The Role Of Auditors In The Detection And Prevention Of Fraud In Some Selected Business Organizations

Project and Seminar Material for Accountancy / Accounting

The Role Of Auditors In The Detection And Prevention Of Fraud In Some Selected Business Organizations


Abstract


This project work investigates the role of auditors in the detection and prevention of fraud in some selected business organization. In carrying out this research work, textbooks were consulted for related literature as well as questionnaires and oral interview for collecting data. All essential departments relevant to the study were properly enlightened and the examinations of an auditor in areas of ramification were thoroughly dealt with. The study revealed that in any business organization, the employment of an auditor whether internal or external can contribute immensely towards the effective management of the organization. It also revealed that auditing the financial statements of companies increases investment and it helped in knowing the importance and role of an auditor in the detection and prevention of fraud in a business organization to enable the organization make efforts in maintaining a positive and at the same time pursue its growth and objectives. This project work will be useful to researchers who try to find out the contribution of an auditor towards business organization in detecting and preventing fraud. Finally, there must be adequate provisions for the reliance of auditor on the control of an organization and any advice given by the auditor must be seen as a professional opinion and it should be taken seriously.


Chapter One


Introduction

1.1 Background to the Study

Fraud is not a recent phenomenon associated to some highly-publicized cases. It can be found early in the history of our world as men have made use of tricks, manipulation, and deceit in order to acquire money, land, goods, or trust, with the overall objective of making profit. The creation of accounting and audit are connected in economic history with the desire, especially on the part of the state and the church, to contain and prevent stealing and misrepresentation in their finances.

Traces of the precursors of audit can be dated back to Antiquity, to ancient Babylon and Egypt, where archaeological findings have proven the existence of some justifying documents of commercial transactions that allowed for a rudimentary form of verification and accounting (Bogdan, 2005). And once the commercial trades blossomed during a period or another, the need to keep a record of transaction also emerged albeit at a primitive level. But with economic prosperity came also the temptation to deceit and manipulate others for self-profit. Control mechanisms were, therefore, developed by state institutions in order to verify and supervise the use of funds and the circuit of transactions, as was the case for example in ancient Rome, where the questors elected by the people were responsible of this role (Bogdan, 2005).

During the middle Ages, however, the interest to control financial documents and accounts and to verify the use or misuse of funds increased in Western Europe. The main objective was to discover those who eluded payment, appropriated funds, or misused money and property, and to defer them to justice. The three institutions that introduced as early as the 13th-14th centuries the idea of verifying accounts and hold the wrongdoers accountable were the state (represented by the reigning monarch), the Catholic Church, and the universities (especially those from Northern Italy), and employed functionaries or monks to keep the accounting of their respective structure (LeGoff, 1990).

From the mid-19th century, the professional category of accountants and auditors emerged as a specialized group of people involved in preventing and detecting real or possible frauds and errors in the financial situations within the state or an economic entity. Their role was not only to investigate, but also to assess possible risks and to guarantee the responsibility of internal control mechanisms. At the end of the 20th century and the beginning of the 21st century, auditors have become a necessity for the good-functioning and efficiency of an economic entity’s management that can prevent and deter possible scenarios of trickery, funds embezzlement, or theft.


1.2 Statement of Problem

All organization can be a risk of fraud. As we know, large fraud will lead to the collapse of the entire organizations, causing major losses to investors, an important legal cost affecting directly to key individuals, and loss of confidence in capital markets. Publicized fraudulent behavior by key executives has negatively impacted the reputation, brands, and images of many organizations in the worldwide.

The definition of ‘fraud prevention and fraud detection’ are related to each other, however it is not the same concepts preventing fraud include policy, procedure, training and communication to prevent fraud happening. While the detection focusing on the activity and technique in order to quickly recognize fraudulent whether fraud has happened or is happening.

Specifically problem of this study are if the role of auditors is well understood in business. The rate of auditors in fraud detection, if there is a legislature to this effects. Who are the offenders of business fraud in an organization. Finally, the misinterpretation of the primary role of audit true and fairness to be the detection of fraud.


