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The Role Of Audit In Managing Fraud( A Case Study Of Unilever Plc)

THE ROLE OF AUDIT IN MANAGING FRAUD( A CASE STUDY OF UNILEVER PLC)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Managing Fraud: Auditing is an independent appraisal process often governed by statute for examining, investigating and verifying the financial statements of any organization or entity by a qualified person appointed to do the job who seeks to established an opinion concerning the truth, accuracy, validity, reliability and fairness of the statements and the records on which the statements are based and concerned with any statutory or other requirements.

To make auditing possible, the internal control measures should be adequate and perfect. The accounting system must be sound and theorganizational structure must not be overlapping.According is a set of rules and method by which financial economic data are collected, processed and summarized into reports that can be used in making decisions. Both definitions confirm that it is the tool for decisions making. Decisions could be made on progress of work, continuity or cancellation of certain policies or method arid modifications where necessary. Accounting systems reflect the soundness of an organization. It is the collation and classification of statistical data resulting from the activities of an entity.Organization’s structure should be designed in such a way as to show the activities and financial responsibilities of each department and sections where activities are segmented andspan of control is clearly stipulated, the needed checks and balances by the examiner who audits would be made easy.

Responsibility accounting, according to simpson (1979:118) is concerned to a large extent with the interface between data inputs and the managers who use data. It is the classification of accounting and statistical data resulting from the activities of an agency in such a way that so directly relates them to the control. Auditing and accounting are synonymous as one cannot work in isolation of the other. Hence, there is need to relate the accounting duties of an entity with the various activities within the system and the allied checks and balances of Every successful company must keep proper accounting records to monitor its activities to enhance adequate control for the progress of the organization. Accounting records must be designed in such a way as to show and explain the transactions of the company. It should be able to disclose with accuracy, the financial position of the company. It should ensure that financial statements prepared comply with the provisions of the enabling act of the company. It should have the details of the assets and liabilities of the company.Record according to Chambers (1972:84) is a formal writing of any fact or proceeding. It is a book of such writing. It is past history. It is memorial, it is valuable to keep record for as long as possible for safekeeping and easy retrieval. Accounting records are essential in the progress of an entity.

The modern technology has made accounting work easier and faster through the use of computers and electronic calculators. The modern technology, not withstanding the use of record books is still very vital for the auditor’s work.Auditors are born and trained to have inquiring minds, as certain financial statements prepared by the management of an entity may actually not represent the true financial position of the organization.To provide credibility to retorts and accounts therefore, auditors must examine records available through to detect errors, disclose fraud, detect any from of irregularity or misleading report, evaluate the effectiveness or otherwise of the internal control system in place. Auditing enablesthe management and investors have correct and efficient information for decisions making .

From the auditor’s point of view, “fraud may be broadly classified as deliberate steps by one or more individuals to deceive or mislead with the objective of misappropriating assets of business, distorting organization’s apparent financial performance or strength, or otherwise obtaining an unfair advantage”.It may start as a genuine mistake, be successfully covered up and develop there after into a full fledged long-terms fraud.Alternatively, it may be a “one-time walk in rip-off”. It ray engineered from within (i.e. employees or managers or both) or from outside (i.e. business contacts or the general public) or combination of the two. The misappropriation of assets may involve the creation, alterative suppression of accounting records, vouchers and documents, or tampering with equipments (e.g. meters, files, containers) or the misuse of time, property or services.The distortion of financial performance or position is more concerned with puffing on a good front or window dressing and is usually perpetrated bymanagement using creative accounting.

Fraud may occur because responsibility for prevention is not allocated, because dishonesty is accepted as inevitable, known cases go unpunished and the diseases spread; because security is thought too expensive or covered by fidelity bond.It is not the auditor’s purpose in carrying out an audit to determine whether or not frauds of any kind have been perpetrated by servants of his clients. As hope said in Kingston Cotton Mill (No. 2) 1896; (the auditor) does not guarantee the discovery of all fraud.As has been stated, the auditor’s duty is to assess whether or not the published accounts accurately represent the true state of his client’s business and to produce report addressed to the owners in which he expresses his opinion of the truth and fairness, and sometimes other aspects of the financial statements. The phrase “true and fair” does not imply that the accounts are correct in every detail and the presence of minor inaccuracy would not invalidate the auditor’s opinion. It is however, obvious that if a material fraud has been perpetrated and is not discovered then the published accounts will not reflect the true state of the client’s business.Consequently, auditors make a contribution to the detection of possible fraud even though “reliance on the auditors to detect fraud is misplaced”. The first stage of an audit is designed to establish if the accounting records are accurate and provide a reliable basis for the preparation of accounts.

