CHAPTER ONE

10 INTRODUCTION

People tend to erroneously think that auditing is a sub-division of accounting probably because that is how it was introduced to them and every auditor as we know is also an accountant But, every accountant is not an auditor Auditing has its roots elsewhere The relationship of auditing and accounting is close but they are not the same

Accounting is concerned with the collection, classification, summarization and communication of financial information It involves the measurement and communication of business events and conditions as they affect the particular enterprise The task of accounting is to provide a detailed financial information that will be manageable and understandable about an enterprise Auditing does more of these things

Auditing is the independent examination and expression of opinion on the financial statements of an enterprise by an appointed or employed auditor in pursuance of that appointment and in compliance with the relevant statutory obligation, hence the role of internal auditors in stock taking It involves critical and thorough investigation of the financial books prepared by the accountants as to whether those financial statement show a discipline department on logic and accounting is part of its utilities

An auditor must exercise reasonable care and skill in carrying out his audit work of stock taking

This was fully stated in the case of RE KINGSTON COTTON MILL (1896) This case considered the degree of care and skill required of an auditor It stipulated than an auditor is a watch dog and not a blood bound That, it is the duty of an auditor appointed to carry out the work of stock taking to ensure that skill, care and caution which a reasonable, competent, careful and cautious auditor will use has been applied in stock taking The auditor has to ensure in stock taking or physical verification of stock either by full count or measurement as incase of bulky stock taking that the stock taking with the bin card record

Stocktaking could be done in three ways namely:

a Counting of stock at the end of the year, before the end of the year or after the end of the year

b Counting of the part of the stock by means of interpolating the total statistics and

c By means of using continuous stock records

It should be known that where stock are materials in the enterprises financial statement and the auditor is placing reliance upon management stock-rate in order to provide evidence of existence, the auditor should attend the stock taking is normally the best way of providing evidence of proper functioning of the management stock taking procedure and also, the existence of stock and their conditions

In the case of Re Kingston Cotton Mill Co, Ltd, it was decided in 1896 that it is not the duty of the auditor to take stock But the practice in the accountancy profession has been improved and as a matter of general practice, the auditor Is now required to:

a Review the stock records available

b Review the adequacy of the stock taking procedure

c Review the cut-off procedure

d Observe at least a part of the stock taking to ensure that the procedure laid down is being followed

e Compare the final stock sheet with the sheets used at stock taking to ensure that the quantities correspond

The auditor has to look into valuation of stock also to ensure the following:

i That the same method of valuation is adopted from one period to the other

ii That stock is valued at cost or realizable value which ever is lower and

iii That damaged or obsolete items are properly written down or written off as circumstances may dictate

11 STATEMENT OF THE PROBLEMS

The nature of the product of Total Nigeria limited particularly liquids like kerosene, petrol, diesel and oil made it very difficult to effectively conduct stock taking at a point in time and also to determine the extent to which internal auditors are involved

The problem emanates from the fact that it is not easy to measure or determine the quantity of oil or gas, petrol or kerosene in the storage tanks, pumps etc This is because as ales are made, the tanks are refilled immediately This peculiar situation makes it very difficult for the internal auditor to reutilize the process of stock taking

Another problem is that the enterprise has a single internal audit department which is not adequately staffed to carryout the routine internal audit functions not to talk of engaging actively in stock taking in the area offices and the various rattail outlet (services station) through out the country

Finally, since sales are made through out the year, period for stock taking will be a problem This is because, before a stock taking will be carried out in the company, there must be a stock taking procedure where by there will be no purchases and sales of the company's products for at least one or two days to enable the auditor and other staff concerned to carry out the stock taking properly and as needed

12 PURPOSE OF THE STUDY

The main purpose or objective of the study is to determine whether persons in position of fiscal responsibility in government and limited liability companies like total Nigeria Limited do act and report in a trade fair manner This is because internal auditing is becoming increasingly important in large business enterprises where the owner can keep close personal contact with all the phases of his business He may not need an elaborate office or organization and extensive internal control But, such situation can be found only in a relating small establishment and not in a larger enterprise that comprises many people who customarily are not supervised directly by the owners The ownership of such enterprise may be scattered widely and an individual who own little or has no proprietary interest will be employed to run the enterprise Separation of ownership from detailed supervision and even from the active management of an enterprise is a common phenomenon

Such a situation present an urgent need for special safeguard to promote honesty and efficiency in the operation of the business and to ensure accuracy in the financial records hence internal auditing

The purpose of this study is also to stress the importance for an organization to be aware of its stock position at all times since stock is as importance as cash in a business The research also wish to across how internal auditing of Total Nigeria Limited has improved management information system and the type of activities performed by the internal auditor

