THE ROLE OF AUDIT FOR THE PROPER ACCOUNTABILITY OF COMPANY'S FUNDS

(A CASE STUDY OF DEPARTMENT OF PETROLEUM RESOURCES (DPR))

By

NWACHI HENRIETTA OGERI

Presented To

Department of Accountancy

ABSTRACT

This research work was designed to study and investigate precisely the Role of Audit for the proper Accountability of Company's Fund with special emphasis on Department of Petroleum Resources.

Prudent fund management requires that available resources be equitable allocated to all activities or proposals such that each ill not suffer under over allocation of funds. How efficient a manager is can be determined by how effective he can account for funds entrusted to his care.

It is expected that available management tools for the purpose of proper accountability be adopted or used by administrators in the discharge of their administrative responsibilities. Audit which is mostly used as the last resort of company's managers need to be enforced by any organization to enable it evaluate performance and deviation.

Data for the study was collected form both the primary and secondary sources. The questionnaire method was used to collect data. Forty-three (43) respondents were selected using the stratified random sampling techniques.

The simple percentage was used in the presentation of data, while the chi-square was used to test the hypothesis.

The study revealed that:

(1) The internal control system is weak.

(2) The accounting system is weak.

(3) Payments are sometimes influenced by top management.

(4) The occasional audits are mainly concentrated on financial matters.

The study finally proffered solution by recommending ways through which organization could achieve their audit objectives.

TABLE OF CONTENTS

Title page i

Approval page ii

Dedication iii

Acknowledgement iv

Abstract vi

Table of contents viii

CHAPTER ONE

1.1 General background of the study 1

1.2 Statement of problem 7

1.3 Objective of the study 10

1.4 Significance of the study 11

1.5 Scope and limitation of the study 12

1.6 Brief history of the Department of Petroleum Resources 12

1.7 The functions of Department of Petroleum Resources 15

1.8 Statement of hypotheses 17

CHAPTER TWO

LITERATURE REVIEW 18

2.1 Internal Audit 20

2.2 System auditing 23

2.3 Accountability 30

2.4 The auditing interest in client accounting system 31

2.5 A documentary evidence of an audited account management 32

2.6 Management 35

2.7 System management 40

2.8 Financial management 41

2.9 Aids to proper accountability of fund 43

2.10 Planning 45

2.11 Control 48

2.12 Organizing 48

CHAPTER THREE

Research Design and Methodology 50

3.1 Sources of data 50

3.2 Research Instruments used 51

3.3 Determination of sampling size 52

3.4 Method of data analysis 52

CHAPTER FOUR

Presentation and analysis of data 55

4.1 Testing the hypotheses 66

CHAPTER FIVE

Summary, conclusion, findings and recommendation 72

5.1 Summary 72

5.2 Conclusion 74

5.3 Recommendation 76

Bibliography 78

Appendix. 81

CHAPTER ONE

INTRODUCTION

11 GENERAL BACKGROUND OF THE STUDY

The word "Audit" is from a Latin word "Audire", which means to HEAR The practice was known to have first existed in Egypt

In medieval period, the stewards were responsible for the welfare of their masters, thereby demonstrating the responsibilities of good and efficient stewardships over financial resources provided and entrusted to them for the proper running of their transaction

Accountability is therefore necessary for managers of company's funds to ensure that money and other assets entrusted to them are adequately taken care of How one is able to account for funds, assets and other valuables entrusted to his care will then determine his efficiency and good stewardship

There is a belief that auditing is a subdivision of accounting, this is probably because that is how it was introduced considering its origin It is true, that every auditor is an accountant but every account is an auditor

The relationship that exists between auditing and accounting is close but not just the same Accounting is objectively concerned with the collection, classification, summarization and communication of financial information Accounting has been observed overtime to be "The language of Business" and that big organizations have failed because o lack of adequate accounting records

Auditing as a phenomenon is the independent examination and investigation of the books of account and vouchers of a business with a view to enabling the auditor to report whether the balance sheet and profit and loss account are properly and adequately drawn up so as to show a true and fair view of the state of the affair and the profit of the business

The auditor could be said to be an independent critic, for in so far as he is appointed to verify a balance sheet and profit and loss account or other forms of statement of account prepared by others An auditor is one to whom the receipt and payment of an organization is read, for him to verify

Professor settler once said, "Auditing is a managerial control which functions by measuring and evaluating the effectiveness of other controls" And according to Arthur W Holms "auditing is independent appraisal activity with an organization for the review of the accounting financial and other operations"

Verification of the correctness and reliability of accounting information is an essential process of lending credibility to accounts This function is performed by the auditor; auditing investigates and reveals the variance of deviation and provides useful information relating to the sources and usage of funds and assets available to an entity for its daily operation

Internal auditing is an appraisal of the information flow, for its quality and compliance and is mainly concerned with the reliability and adequacy of the accounting system through:

