TOPIC: Impact of Independent Audit on Financial Accountability

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

This section discusses the background to the research problem as a way or

means of conceptualizing the research statement. It is important to note how and
why auditing came about. It is also vital to have an understanding of how it
operates in relation to effecting accountability.

The use of auditing had been in use since ancient times. Mesopotamian relics
pertaining to 3600- 3200 BC have been found with tiny marks, dots, ticks and
circles placed on sides of the figures. It indicates that those figures had been
checked. Ancient Egyptians got their financial transactions recorded by two
separate persons and another person was appointed for conducting their audit.
Greeks also used to appoint officials who checked the accounts of public officials
at the expiry of their term. Romans developed an effective system of financial
administration and there was a system of checks and counter-checks. Signs of
audit are also found in early Islamic history. A Muslim official, called Mubtasib
was appointed by the government in those days to oversee the functioning of the
trader’s in order to prevent from exploiting the consumers. He would also deal
with complaints of bribery and misappropriation of public funds. In the times of
Mughals as well, officials responsible for the accounts and audit of the state were
appointed (htt:bizcovering.com/accounting/evolution-of-auditing-from-ancient-
times).

Auditing existed primarily as a method to maintain governmental accountancy

and record keeping was its mainstay. It wasn’t until the advent of the industrial
revolution, from 1750 to 1850, that audition began its evolution into the field of
fraud detection and financial accountability. Business expanded during this
period, resulting in increased Job positions between. Owners to customers.
Management was hired to operate businesses in the owners’ absences and
owners found as increasing need to monitor their financial activities, both for
accuracy and for fraud prevention. In the early 20th Century, the reporting
practice of auditors, which involved submitting reports of their duties and
findings, was standardized as the “independent Auditor’s Report”. The increases
in demand for auditors lead to the development of testing process. Auditors
developed a way to strategically select key cases as representative of the
company’s overall performance. This was an affordable alternative to examining
every case in detail and it required less time than standard audit.

Auditing standards differed between America and Britain. American audits

continued to evolve away from being solely a method of detecting errors and
fraud, while Britain kept this as its main function. Now, both in America and Great
Britain, audits are a standard way of providing a monitoring of a business’s
financial integrity. Fair reporting practices are used to analyze their financial
statements. Audits provide feedback on a company’s financial information and
reporting as well as an analysis of any fraudulent activity, potential and actual.
 Audits are performed to manage and confirm the correctness of a company’s
accounting procedures. Auditing evolved as a business necessity once it became
evident that a standardized form of accountancy must exist to avoid fraud. It has
developed into a standardized yet complex field that is regarded as an important
procedure in the management of business finance.

Auditing is a branch of financial management concerned with assessing the

internal financial status of a business. Audits are evaluations of the financial
capability of a company. Companies prepare financial statements of their
activities, which represent their overall performance. These financial statements
are evaluated by auditors, who assess them according to the industry’s generally
accepted standards. They are examined for accuracy and fairness in their
reporting. Companies are expected to pass their audits as the results are very
important to the company’s reputation and success. Audits are very valuable to
external company affiliates, such as shareholders and investors, because they
provide an extra reassurance of their choice in investments when issues arise.
(www.ehow.com/ about – 4681905-history-of-auditing.himl)

However, accountancy profession is considered to be one of the noblest

professions and is held in high esteem in public eyes. By making use of a business.
The profession of accountancy also enable the management to discharge its
functions efficiently based upon the information provide by accountant. The
accountant also serves the society by virtue of his education, training, analytical
mind and experience.

1.2 STATEMENT OF THE PROBLEM

 The corporate collapses, business failures mismanagement,
misappropriations, corruption and fraudulent financial reporting scandals of the
1990s and early 2000s led to a very turbulent time and resulted in a credibility
crisis for the auditing profession. One of the consequences of this was the demise
of Arthur Andersen and the resultant decrease in the number of big audit firms
from five to four. A further consequence was the drastic interventions by
governments, regulators and the auditing profession itself, which have given rise
to various and onerous new laws, regulations and standards that govern financial
reporting and auditing thereof. (knechel, et al 2007)

The period 2000 through 2006 has been a very turbulent time for the
auditing profession, a period that witnessed numerous scandals and their
aftermath (Enron, WorldCom, Parmalat), strident calls for changes in the way the
profession is governed. Long held attitudes and customary practices have been
challenged and found to be deficient by the media, the investing public and those
charged the regulating financial reporting and auditing. Issues of auditor’s
independence the role of corporate governance, the responsibilities of
management, the appropriateness of consulting services and the overall
professional obligations of auditors have been discussed and debated by a broad
array of interested groups and individuals. The theme linking these debates has
often been ‘what is wrong with the auditing profession?’ As a result, this period as
probably resulted in more substantive changes to the auditing profession than
any other period in modern day business history.
On the other hand, management normally has a special interest in preparing
financial statements that report favorable results of operations and financial
position. (Jack.E and James H, 1994).

The problem of accountability is that it is the recipient of more lip service

than action. Accountability (to do what needs to be done) requires a level of
commitment and discipline that many leaders spend time and energy seeking
ways to avoid. Every leader does this to some degree. But the problem with
accountability is that the more a leader avoids it, the more leaks spring up
throughout their company.

