USES AND IMPACT OF AUDIT IN MANAGING MEDIUM SCALE COMPANIES IN NIGERIA

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ABSTRACT

A lost of human, material and financial resources are trapped in medium scale businesses.      They   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 governments’ tax and value added tax (VAT) receipts as well as Gross National  Product  (GNP).     Auditing  recently  has  been  facing  confidence problem especially in the area of corporate reporting.   Corporations in the United States of America and banks in Nigeria crashed even after audit report declared them healthy.  This research was based on the topic: Uses and Impact of audit in managing medium scale companies in Nigeria.  The objectives of the study include among others: To determine the need for the conduct of the audit in the management of medium scale companies; To examine the effectiveness of the auditors in the performance of their duties; To ascertain the relevance and adequately of accounting standards as well as its application by the auditors.  The significance 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 selfishness of audit; To ascertain these objectives, a survey research  was  carried  out  with  respondents  from  two  companies,  Halden Nigeria  Limited and Cogipar Nigeria  Limited, both in Port Harcourt.   The study   also   formulated   the   following   hypotheses.      There   is   significant relationship between audit and cost reduction; There are significant problems facing the conduct of audit; Audit reports are of significance to the user of accounting  information.    These hypotheses  were  tested  with  the  chi-square statistic.  To all cases, 5% level of significance was used.  The findings are in agreement  with  the hypotheses as stated above.   Recommendations  include companies adopting  regular and periodic audits; auditors having  expanded knowledge of the business of their clients so as to offer reasonable advise to them and others.

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 26- 28,  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:

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.

1.6      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.



This material content is developed to serve as a GUIDE for students to conduct academic research


USES AND IMPACT OF AUDIT IN MANAGING MEDIUM SCALE COMPANIES IN NIGERIA

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