(i) Evaluation of compliance with generally accepted accounting principles and the Companies and Allied Matters Act (CAMA) 1990

(ii) Protection of assets

(iii) Detection of waste

(iv) Prevention of fraud

Operating within this entity, internal audit is an independent appraisal of the activity for the review of operation as a service to management; it is a measurement and evaluation of the effectiveness of control in the organization

The system of external audit however is a more independent assessment of financial operations; it is an objective examination of the account with a view to ascertaining whether or not they show a true and fair view of the state of affair It is an impartial investigation to confirm that transactions are supported by relevant and reliable documentary evidence

Auditing is a method of reviewing system, conducting test, comparing the result and reporting the final opinion It is this factor that makes auditing a social responsibility, assessing the quality of resources utilized in a financial operation with a view to ensuring the financial management of an organization is free form error and fraud

An auditor can either be in a statutory form, such as a limited liability company or a private audit such as sole traders and partnership and non-statutory organization audit

In the case of statutory and that is most relevant in this discussion, the shareholders of a limited liability company pull their resources together to form the company, but some of them have limited management skills hence the need to employ full time managers who will manage their resources in the company for them The directors who manage the affairs of this company are therefore agents or stewards of the shareholders The stewards, from year to year give account of their stewards to the shareholder of the investment in the company

However, for the directors' accountability to be credible, the Companies and Allied Matters Decree (CAMD), 1990 empowers the shareholders to appoint an outsider (in the form of an auditor) to review the management's accountability and give his report thereon This is the category within which the department of petroleum resources (DPR) falls Audit here serves as a means of protecting+ the shareholders from any resource mismanagement by the company's directors

It has been made to be that an external auditor of a limited liability company must be a chartered accountant ie be a member of the Institute of Chartered Accountants of Nigeria (ICAN), or member of the Association of National Accountants of Nigeria (ANAN) and must hold a practicing license

Some examples of the dramatic changes in accounting and auditing provisions, brought in by the CAMD 1990 were that:

(i) Every company was required to present annually to its shareholders not just the traditional balance sheet but also a profit and loss account more significantly, the auditor was for the very firm time required to give a report as to the reliability of both statements

(ii) The appointed auditor's duties, power and responsibility were clearly laid down in Act which puts the emphasis on the need for the auditor to give an expert opinion on the auditing of the company's published results rather than on detection of error and fraud

In the above therefore, the primary objectives of the auditor as stated in the Act 1990 is whether in the auditor's opinion, the financial statement give a true and fair view of the balance sheet and of its result for the period then ended Moreover, whether the opinion of the auditor, after export examination, he was satisfied that the company had maintained adequate accounting records

12 STATEMENT OF PROBLEM

The essence of asking one to account for the responsibility entrusted to his care has been a matter of great concern in Nigerian companies both in past and recent time When one is given company fund for a particular assignment and comes back to drop the balance at the completion of the assignment this in itself is an act of accountability Be it as it is, the truth and fairness of such an accountability can only be confirmed by a third party after confirmation of the schedule of expenditure and income or fund supplied to him for such purpose

In the world of business organization, it is expected that every business outfit be it private or public should judiciously utilise its available resources for an effective and efficient operation It follows that prudent fund management, which requires that available resources be equitably allocated to all activities as it concerns the company

In the early days, industries were small in size and could be controlled by the management alone But as a result of expansion of these industries, management could not cope with the situation

The detection of errors and fraud continued to dominate the conduct of company audit, despite the fact that it was now becoming more the rule rather than the exception for the auditor to be a professional accountant Increasingly however, there was recognition of the need to provide detailed financial accounting information for the benefit of investor and other interested parties; as more and more importance was attached to the information contained in company's balance sheet, so the role of the auditor was increasingly seen as being to lend credibility to this information of account

It was the rapid development of the 1930s and 1940s, which really saw the "Birth" of auditing as we know it and understand it today During this period, company management, particularly, larger enterprises, proved their acceptance of responsibility for detection of error and fraud, they did this by establishing systems of financial control and reporting, which were designed to minimize the risk of errors and fraud ever taking place at all

This development was necessitated by the fact that the volume of transactions in which many companies were now involved meant that auditors were forced to use system of test checking if they were to complete the audit in a reasonable time

So it was that, the major audit objectives were established as firstly, the giving of an opinion on the quality of the accounting information supplied to shareholders in the annual accounts and secondly, the verification of the reliability of the accounting records

As stated, the auditor has a statutory duty to form an opinion on the truth and fairness of company financial statement, in order to discharge his responsibility properly The auditor will always have to undertake an examination of the underlying accounting records of a company in order to consider whether or not such records provide a reliable basis for the preparation of account, which shows a true and fair view

