THE AUDITOR AS AN INDISPENSABLE PART OF A PROFITABLE BUSINESS ORGANISATION

THE AUDITOR AS AN INDISPENSABLE PART OF A PROFITABLE BUSINESS ORGANISATION

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CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Complexity and the continuous growth in business organization call for more employees and also the separation of the business from its owners. Because of this increase in size of the business, it is not possible for the owner to run all the departments, effectively. He now requires more hands, making way for managers to be employed to run the various departments.

It is important therefore at this to say that as the business continues to show a constant growth rate, the sole trader will gradually give way to partnership, perhaps for better management and also due to the need for bigger capital.

As the partnership becomes bigger, it ushers in the limited liability company which came in with share holding concept a situation a very large sum of money is required for a business venture by the public each contributing a singly unit o share.

Shareholders, as owners of the business appoint directors to run the day-to-day affairs of the company. The directors, on the other hand appoint managers who serve as stewards of the company.

The managers fulfill their accountability to the shareholders and other interested parties by preparing financial statements. The financial statement may take the form of balance sheets, profit and loss account, source and application or fund statement (VAS) an historical financial summary.

The statement are presented in annual reports conform with accounting goals and standards, which now serve as instruments for activating profit in a business organization.

In some cases, when managers report to shareholders, some problems arise, such as can the shareholder believe this report, most of the following are the reasons shareholders doubt the report of managers.

1     Most of these contain errors, e.g. error in principle, error of omission and commission, to mention but a few.

  • Such reports can be misleading.
  • Such report may not disclose relevant information.

To solve the above-mentioned problems, the company has to appoint an independent expert called “AUDITOR” to investigate the reports and make his own opinion and report on h is findings.

However, the auditor is seen as a watchdog on the records of the organization so as to ensure that the financial statements are a reflection of the affairs of the organization as prepared in these records. Since these records are a summary of the transactions for a specified period, the auditor also goes behind these records to the source documents in order to confirm the accuracy, completeness and validity of the records.

According to Pugh Michael (1992) p. 12 it is the responsibility of the auditor to ascertain that all financial statements of the business are followed, because the accounting profession requires of its members integrity, transparency, honesty, independence and objectivity of performance as well as strict adherence to accepted professional standards.

Also looking at the works of A.W. Holiness (1959) p. 12, he stated that there is a provision that all registered limited liability companies must have their financial records audited annually by a firm or auditors so appointed. He further stated that the law concept compels the auditor to express his opinion to the directors and at the same time, the auditor must be seen as independent.

In summary, the auditor, shareholder and director have a tripartite relationship in the company. The shareholder are owners of the company, directors are employed by the shareholder to oversee the business, inform the shareholders appoint the auditor to act as check and balance for the purpose of fitting them a true and fair view of the company’s account at any point in time.

 

STATEMENT OF THE PROBLEM

Many people see the auditor in different ways. Some take them to be a body that checks the fraudulent art in some bodies business. While others see him as somebody who approaches his work with suspicion or with a conclusion that something is wrong.

In the case of DE-KI NGTON MILL COMPANY (1896), it was held that the auditor is not bound to approach his work with suspicion or with a foregone conclusion that there is something wrong.

Business organizations today are filled with stories of 419ers, Ducks and Drakes of public funds, etc. fraudulent acts is now the order of the day, that most times, one wonders if there is no means of eliminating the act.

It has been stated that managers of a business are also the custodians of its assets and are therefore hold liable in the occurrence of a loss.

However, the accountant who prepares the books of account is directly under the managers and thus it is possible for the managers to alter the records, the books, covers fraudulent acts, deliberately, given an unfair view in their statement of accounts.

Therefore in the interest of the shareholders and investors, and to ensure that there is no room for mismanagement of funds, the auditor is appointed to act as watchdog on the companies’ accounts. Also, the auditor as an accounting expert should be independent of the company’s management, and his duty theme is to give credibility to the financial statement of books or the company in question. He also guarantees that the companies, books of account present a true and fair view of the company.

Looking into the books of Augusta, it states that the duty of the auditor is limited to expressing an opinion as to whether or not the company’s financial statement is to the best of his knowledge represent a true and fair view of the company. According to her, he is not responsible for not detecting and uncovering fraud as such duties belongs to the management and one only a subsiding duty to him.

This brings

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