THE ROLE OF AN AUDITOR IN SMALL BUSINESS ORGANISATIONS

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Author

Presented To

Department of Entrepreneur

ABSTRACT

A significant contribution to the development and survival of business organization is the role that auditors play. This research work, The Role of Auditors in Small business organizations, give a broad understanding of what the auditors role entails.

        In the course of this research, data was collected by means of questionnaire. The collected data were analyzed with the aid of percentages. Further analysis was done on relevant information. The statement of research hypothesis was tested using chi-square distribution.

        The use of internal control questionnaire and evaluation forms by auditors, to ascertain and evaluate the strengths and weaknesses of internal control systems of business organization, with a view to determining the degree of reliance to be placed on the internal control system, is a major finding of this research.

        The recommendation made in respect of the above finding, is that internal control questionnaire and evaluation forms which auditors use in ascertaining and evaluating internal control system should be constantly reviewed and revised in light of current changes made in clients internal control systems

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

According to the third national development plan (vol 1 page 353) “manufacturing establishment employing less than 10 people or whose investment in machinery and equipment do not exceed N600, 000 are referred to as small scale industries

        In the credit guidelines of the Central Bank of Nigeria (CBN) small scale enterprise are classified as those business with an annual turnover of less than half a million naira Currently, as given by the government, small scale industry refers to those industries with a capital investment not exceeding N150, 000 in machinery and equipment alone

        Today, every business organization intends to continue as a going concern, ie continue to acquire assets, increase sales, improve profit margin, to remain in operational existence into the foreseeable future and not having any intention to curtail or significantly reduce its scale of operation

        To acquire this aim, the organization will have to institute sound internal control and accounting system, appoint directors and managers to direct the affairs of the business and to ensure that the funds intended to achieve this aim are well applied

        Business organization who successfully put these structures in place may yet fail to develop and survive in isolation of the auditor It is evidenced by the fact that the directors and managers who are expected to manage the funds and direct the affairs of the business may begin to perform their activities with non-challant attitude knowing fully well that their work will be checked by an independent person (the auditor), as a result, funds may be misapplied, diverted, embezzlement may be on the increase, loss of confidence by shareholders on directors etc with all these, the organization may no longer be able to continue as a going concern, and this will eventually result to the liquidation of the business

        No doubt, the role of an auditor in the development of small business organization is inevitable With the role of auditor in force, the directors and managers are more careful in performing their duties as they may want to protect and maintain their integrity As a result, mis-management, diversion, mis-application and embezzlement of funds will be greatly checked The auditors’ role in achieving these may include: reviewing the controls of the organization in the traditional areas of accounting and finance to ensure compliance and contemporary areas of personnel, marketing, sales, and production, to ensure efficiency of the economy etc

During the audit, frequent correspondences are made between the auditor and the client such as internal control letter, management letter, letter of representation, all aimed at ensuring the survival of the business At the end of the audit, a final audit report is made to the shareholders to boost their credibility on the directors

This project brings out in details what auditors do in practice that is, their roles in the development and survival of small scale business organization

A substantial aspect of this project shall focus on external auditing with particular reference to small business organizations in Akoko-Edo

12   STATEMENT OF THE PROBLEM

Though in most cases, small business organizations are usually operated by their proprietors, yet there is still many of those small business organizations whose management is rested on people other than the proprietors hence the need for audit arises

However, in the course of this research, the following problems are to be examined

1. Do auditors in small-scale business, comply with the provisions of the companies and Allied matters Act 1990 (CAMA) in the execution of his audit assignment?
2. How efficient is their internal control mechanism?
3. Do audited accounts present a “true and fair view?
4. What are the auditors’ responsibilities in the accounts of the business organizations?
5. Has cases of fraud and error been prevented in the business?
6. Is the principle of independence and honesty, competency observed in small scale industry?
7. Do the auditors get all necessary information and right access to the business books of accounts and financial statement?
   1. OBJECTIVES OF THE STUDY

The main objective of this research work is to appraise the auditor himself in respect of the role he plays in the firm such as:

1. To ascertain whether auditing is aimed at checking the internal control system adopted in business organizations
2. Ensuring that Auditors in small business organizations comply with the companies and Allied matters Act 1990 provisions in the execution of his audit
3. To ascertain the auditors responsibilities in the accounts of the business organization
4. To ensure that the audited work represent a true and fair view of the records
5. The auditor should check fraud and error
6. Ensuring that the principles of independence, honesty and competency are observed in the business
7. The Auditor should have access to all the necessary information and assess to the business books to help the proprietor have a sound accounting techniques
   1. THE SCOPE OF THE STUDY

This research work looks at the role of the auditors in small scale business organizations with reference to small scale business organizations in Akoko-Edo It takes a critical look and reveals the various activities of the auditors in order to ascertain the performance of the internal control of small business organizations