13 SIGNIFICANCE OF THE STUDY

It is believed that this study will not only be useful to the company where it is carried out but also to the companies that carry out the same type of business Not only that Total Nigeria Limited is a commercial oil company, there is need to know its internal auditing system and how it has helped the efficiency of the accounting records again, this study will add tot he advancement of knowledge in the field of internal auditing in the company to the future researchers in the area external auditors as well as internal auditors will benefit immensely from this work

14 STATEMENT OF HYPOTHESIS

Hypothesis serve as guides for the researcher in the entire process of research endeavour and also, trim the main line of his study They assumed answer to the principal question of the study, the correctness of which the researcher assess I the course of this study

Hypothesis are either proved or disproved, accepted or rejected, that depends on the future In order world, hypothesis interpose between a statement of the problem and the solution of the problem

The importance of hypothesis to the course of this study are listed here under:

a Internal auditors recommendation as regards to stock taking is well carried out in Total Nigeria Limited

b That proper records of stock is not well carried out

c That proper accounting records are maintained for stock taking

d That effective internal auditing has enabled management to achieve its objective

e That effective internal auditing has not enabled management to achieve its objective

15 SCOPE OF THE STUDY

The researcher wants to examine in detail the role of internal auditor in stock taking

Although, the study reviewed the internal auditing in companies but the investigation carried out by the researcher covered only Total Nigeria Limited which was the case study of this research

There was a plan by the researcher to administer questionnaires to all branches of total Nigeria Limited in the country but confined most of this to only few branches due to financial problems

16 LIMITATIONS OF THE STUDY

The limitations of this study is due to many factors like problems on interview meetings and that of conviction of officials taken as specimen

Some of the personnel encountered could not pay attention tot he researcher and as a result a lot of explanation and persuasion is a result a lot of explanation and persuasion is needed to get the maximum co-operation of some respondents

Also, inadequate fund and time factor necessary to cover some parts of the branched of Total Nigeria Limited coupled with the indifferent attitude of some audit clerk to reveal certain vital information for confidentiality purpose constitute to the limitations of this study

Another problem encountered in the study by the researcher centered on the absence of the internal auditors to carry out the research work as required in the branches of their tow

Inspite of all these problems, the research work was still carried out peacefully and successfully hence those who know the importance of research contribute immensely in making the study a huge success

16 DEFINITION OF TERMS

In order to ensure proper and easy understanding of what the study is all about to some people especially those that are not in the same discipline, some unfamiliar words used in the project are defined below

INTERNAL AUDITING

This is the independent appraisal of the activities within an organization for review of accounting and other operations as the basis for service to management It is a management control which functions by measuring and evaluating the effectiveness of other controls

In other words, internal auditing is an element of internal control system set up by the management of an enterprise to examine, evaluate and report on the operations of financial and management controls within the enterprise

INTERNAL AUDITOR

Internal auditor is the person who performs the work of internal auditing He review the accounting system and other operations to ensure that they are in line with the need of the organization in relation to its operations He also review the organization's internal control system and monitors the activities of the organization to ensure that they are in line with the systems set up and the controls that are in place

INTERNAL CONTROL

This is the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the asset and secure as far as possible the competence and accuracy of the records

It is pertinent to mention that internal control comprises the whole system of financial and other controls set up and operating within a business

STOCK TAKING

This is the counting and checking of prices and quantities of goods or items in the store by selected official of the company in order to know whether the physical numbers and prices tally with what was written in the cards

BIN CARDS

These are cards that contain the description on a good or item, the receipts and issues of materials It also help the stock keeper in controlling stock

EXTERNAL AUDITOR

This is a person appointed to express opinion in accordance with the statutes and to report on the truthfulness and fairness of the accounts as presented by the director He is responsible tot he shareholders and the public but reports tot he shareholders of the company

CALIBRATED CHART

This is an investment through which the capacity of a compartment of tank is know

VOUCHING APPROACH

The vouching approach is typified by checking and ticking the quantities of transaction document to ensure that they have been accurately recorded

VERIFICATION APPROACH

This means direct verification of assets, liabilities, income, expenditures and other matters by the auditor

SYSTEM APPROACH

This entails the system to audit which govern the control feature in order to determine the extent to which the objective of the system will be met

JETTY

This is a wall or platform built out into the sea, river etc where boats carrying petroleum product can be tied and where people can get on and of boats

WATCH DOG

A person or group of people whose job is to check that companies are not doing anything illegal or ignoring people's rights In this context, the term watch dog refers to internal auditor