CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
Managing Fraud: Auditing is an independent appraisal process often
governed by statute for examining, investigating and verifying the
financial statements of any organization or entity by a qualified person
appointed to do the job who seeks to established an opinion concerning
the truth, accuracy, validity, reliability and fairness of the
statements and the records on which the statements are based and
concerned with any statutory or other requirements.
To make auditing possible, the internal control measures should be
adequate and perfect. The accounting system must be sound and
theorganizational structure must not be overlapping.According is a set
of rules and method by which financial economic data are collected,
processed and summarized into reports that can be used in making
decisions. Both definitions confirm that it is the tool for decisions
making. Decisions could be made on progress of work, continuity or
cancellation of certain policies or method arid modifications where
necessary. Accounting systems reflect the soundness of an organization.
It is the collation and classification of statistical data resulting
from the activities of an entity.Organization’s structure should be
designed in such a way as to show the activities and financial
responsibilities of each department and sections where activities are
segmented andspan of control is clearly stipulated, the needed checks
and balances by the examiner who audits would be made easy.
Responsibility accounting, according to simpson (1979:118) is
concerned to a large extent with the interface between data inputs and
the managers who use data. It is the classification of accounting and
statistical data resulting from the activities of an agency in such a
way that so directly relates them to the control. Auditing and
accounting are synonymous as one cannot work in isolation of the other.
Hence, there is need to relate the accounting duties of an entity with
the various activities within the system and the allied checks and
balances of Every successful company must keep proper accounting records
to monitor its activities to enhance adequate control for the progress
of the organization. Accounting records must be designed in such a way
as to show and explain the transactions of the company. It should be
able to disclose with accuracy, the financial position of the company.
It should ensure that financial statements prepared comply with the
provisions of the enabling act of the company. It should have the
details of the assets and liabilities of the company.Record according to
Chambers (1972:84) is a formal writing of any fact or proceeding. It is
a book of such writing. It is past history. It is memorial, it is
valuable to keep record for as long as possible for safekeeping and easy
retrieval. Accounting records are essential in the progress of an
entity.
The modern technology has made accounting work easier and faster
through the use of computers and electronic calculators. The modern
technology, not withstanding the use of record books is still very vital
for the auditor’s work.Auditors are born and trained to have inquiring
minds, as certain financial statements prepared by the management of an
entity may actually not represent the true financial position of the
organization.To provide credibility to retorts and accounts therefore,
auditors must examine records available through to detect errors,
disclose fraud, detect any from of irregularity or misleading report,
evaluate the effectiveness or otherwise of the internal control system
in place. Auditing enablesthe management and investors have correct and
efficient information for decisions making .
From the auditor’s point of view, “fraud may be broadly classified as
deliberate steps by one or more individuals to deceive or mislead with
the objective of misappropriating assets of business, distorting
organization’s apparent financial performance or strength, or otherwise
obtaining an unfair advantage”.It may start as a genuine mistake, be
successfully covered up and develop there after into a full fledged
long-terms fraud.Alternatively, it may be a “one-time walk in rip-off”.
It ray engineered from within (i.e. employees or managers or both) or
from outside (i.e. business contacts or the general public) or
combination of the two. The misappropriation of assets may involve the
creation, alterative suppression of accounting records, vouchers and
documents, or tampering with equipments (e.g. meters, files, containers)
or the misuse of time, property or services.The distortion of financial
performance or position is more concerned with puffing on a good front
or window dressing and is usually perpetrated bymanagement using
creative accounting.
Fraud may occur because responsibility for prevention is not
allocated, because dishonesty is accepted as inevitable, known cases go
unpunished and the diseases spread; because security is thought too
expensive or covered by fidelity bond.It is not the auditor’s purpose in
carrying out an audit to determine whether or not frauds of any kind
have been perpetrated by servants of his clients. As hope said in
Kingston Cotton Mill (No. 2) 1896; (the auditor) does not guarantee the
discovery of all fraud.As has been stated, the auditor’s duty is to
assess whether or not the published accounts accurately represent the
true state of his client’s business and to produce report addressed to
the owners in which he expresses his opinion of the truth and fairness,
and sometimes other aspects of the financial statements. The phrase
“true and fair” does not imply that the accounts are correct in every
detail and the presence of minor inaccuracy would not invalidate the
auditor’s opinion. It is however, obvious that if a material fraud has
been perpetrated and is not discovered then the published accounts will
not reflect the true state of the client’s business.Consequently,
auditors make a contribution to the detection of possible fraud even
though “reliance on the auditors to detect fraud is misplaced”. The
first stage of an audit is designed to establish if the accounting
records are accurate and provide a reliable basis for the preparation of
accounts.
