CHAPTER ONE

INTRODUCTION

1.1 Background of the Study.

The curiosity to verify and obtain an expert opinion is the sole purpose of auditing and this is human nature. The history of auditing can be traced to the history of accounting which all began from the separation of the duties of agents from that of their principal.

Where the principal provides the funds, the agents use these funds (agency theory) and prepares reports on how the funds were used (accounting) to the auditor who verifies the Genuity of such reports and gives his opinion before such is presented to the principal. Consequently, the agency theory, accounting theory, and auditing theory are intertwined.

The significant aspect of the history of auditing theory is the role and function of auditors. Seleem (2012) opined that their roles have not been defined from inception. As observed by Liliana (2012) auditing has permanently evolved, answering to the changes in the environment and modifying its objectives starting from the middle age, passing through the industrial revolution up to the 21st century.

The word “Audit” comes from the Latin word audire meaning “to hear”, “to listen”. Power (1999) defines auditing as a systematic and independent examination of books, accounts, documents, and vouchers of an organisation to ascertain how far the financial statements present a true and fair view of the concern.

The incident of fraud and misappropriation of funds in recent times posed a threat to auditing as a branch of the accounting profession because of its frequent nature. Fraud could be defined as an international act by one or more individuals among management, employees or third parties which results in a misrepresentation of financial statements (Adeniji 2004:353 and ICAN 2006:206).

Lorsase (2004) notes that, when fraud occurs in a workplace, the question asked is “where are accountants and auditors?” as was the case of the great fall of Enron. That auditor has the responsibility for the prevention, detection, and reporting of fraud and other illegal acts.

Auditors are primarily concerned about fraud as it relates to misstatements in the financial statement (Bells and Carcello 2000). Thus, auditing has a greater impact on the prevention of fraud and financial irregularities that makes effective use of their auditing system.

The public sector internal audit function is an element of a strong public sector governance foundation. Most public sector internal auditors also play a role in their entity’s accountability to the public as part of the check-and-balance process.

Thus, public sector internal audit works with those charged with governance, such as board, audit committee, senior management, or, where appropriate, an external oversight body, in ensuring that appropriate systems of control are designed and implemented. As such, internal auditing can provide assistance regarding the accomplishment of goals and objectives, strengthening controls, and improving the efficiency and effectiveness of operations and compliance with authority.

Internal control (audit) therefore is the system of internal administrative and financial checks and balances designed by management and supported by corrective actions to ensure that the goals and responsibilities of the organisation are achieved Cahill (2006). According to the institute of internal auditors (1991), the internal audit is expected to review the means of safeguarding assets and where appropriate, verify the existence of such assets.

Therefore, internal auditing furnishes qualities with analysis, appraisals, recommendations, and information concerning all activities reviewed. The survival of any organisation depends on its effective and efficient utilization of resources (both financial and non-financial)

The International Federation of Accountants (IFAC) is the global organization for the accountancy profession. Founded in 1977, IFAC has more than 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants employed in public practice, industry and commerce, government, and academe. The organization supports the development, adoption, and implementation of international standards for accounting education, ethics, and the public sector as well as audit and assurance.

It supports four independent standard-setting boards, which establish international standards on ethics, auditing and assurance, accounting education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in business and small and medium accounting practices, (www.ifac.org).

The international standards are designed to be applied in conjunction with the core principles of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants—integrity, objectivity, professional competence and due care, confidentiality, and ethical behavior, all professional auditor, his status and responsibilities.

Article 710, The auditor shall certify that the summary financial statements are regular and accurate and give a fair image of the result of operations of the past fiscal year as well as the financial situation and the estate of the company at the end of the said fiscal year.

Article 725 The auditor shall be liable, to both the company and third parties, for the torts, and negligence of which he is guilty in the exercise of his duties. However, his responsibility may not be committed for information he gives or the facts divulged by him in the performance of his task, in accordance with the provisions of Article 153 of this Uniform Act. Accountants must comply with these principles.

1.2 Problem Statement

Fraud is said to be a deliberate act of falsifying records by an individual or group of individuals which misrepresent the truth and cause harm to its victims. This practice is commonly found in government organization than most owners of private organizations realize it. Many unlucky organizations fall prey to fraud.

Government organizations like CDC are particularly likely to be victims of internal fraud as the government tends to put a blind eye in their employees. Proper precautionary measures against fraud may also be neglected. The problem is that the trust bestowed on employees of government organizations is not always justified.

All it takes is for one employee to decide they deserve a bigger slice of the national cake than they currently receive, and that could be enough to bring down the business. Clearly, fraud is a pervasive corporate problem affecting organizations across industries and sectors without regard to size. Due to the disastrous consequences of fraud, failure to put deterrent procedures in place could put a government organization out of business within days.

Fraud prevention then is a defined program of proactive measures to avoid organization at a competitive disadvantage when fraud becomes a cost of doing business. Therefore, this study tends to examine the effectiveness of public sector internal auditors in fraud prevention. The study shall be guided by the following research questions:

1.3 Research Questions

1. What are the problems associated with internal auditing in the public sector?
2. Who is involved in internal audits in the public sector?
3. How does internal audit in the public sector affect fraud?
4. What are the procedures of internal audits in the public sector?

1.4 Research Objectives.

1.4.1 Main Objective

The general or main objective of the study is to examine the role of internal audits in the detection and prevention of fraud in public institutions.

1.4.2 Specific Objectives

The specific objectives would include;

1. To identify the problems associated with internal audits in the public sector.
2. To examine the academic qualifications and disciplines of internal auditors of the public establishment.
3. To establish a relationship between internal audit, fraud prevention, and detection.
4. To access the audit procedures put in place for public sector auditing.

1.5 Research Hypothesis.

The hypothesis will be stated in the null and alternative form:

Ho: internal audit in the public sector is not a significant tool for fraud prevention.

 H1: internal audit in the public sector is a significant tool for fraud prevention.

 

Further Readings 

THE IMPACT OF EXTERNAL AUDITORS ON THE PERFORMANCE OF PUBLIC LIMITED COMPANIES IN BUEA