 and Uwota, 2012).
Wikipedia (2012) asserted that auditing plays a vital role in
accounting of a systems internal control; it seeks to provide a
reasonable assurance that the financial statements are free from
material misstatement and error. In supporting this claim, Uwota (2012)
wrote that auditing consists of a searching investigation of the
accounting records and other evidences supporting the financial
statements in order to provide a fair and reasonable picture of
financial details of the company.
2.1.2 BRIEF HISTORY OF AUDITING
The development of modern accountancy and
auditing dales back to the great expansion in industry and commerce,
which has taken place the industrial revolution of the 18th century
(Okezie 2008) Ecaterial (2007) pointed out that the industrial
revolution led to the development of large industrial companies with
complex bureaucratic structures. In the course of time, specialists
were needed to provide appropriate book-keeping and auditing as a
result of separation of ownership from management of large companies.
The need for the managers to account to the shareholders became
necessary. The shareholder thus, requires an independent person(s) to
represent their interest in reviewing the reports of the managers to
ensure that it is accurate.
In recent times, the demand for auditors exists not just only in
the process of communication of accounting information but also a
regulation requirement made by government to ensure proper
accountability of both public and private companies.
Okezie (2008) posited that the 1844 joint companies Act started
that legal lead for the annual audit of the balance sheet of Joint
Stock Companies in Britain. Later is 1856, the compulsory audit of
limited liability companies was abolished. It was, however, restored by
the companies Act of 1900 which required the auditors to state whether
in their opinion, the balance sheet showed a “true and correct” view of
the state of affairs in such companies. There was no provision
relating to the profit and loss account in the 1900 Act. The English
Companies Act 1948 however laid a comprehensive foundation for modern
day auditing practice which includes;
- It laid down certain minimum information to be disclosed by companies account
- It required auditing report to express opinion on both profit and loss account and the balance sheet
- It required auditing report to express opinion on group financial statements
- It set a minimum requirement for any person or group of persons aspiring to be auditors
- It replaced the “true and current view” with the true and fair view”.
Similarly, the development of accountancy and
auditing in Britain influenced that of Nigeria. This took the firm of
the establishment of the institute of chartered accountants of Nigeria
(ICAN). In 1965, the enactment of the companies decree of 1968 which
can rightly be referred to as the “carbon copy” of the English
companies Act of 1948 to the Companies and Allied Matters Decree of
1990 and lastly new legislations such as the Companies and Allied
Matters Act (CAMA) 2004, Investment and Securities Act (ISA) 1999, the
Bank and Other Financial Institutions Act (BOFIA) 2003 etc. have in one
way or the other sharpened the industry the way it is today.
2.1.3 THE NEED FOR AUDITING
Delathe (2012) stated that auditing in the past, have been
considered as a simple administrative procedure comprised mainly of
checking accuracy of transactions pre-payment verification and control,
counting assets and reporting in past event, a combination of forces,
has, in recent time, let to a quiet revolution in the accounting
profession, Government, private and public companies are moving towards
a higher level of transparency and as such demonstrate accountability
and stewardship in the use of resources entrusted to them.
Reason for Auditing includes
- Evaluation and risk management
- Control and Government processes
- Investigative and Advisory services
Clement (2012) note that audit system is
important for a company because its enables it to pursue and attain its
various corporate objectives. Business processes need various forms of
interval control to facilitate supervision and monitoring, prevent and
detect irregular transaction, measure ongoing performance, maintaining
adequate business records and to promote operations productivity,
interval Auditors, review the design of the interval control and
informally propose improvement and document any materials
irregularities to enable further investigation by management if it is
warranted under the circumstances.
Manguis (2011) observed that auditing helps top management manage
corporate affairs, providing guidance on various issues ranging from
financial accuracy to interval control to regulatory compliance. They
also help department heads indentify tools and methodologies to improve
operational activities, putting companies on a more sustainable path.
The need for Auditing stems from.
- Internal control
- Financial Review
- Regulatory monitoring
Uwota (2012) conductively ascribed that the need for auditing rose from the following point which are.
- Financial statement may actually not represent the financial position of the organization.
- The accounts prepared by the company’s accountant(s) may contain errors on misstatement.
- Separation of ownership from management of companies.
- Meeting statutory requirements.
- Establishing a degree of correspondence between assenting made by management and users criteria.
(Ecataina, 2007)
2.1.4 ADVANTAGES OF AUDITING
Okezie (2008) enumerated the advantages of audit to include.
- It helps to agree tax assessment with the interval revenue service.
- It facilitates any claim for loss of profit from an insurance company, including consequential loss.
- It helps to reduce fraud and errors, through interval control system etc.
- It enables the client to obtain general and sound financial advice.
- It help to reduce on settle dispenses that might otherwise
arise regarding acceptance of the annual account and also provides a
proper basis for the valuation of good-will on admission or retirement,
or death of a partner or sale of shares or determination of share
price at approved stock exchange.
- It helps to attest to the truth and fairness of financial statement of companies.
2.1.5 DISASVANTAGES OF AUDIT
Uwota (2012) stressed that as
useful as audit is to an organization, certain side effects are known
with the process of audit. They include:
- It is a very costly exercise
- It is time consuming
- It sometimes leads to stop of work, especially during cash or stock count.
2.1.6 TYPES OF AUDITOR
Several types of audit exist in modern day practices these, Deloritte (2012) gave as;
- Statutory audit
- Private audit
- Interim audit
- Management audit
- Continues audit
- Internal audit
- Financial and Regularity audit
- Effectiveness audit
- Value for money audit
Statutory audit is that types of audit imposed by
statute, which is carried out because the law requires it. The duties
of an auditor under this type are spelt out in the enabling statute
(like the companies and allies matter acts 2004) and cannot be limited
in any way by the client (although the scope could be increased by
mutual agreement between the client and eth auditors) e.g. annual audit
of companies and government departments and corporations by external
auditors.
The private audit is an audit not imposed by law. The duties of
eth external auditors is/are stated by the engagement letter. A private
audit is therefore a special audit where the duties and functions of
the auditors are specified by the engagement letter and not statute.
Interim audit is the term used to describe the audit conducted
before the end of eth financial year. This is where the external
auditor reviews the records of an organization before the year end and
may be so required by management of companies or their financers e.g.
banks, investor supplies etc.