As provided by literature review, there is lack of private sector financial

accountability, which often leads to poor service delivery. However, institutes
such as auditing firms have been put in place to affect private sector financial
accountability. Nevertheless, our concern is on how effective is the independent
auditor in ensuring financial accountability.

This study is structure to provide answers to the following research question:

 What is an independent audit?

 What is the role of independent audit on financial statement?
 What are the problems associated with independent audit?
 What are the characteristics of independent auditor?
 What is the independent auditor’s responsibility?
 Is the Auditor’s report effective?
 What are the impacts of auditing on accountability?
  What are the measures put in place by the independent audit regulators to
ensure that auditors meet established standards?
 What is the management responsibility in ensuring accountability?
 How effective is the independent auditor in ensuring financial
accountability.

1.3 OBJECTIVES OF STUDY

The main objective of this research is to assess the effectiveness of audition on

organization’s financial accountability. To be able to reach this goal, the following
specific objectives are considered:

1. Find out the problems associated with independent auditors and financial
statements.
2. Assess the effectiveness of independent audit on financial statements.
3. Make recommendation.
1.4 RESEARCH HYPOTHESIS

(Ho): Independent Audits do not significantly affect financial accountability.

(H1): independent Audits significantly affect financial accountability.

1.5 SIGNIFICANCE OF THE STUDY

Amidst high mismanagement and misuse of investors’ funds as well as fraud,

there if need to investigate whether investor’s funds are being accounted for
adequately. The independent auditor being one of the out if she is being effective
in performing its duties and also discover some loopholes if there are any and
suggest remedial means to the situation.

The research is significant in that it touches the core issue of an economy,

which is finance. Fraud misappropriation of private’s sector resources imposes
great consequences to the economy. Instead of eradicating poverty, the economy
might on the severs fuel poverty. For example, finance provided for the running of
an organization is misappropriated; it might take a long time to reimburse the
misuse money, which might result to bankruptcy of the organization. Thus,
efficient, effective and economic management of resources occurs because of
proper structures that result in accountability and transparency.

The research will help the stakeholders and store holder to be able to
distinguish the role-play by both the auditor and the management in ensuring
accountability. Also by exploring the effectiveness of independent audit in
ensuring financial accountability, students gain an understanding of both the
auditing and accounting principles.

The significant of this study is to appreciate the role independent audit plays
in ensuring that companies present financial statements in accordance with the
generally accepted accounting principles. In addition, how it focuses
management’s attention on the strength and weaknesses of her internal control
system. This study will also help the auditors to plan and perform their audits with
due care. Again, this study is significant to the auditing profession in that it helps
them assess the degree to which Certified Public Accountants (CPA) adhere to the
established professional standards. Moreover, this study is important to the
government in that, it helps them identify the various means which the
independent auditors take to ensure that companies meet the statutory and legal
requirements, such paying their taxes when it is due.

Lastly, this study is significant to the economic growth in that, independent

audit safeguard cooperate investment, which in turns yields income (dividend),
and hence eradicate poverty. The study is also significant to the community in
that, it helps the community to have confident in the auditors.

1.6 THE SCOPE OF THE STUDY

The focal point of concern is not just the studying of Auditing in its entirety per
say, but rather the perceptions of the effectiveness of auditing in ensuring
financial accountability around the Bamenda municipality. The study however, is
limited only to a selected sample of firms, MFI around Bamenda. Issues other
than the effectiveness of auditing in ensuring financial accountability will be of
less concern.

The main reason for streamlining this work only to the Bamenda municipality
is to get an in depth understanding of how firms, banks in this area perceive the
effectiveness of auditing in ensuring financial accountability.

1.8 LIMITATIONS OF THE STUDY

The study is to be limited to the impact of independent audit on financial

accountability by focusing on Firms, MFI in the Bamenda Municipality.
 - Given that the office of the auditor keeps information, which can be highly
confidential, the researcher not being part of the organization is likely to
face some resistance when carrying field research.
- Another limitation is financial difficulties, since the expenses of research
include transportation cost and other costs incurred in the course of the
research.
- In addition, there is limitation in the volume of literature to be review since
there are very few books in the school library on auditing.
- Finally, the time period will be insufficient to come out with solid research
findings since the researcher has to conduct the research alongside other
courses.

1.9 ORGANIZATION OF THE STUDY

This study will be organized in five chapters as follows. Chapter One gives an
overview of the study including the background to the study, research problem,
objectives of the study, hypothesis, significance of the study, scope and limitation,
organization of the study. The second chapter entails definition of relevant key
terms and then reviews relevant literature on the subject matter. Chapter Three
provides an insight into the procedures the researcher would use in carrying out
the study. This includes the description of the study type and design, Area of
Study, data collection methods and analysis among others. Chapter Four focuses
on the analysis of the results of the findings. This will consist of tables and charts
to give more meaning to the data that would be collected from the field. Chapter
Five will provide summary of the study findings and draw the final conclusions
and recommendations to ensure that possible area for further studies.