1.3 Objectives of the Study

The objectives of the study are stated below;

  1. To ascertain if there is significant relationship between the role of the auditor and fraud detection in selected firms in Nigeria.
  2. To ascertain if there is significant relationship between fraud detection and audit of the financial statement in selected firms in Nigeria.
  3. To ascertain the relationship between the qualification and experience of the auditors and fraud detection in selected firms in Nigeria.

1.4 Research Questions

The following are the research questions of the study;

  1. What is the significant relationship between the role of the auditor and fraud detection in selected firms in Nigeria?
  2. What is the significant relationship between fraud detection and audit of the financial statement in selected firms in Nigeria?
  3. What is the relationship between the qualification and experience of the auditors and fraud detection in selected firms in Nigeria?

1.5 Statement of Hypotheses

Hypothesis One
  • HO: There is no significant relationship between the role of the auditor and fraud detection in selected firms in Nigeria.
  • HI: There is significant relationship between the role of the auditor and fraud detection in selected firms in Nigeria.
Hypothesis Two
  • HO: There is no significant relationship between fraud detection and audit of the financial statement in selected firms in Nigeria.
  • HI: There is significant relationship between fraud detection and audit of the financial statement in selected firms in Nigeria.
Hypothesis Three
  • HO: There is no relationship between the qualification and experience of the auditors and fraud detection in selected firms in Nigeria
  • HI: There is relationship between the qualification and experience of the auditors and fraud detection in selected firms in Nigeria.

1.6 Significance of the Study

It is believed that at the completion of the study, the findings will be useful to the management of organizations as the study seek to emphasis on the usefulness of forensic audit in fraud prevention and detection in organizations. The study will also be of great importance to the audit profession as the study seek to elaborate on the importance and role of forensic audit in crime prevention and detection. The study will also be of great importance to student who intend to embark on a study in similar topic as the findings of the study will serve as a pathfinder to them. Finally the study will be of great importance to students, teachers and the general public as the finding will add to the pool of existing literature. Generally, the result of this research would help prospective investors, students, researchers, bankers, managers, governments, directors, employees and other financial institutions.


1.7 Scope and Limitation of the Study

This study is on the role of auditors in the detection and prevention of fraud in some selected business organizations in Edo State. The researcher delineated the scope of the study to public and private organizations in Benin and Auchi in Edo State due to time and financial constraint. The following are some other variables to be considered in examining the role of auditors in business organizations such as audit: auditor, qualification and disqualification of an auditor, auditor’s responsibilities in fraud detection and prevention, professional conduct of auditor fraud, the offenders. At first financial constraint, some of the business organizations were not easily accessible. Another limitation was time constraint; therefore time became a limiting factor since all the business organizations cannot be visited by the researcher within a very short time. Secondly, small sample size is one of the limitations and the researcher distributed 133 questionnaires and after filtering out the questions and answers are not valid questions, only 100 questionnaires of which were used for this study. Therefore, it leads to the population of the study which was limited to two areas, Benin and Auchi in Edo State.


1.8 Definition of Terms

Auditing:

Auditing is seen as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.

Audit:

Audit is simply a systematic examination and verification of a firm’s books of account, transaction records, other relevant documents and physical inspection of inventory by qualified accountants (called auditors).

Auditor:

An auditor may be defined as an accountant who has undergone a recognized bodies resident in Nigeria and who is carrying out a professional accountancy practice.

Fraud:

This is the intentional deception to cause a person to give up property or some lawful right. It is also an intentional act by one or more individual among management, employees or third parties, which results in a misrepresentation of financial statements.

Financial Statement:

The term “financial statement” covers the Balance Sheet, Income Statement or Profit and Loss Accounts, Statements and explanatory materials, which are identified as being part of financial statement.

Incorporated Registered Companies:

These are companies incorporated under the Companies Decree and as amended by the Companies and Allied Matters Act (CAMA) 1990.