This objective can be achieved by checking all the routine
transactions which took place during the financial year and this process
might uncover fraud, except where fictitious evidence have been
carefully created.However, the cost of such an approach is prohibitive.
Fortunately, it possibleto reduce the volume of test without greatly
reducing the validity of opinion by using sampling technique. Using such
an approach almost as likely to detect fraud, which would be found by a
far comprehensive examination. But even this approach is also be
expensive. As a result, the auditors adopt a different method, which
relies extensively upon the organization’s system of internal control
and internal checks. The essence of the approach is to analyze and
evaluate the system and then to carry out tests to establish that the
controls are operating intended and constitutes a reliable basis for the
preparation of the annual accounts and to determine the required
substantive testing.
The examination of the system is usually done with the following
fundamental consideration:IThe possibility of defalcation/fraud, either
permanent or temporary.ii.the possibility of undiscovered errors
occurring.iii.the possibility of accounts being deliberately
distorted.If the internal control is very weak, it may notbe possible to
express an opinion at all on the accounts presented. If on the other hand
the internal control is strong, there could be a minimization of the
amount substantive testing used in arriving at an opinion.The second
stage of an audit is much more likely to detect a major fraud. Here,
substantive evidence is sought in support of all items appearing in
accounts.
This evidence is required to show, inta alia that the asset actually
exist, that the company has good title to them and that theyas correctly
shown as regards cost.Evidence is also required in support of items
appearing in the profit and loss accounts. Much of the evidence is
derived from documents already in the possession of the company and
subjected internal control, but otherevidence is derived from physical
inspection and direct from their parties.In carrying out this process,
the auditor inevitably concentrates on fib higher value items and those,
which are more easily susceptible to misappropriation.At the final
stage ofan audit, the search for and examination substantive evidence
may contribute to a large extent in detection fraud. The auditor in
performing his duty aims at being thorough a systematic, but there is no
doubt that some carefully planned and highly ingenious schemes can
defeat the most thorough and systematic of audits.
Thus quoting from Justice Hope in the Kingston cotton mill case of
1896”“Auditors must not be liable for not tracking out ingenious and
carefully laid schemes of fraud when there is nothingto arouse their
suspicion, and when those frauds are perpetrated by tried servants of
the company and are undetected for years by the directors. So to hold
would make the position of an auditor intolerable”.Though the auditor in
carrying out his work should exercise due professional care and
reasonable skill but need not approach it with suspicion. However, if he
(auditor) is put upon inquiring by anything he discovers during the
course of his checks, must investigate it until he reasonably satisfies
himself as to the explanation. If material irregularities are
discovered, he must report accordingly –either to the directors or to
the members as appropriate.
It is convincingly clear however, that only irregularities (Perhaps
Innocent) and fraud could arouse the auditor suspicion. The courts have
had occasions to consider many cases where was held on the facts of
those cases that the auditor ought to have be put on inquiry. References
to some of these cases, which are in no way definitive, will indicate
some of the factors which the auditor ought to consider. In Brown and
Wright v. Thompson, Pluckett and co (19939) act 397, the auditor was
held negligent in that on striking the trial balance in successive
years, he discovered a deficiency of up to fivethousand pounds which he
put down to book keeping error rather than tracking down he real cause;
namely fraud.Other areas have been omissions, increasingly or unusually
large cash balances, knowledge of dishonesty in a servant and entries
made after relevant data which are deemed ought to have put the auditor
upon inquiry. The auditor will normally be held liable if in the course
of his checks he overlooks some errors, omissions or suspicious
circumstances or fails properly to investigate the matter having
detected it.
If the overall programme of his audit work is reasonable, it is
unlikely that the auditor will be held liable if that programme of work
did not included the examination of some accounting records or documents
which contains some obvious errors on its face which even a most
cursory examination must have uncovered. Where the fraud or error does
not have effect upon the financial state of the business, it is doubtful
that whether the auditor would be held liable where the details of the
auditreasonably did not deal with the area of the fraud or error.
However, where the fraud or error has a material effect upon the
financial state of the business, the onus upon the auditor to show he
was acting reasonably in not discovering it will be heavy.the research
therefore seek to evaluate the role of the auditor in managing
fraud.with a case study of unileverplc
1.2. STATEMENT OF THE PROBLEM
The main factors contributing to today’s increased level of fraud included:Growing complexity of organizations.
Ever-increasing speed of modern commerce and computerization.,History of inattention.,Understaffing of internal audit
functions.;Acceptance of some level of fraud as the ‘cost of doing business’.Outdated and ineffective internal controls.