13 OBJECTIVE OF THE STUDY

The major objective of this study is to investigate how the activities of auditors in Nigeria companies with particular reference to Department of Petroleum Resource (DPR), have affected and correct the ills of improper accountability

Specifically, the study would among other things:-

(i) Identify the relationship between auditing and accountability and whether auditing can ensure proper accountability

(ii) Compare standard performance with actual, to check variance or deviation

(iii) To investigate why fraud is prevalent in companies

(iv) The role of the auditor in such entities, sources and application of company's funds

14 SIGNIFICANCE OF THE STUDY

It is hoped that at the end of this study useful information about the role of auditing as it affects proper accountability of company's funds with particular reference to DEPARTMENT OF PETROLEUM RESOURCES (DPR)

Also, as suspected, since much has not been done in this area, it is hoped that this study would identify areas of future research-work in the study area and similar areas Finally, it would serve as a generally literature for future research work

15 SCOPE OF LIMITATION

The study reviewed the role of auditing for the proper accountability of company's funds The investigation carried out is confirmed to DEPARTMENT OF PETROLEUM RESOURCES (DPR) This is due to certain unavoidable constraint like time, finance as well as the strenuous task involved in getting explanations coupled with some audit clerks feeling too reluctant to release certain information on the ground of confidentiality

16 BRIEF HISTORY OF THE DEPARTMENT OF PETROLEUM RESOURCES

In the early fifties, petroleum matters were handled by the hydrocarbon section of the ministry of Lagos Affairs which reported directly to the Governor - General This unit kept records on exploration matters and importation of petroleum products; it also enforced safety and other regulations on petroleum operation, which were then mostly products importation distribution As the activities of the petroleum industry expanded, the unit was upgraded to a petroleum division within the ministry o mines and power

It grew to become the DEPARTMENT OF PETROLEUM RESOURCES in 1970 In 1971, a new body - the Nigerian National Oil Corporation (NNOC) was created to handle direct commercial operational activities in the oil industry on behalf of the Federal Government, while the Department of petroleum Resources in the Federal Ministry of Mines and Power continued to exercise the statutory supervision and control of the industry In 1975, the Department was upgraded to a ministry and named the ministry of petroleum and energy which was later renamed the ministry of petroleum resources

Decree 33 of 1977 merged the ministry of petroleum resources and the Nigerian National Oil Corporation 9NNOC) to form the Nigerian National Petroleum Corporation (NNPC), in order to conserve the then scarce manpower in the oil industry This degree also created the petroleum inspectorate as an integral part of the NNPC, and entrusted it with the regulation of the petroleum industry, but barred it from engaging in any commercial transactions and from taking commercial decisions for the corporation

In 1985, the Ministry of Petroleum Resources was re-established, but the petroleum inspectorate remained within the Nigerian National Petroleum Corporation and retained its functions until March 1988 when the Nigerian National Petroleum Corporation was reorganized By this reorganization, the petroleum inspectorate was excised from the Nigerian National Petroleum Corporation, and transferred to the ministry of Petroleum Resources as Department of Petroleum Resources

The role of the Department of Petroleum Resources in these matters is mostly advisory and it includes identifying infringement and making them known to the government agencies, which possess the appropriate enforcement authority However, section 7 (1) of the Decree 1969 and Regulation 25 of the mineral oils (safety) Regulation 1963 confer the power of arrest and a magistrate on officers of the department of petroleum resources in certain circumstances

17 THE FUNCTIONS OF DEPARTMENT OF PETROLEUM RESOURCES

From the provisions of the above stated decrees and regulations, the functions of the DEPARTMENT OF PETROLEUM RESOURCES may be summarized as follows:

(i) Supervising all petroleum industry operations being carried out under licenses and leases in the country, in order to ensure compliance with the applicable laws and regulations

(ii) Monitoring the petroleum industry to ensure that operations are in line with national policies and goals

(iii) Enforcing safety regulations and ensuring that operations conform to national and international industry practices and standards

(iv) Keeping and updating records on petroleum industry operations, particularly on matters relating to petroleum reserves production exports, licenses and leases, as well as rendering regular reports on them to government

(v) Advising government and relevant government agencies on technical matters and public policies which may have an impact on the administration and control of petroleum

(vi) Processing all applications for licenses to ensure compliance with laid down guidelines before making recommendations to the Honourable Minister of Petroleum Resources

(vii) Ensuring timely and adequate payment of all rents and royalties as and when due

These functions cover all the activities of the petroleum industry which geophysical and geological activities, drilling, production, exports refining, petrochemicals, transportation and distribution (by pipeline, rail, road and ocean tankers) and marketing of petroleum products

18 STATEMENT OF HYPOTHESES

This study is aided by two hypothesis this is to make the study go beyond mere description

(i) Auditing has positive rule on the accountability of company's funds

(ii) Managers of company funds make adequate and efficient utilization of scarce resources at their disposal