Audit Report:

This is the means by which the auditors express their opinion on the truth and fairness of the company’s financial statement.

Independence:

To the accountancy profession, independence is a fundamental concept that implied the attitude of mind, characterized by objectivity and integrity in approach to audit assignment.

Auditing Standards:

These are the basic principle and practices to be followed in all audits. They specify the requirement that an audit must meet if it is to be considered a satisfactory and professional effort.

Accounting:

This is concerned with the keeping of records of daily transactions entered into in the day-to-day management of a business organization.

Role:

The position or purpose that someone or something has in a situation, organization, society, or relationship.

Internal Auditing:

Is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal auditing is a catalyst for improving an organization’s governance, risk management, and management controls by providing insight and recommendations based on analyses and assessments of data and business processes. With a commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice. Professionals called internal auditors are employed by organizations to perform the internal auditing activity.

Fraud:

This is a deliberate deception, trickery, or cheating intended to gain an advantage.


1.9 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

  • Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc.
  • Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.
  • Chapter three is a research methodology covers deals on the research design and methods adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at assessing the contributions of auditors in the detection and prevention of fraud, thus the topic “the role of auditors in the detection and prevention of fraud in some selected business organizations”.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations were made which in the opinion of the researcher will be of benefits in addressing the challenges associated with fraud prevention in Nigeria.


5.2 Summary

This study examines the role of auditors in the prevention and detection of fraud in some selected business organizations. It has discussed the auditing approach or procedure necessary for detection, prevention of fraud and the type of control to be established in order to control the incidence of fraud in the state. It should be emphasized that whether within the business world or in the public sector, the ultimate responsibility for discouraging and preventing fraud and corrupt practices rests with management. the study revealed that the use of professional auditors do significantly reduces the occurrence of fraud cases in business organizations, as it equally showed that there is a significant relationship between fraud detection and audit of the financial statement in selected firms in Nigeria.


5.3 Conclusion

Based on the findings of this study, it is therefore concluded that although the selected organizations produced and published financial statements and also services of auditors, there are still cases of fraud due to poor management, non-engagement of the services of external auditors poor internal control systems and corruption generally. It is also concluded that the role of auditors can lead to fraud detection in the financial statements of selected firms and also that the qualification and experience of auditors play a major role in fraud prevention and detection in these organizations.

The increasing occurrence of fraud in modern day business environment requires the services of auditors to unearth fraudulent activities within and outside an organization. Also, continued audit failures over the last five decades have prompted a paradigm shift in accounting. It is generally accepted that an auditor has the duty to perform tests to detect material defalcation and errors if they exist. However, fraud detection experts called forensic accountants are now been hired in developed economies to investigate cases of fraud.


5.4 Recommendations

  1. It is therefore recommended that selected firms should ensure policies and strategies aimed at effective management.
  2. Also recommended is that management should continually engage the services of qualified and experienced external. Auditors which will not only put in place an effective internal control system but which will equally enhance it.
  3. The study recommend that professional bodies in Nigeria like the Institute of Chartered Accountants, Association of National Accountants, and the National Universities Commission should encourage the formalization and specialization in the field of forensic accounting. In addition, government should develop more interest in forensic accounting for monitoring and investigating suspected culprits in fraud cases as evidenced in the examples earlier cited. Also, our laws should be up to date with latest advancement in technology to ensure admissibility of evidence in a law court for successful prosecution of criminal and civic cases. Government should have an effective plan with other countries in extraditing run away fraudsters from anywhere around the globe.
  4. Finally, it is also recommended that government should ameliorate the expenses involved in engaging the services of a forensic accountant. It is hoped that if these recommendations are implemented and culprits treated without favouritism; the occurrence of fraud will reduce drastically within the Nigerian Society which ultimately should impact on our global rating by transparency international.

The Role Of Auditors In The Detection And Prevention Of Fraud In Some Selected Business Organizations


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