Aggressive accounting practices.Increasingly transient employees. Many organization do not consider this underlying factors
They run and manage the organization without meticulous check of their accounting process, records, or system.
The result is the consistent and massive fraud in many organization which have wreck some and others are at near collapse
This is not aiding to support government effort in trying to build a strong and virile economy.
Therefore the problem confronting this research is to evaluate the
role of audit in managing fraud in the organization With a case study of
uniliverplc
1.3. RESEARCH QUESTION
What is the nature of fraud in the organization
What is the causes and effect of fraud in the organization
What is the nature of audit in the organization
What is the role of audit in managing fraud in the organization
1.4. OBJECTIVES OF THE RESEARCH
To determine the nature ,causes, and effect of fraud in the organization
To determine the nature and role of the audit in managing fraud in the organization
To determine the nature and role of audit in managing fraud in uniliver
1.5. SIGNIFICANCE OF THE RESEARCH
The research shall profer possible measures in managing fraud through
proper audit in the organization It shall also serve a useful source of
information to managers and accounts of firms
1.6. STATEMENT OF THE HYPOTHESIS
Ho The level of fraud in uniliver is low
Hi The level of fraud in uniliver is high
Ho Audit in uniliver is not significant
Hi Audit in uniliveris significant
Ho The role of audit in managing fraud in uniliveris notefective
HI The role of audit in managing fraud in uniliver is effective
1.7. SCOPE OF THE STUDY
The study focuses on the evaluation of the role of audit in managing fraud in the organization With a case study of uniliverplc
1.8. DEFINITION OF TERMS
AUDIT DEFINED
Auditing is an independent appraisal process often governed by
statute for examining, investigating and verifying the financial
statements of any organization or entity by a qualified person appointed
to do the job who seeks to established an opinion concerning the
truth, accuracy, validity, reliability and fairness of the statements
and the records on which the statements are based and concerned with
any statutory or other requirements
FRAUD
From the auditor’s point of view, “fraud may be broadly classified as
deliberate steps by one or more individuals to deceive or mislead with
the objective of misappropriating assets of business, distorting
organization’s apparent financial performance or strength, or otherwise
obtaining an unfair advantage”.It may start as a genuine mistake, be
successfully covered up and develop there after into a full fledged
long-terms fraud. Alternatively, it may be a “one-time walk in rip-off”.
It ray engineered from within (i.e. employees or managers or both) or
from outside Economy and Efficiency: audit
This type of audit attempts to identify whether the entity is managing and utilizing its resources
economically and efficiently and addresses areas of uneconomical or inefficient tendencies for management information.
Programme Results
This type of audit identifies whether desired results and objectives
are being achieved and recommend alternative where necessary.
Financial and Regularities Audit
this type ensures that system of account and financial controls are
efficient and operating properly and transactions have been correctly
authorized and accounted for, it is also to verify that expenditure has
been incurred or approved services in accordance with the regulations
guiding the entity.
Value for Money Audit
this examines whether programmes or project under meets the goals and
objectives establishing the entity. Audit types are further classified
into:
Statutory Audit: These are auditing carried out in compliance with the provision of the companies and allied matters Act, 1990. It is a compulsory requirement for some selected firms registered under the act.
Non-statutory Audit: these are the ones carried out by the company itself using its own employees. It can be grouped by
references to instruction such as complete audit
etc.(i)CompleteAudit: This can be described as one in which the auditor
is given
unrestricted scope as to work which he is to perform and in which he
uses his own discretion as to the extent of the detailed work. The
auditor may be held liable for anyloss arising through his neglect in
any such case.
(ii)Partial Audit: The idea of this means that the auditor is
restricted to a particular area of work only or is restricted in any way
as to his power of enquiry.
(iii)Continuous audit: A continuous audit is one where the auditoror his staff is constantly engaged in checking the
accounts during the which period or where the auditor or his staff attends at regular or irregular intervals during the period.
(iv)Final audit: This is one which is not commenced until after the
book have been closed at the end of the financial year or which is only
commenced towards the end of the financial year carried through to
completion after the end of the year.
(v)Internal and External audit: The basic difference is the body been
whose behalf the auditwork is concluded. In an external audit, a report
is made to a person external to the audited entity especially the
shareholder and members of the legislature. In an internal audit, it is
an independent appraisal of the activities within an organizationfor the
review of accounting financial statements and other operations basic
form for the service to management. It is a managerial control,
measuring and evaluating the effectiveness of other operational
controls.
(vi)Annual audit and Ad-Hoc: Annual audit is the regular audit
usually governed by statute, while ad-hoc audit is as a result of needs
for investigation.
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