        An insight as to the correctness and accuracy of the records kept by small business organization will be looked into and the auditors areas of concentration will be emphasized

15   STATEMENT OF RESEARCH HYPOTHESIS

        The under listed hypothesis are formulated for testing in this research study Scientific test of these hypothesis are employed to arrive at reasonable conclusions The formulated hypothesis for considerations includes

a) Ho: The auditor does not help to check the internal control system in     small business organizations

    Hi: The auditor helps in checking the internal control system in small business organization

b) Ho: The auditors do not play a significant role in the development and survival of small business organization

   Hi: The auditors play a significant role in the development and survival of small business organization

16   SIGNIFICANCE OF THE STUDY

        The research work is an investigation into the role of the auditor in small business organizations with reference to small business organizations in Akoko-Edo

        Its purpose is to show the importance of an auditor to users of accounting information such as:

1. Government
2. The public
3. Management/managers
4. Creditors
5. Private individuals

f Tax analyst etc

Its also based on correcting the wrong interpretation of the role of auditors in small business organization

17   LIMITATIONS OF THE STUDY

        A lot of limitations was encountered in collecting information in carrying out this research study The problems of the executive officers willing to give information or have a direct interview with the researcher

        Financial constraint is inevitable considering the present economic situations Due to lack of finance at the researchers disposal it was not possible to capture many small scale businesses

        In developing countries like Nigeria, there is the problem of insufficient data

        Furthermore, the organization secrecy as to relating their financial report to the researcher was also faced

18   METHOD OF DATA ANALYSIS

        Most analysis was done by means of tables and percentages Tables were drawn, to show the various response of the question raised in the survey In testing the two hypothesis, chi-square (X2) is used in that, the data are discrete and variables studied are independent of one another

19   DEFINITIONS OF TERMS

        Terms used in the course of this study are explained in relation to what it stands for They include:

1. AUDIT: Okolo (1987:7) defined Audit as “an objective and conscientious examination of a statement of account, the underlying records and all the available evidence relating to the statement of account as will enable the auditor to form an opinion as to whether it represent a fair and true view of whatever it purports to represent and to report accordingly
2. AUDITING: Mautz and Sharaf (1961) say that auditing is concerned with verification, the examination of financial data for the purpose of judging the faithfulness with which they portray events and conditions
3. AUDITOR: An auditor is an independent professionally trained accountant who deals with statement of accounts relating to different organizations Austin O Okolie (2007)
4. EXTERNAL AUDIT: Okolie (1988:61) defined external audit as “the independent, objective and conscientious examination of a statement of account, the underlying documents, physical assets and all other evidence as will enable the auditor to form an opinion as to whether or not the statement of account presents a true and fair view of whatever it purports to represent, and to report accordingly”
5. INTERNAL AUDIT: Millichamp (1990:434) defined internal Audit as “an independent appraisal function within an organization for the review of systems of control and the quality of performance as a service to the organization It objectively examines, evaluates and report on the adequacy of internal control as a contribution to the proper economic, efficient and effective use of resources
6. FINANCIAL STATEMENT: Ayaduba (1996:16) defined financial statements as “periodical financial reports of accounts and other related documents that highlight the financial position of an enterprise as well as its profitability
7. INTERNAL CONTROL: Millichamp (1990:76) defined internal control as the whole system of controls, financial and otherwise established by the management in order to carry on the business enterprise in an orderly and efficient manner
8. FRAUD: Okolo (1988) it is used to refer to the intentional mis-representation of financial statement/information or mis-appropriation of assets which could result in mis-statements of an entity’s financial statements by proprietors, management, employees, third parties etc
9. ERROR: Okolo(1988): this refers to unintentional mistakes in preparing financial statements
10. AUDIT PROGRAMME: Austin O Okolie (2007): is a list of audit assignments detailing work to be carried out by the auditor

REFERENCES

Anyaduba, JO (1996): “Financial statements: still a long way to go” ICAN News volume 1 No2 Victoria Island Lagos A publication of The Institute of Chartered Accountants of Nigeria

Arens, AA (1984): Auditing An Integrated Approach 3rd Edition Prentice Hall Int Englewood Cliffs New Jersey

AustinO Okolie (2007): Fundamentals of Audit 3rd Edition Benin city Nono publishers

Mautz, RK and Sharaf, HA (1961): The philosophy of Auditing, American Accounting Association, Florida USA

Mellichamp, AH (1990): Auditing, An Instructional manual for Accounting Students 5th Edition London DP publications limited shepherds Bush Green

Okolo, JU (1987): The concept and practice of Auditing Ibadan Evans Brothers Limited

Vivian RV Copper (1977) Statement manual of Auditing Gec and Co publisher 1 Hod London and Albon 1977