This objective can be achieved by checking all the routine transactions which took place during the financial year and this process might uncover fraud, except where fictitious evidence have been carefully created.However, the cost of such an approach is prohibitive. Fortunately, it possibleto reduce the volume of test without greatly reducing the validity of opinion by using sampling technique. Using such an approach almost as likely to detect fraud, which would be found by a far comprehensive examination. But even this approach is also be expensive. As a result, the auditors adopt a different method, which relies extensively upon the organization’s system of internal control and internal checks. The essence of the approach is to analyze and evaluate the system and then to carry out tests to establish that the controls are operating intended and constitutes a reliable basis for the preparation of the annual accounts and to determine the required substantive testing.

The examination of the system is usually done with the following fundamental consideration:IThe possibility of defalcation/fraud, either permanent or temporary.ii.the possibility of undiscovered errors occurring.iii.the possibility of accounts being deliberately distorted.If the internal control is very weak, it may notbe possible to express an opinion at all on the accounts presented. If on the other hand the internal control is strong, there could be a minimization of the amount substantive testing used in arriving at an opinion.The second stage of an audit is much more likely to detect a major fraud. Here, substantive evidence is sought in support of all items appearing in accounts.

This evidence is required to show, inta alia that the asset actually exist, that the company has good title to them and that theyas correctly shown as regards cost.Evidence is also required in support of items appearing in the profit and loss accounts. Much of the evidence is derived from documents already in the possession of the company and subjected internal control, but otherevidence is derived from physical inspection and direct from their parties.In carrying out this process, the auditor inevitably concentrates on fib higher value items and those, which are more easily susceptible to misappropriation.At the final stage ofan audit, the search for and examination substantive evidence may contribute to a large extent in detection fraud. The auditor in performing his duty aims at being thorough a systematic, but there is no doubt that some carefully planned and highly ingenious schemes can defeat the most thorough and systematic of audits.

Thus quoting from Justice Hope in the Kingston cotton mill case of 1896”“Auditors must not be liable for not tracking out ingenious and carefully laid schemes of fraud when there is nothingto arouse their suspicion, and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold would make the position of an auditor intolerable”.Though the auditor in carrying out his work should exercise due professional care and reasonable skill but need not approach it with suspicion. However, if he (auditor) is put upon inquiring by anything he discovers during the course of his checks, must investigate it until he reasonably satisfies himself as to the explanation. If material irregularities are discovered, he must report accordingly –either to the directors or to the members as appropriate.

It is convincingly clear however, that only irregularities (Perhaps Innocent) and fraud could arouse the auditor suspicion. The courts have had occasions to consider many cases where was held on the facts of those cases that the auditor ought to have be put on inquiry. References to some of these cases, which are in no way definitive, will indicate some of the factors which the auditor ought to consider. In Brown and Wright v. Thompson, Pluckett and co (19939) act 397, the auditor was held negligent in that on striking the trial balance in successive years, he discovered a deficiency of up to fivethousand pounds which he put down to book keeping error rather than tracking down he real cause; namely fraud.Other areas have been omissions, increasingly or unusually large cash balances, knowledge of dishonesty in a servant and entries made after relevant data which are deemed ought to have put the auditor upon inquiry. The auditor will normally be held liable if in the course of his checks he overlooks some errors, omissions or suspicious circumstances or fails properly to investigate the matter having detected it.

If the overall programme of his audit work is reasonable, it is unlikely that the auditor will be held liable if that programme of work did not included the examination of some accounting records or documents which contains some obvious errors on its face which even a most cursory examination must have uncovered. Where the fraud or error does not have effect upon the financial state of the business, it is doubtful that whether the auditor would be held liable where the details of the auditreasonably did not deal with the area of the fraud or error. However, where the fraud or error has a material effect upon the financial state of the business, the onus upon the auditor to show he was acting reasonably in not discovering it will be heavy.the research therefore seek to evaluate the role of the auditor in managing fraud.with a case study of unileverplc

1.2. STATEMENT OF THE PROBLEM

The main factors contributing to today’s increased level of fraud included:Growing complexity of organizations.

Ever-increasing speed of modern commerce and computerization.,History of inattention.,Understaffing of internal audit

functions.;Acceptance of some level of fraud as the ‘cost of doing business’.Outdated and ineffective internal controls.

Aggressive accounting practices.Increasingly transient employees. Many organization do not consider this underlying factors

They run and manage the organization without meticulous check of their accounting process, records, or system.

The result is the consistent and massive fraud in many organization which have wreck some and others are at near collapse

This is not aiding to support government effort in trying to build a strong and virile economy.

Therefore the problem confronting this research is to evaluate the role of audit in managing fraud in the organization With a case study of uniliverplc

1.3. RESEARCH QUESTION

What is the nature of fraud in the organization
What is the causes and effect of fraud in the organization
What is the nature of audit in the organization
What is the role of audit in managing fraud in the organization

1.4. OBJECTIVES OF THE RESEARCH

To determine the nature ,causes, and effect of fraud in the organization
To determine the nature and role of the audit in managing fraud in the organization
To determine the nature and role of audit in managing fraud in uniliver

1.5. SIGNIFICANCE OF THE RESEARCH

The research shall profer possible measures in managing fraud through proper audit in the organization It shall also serve a useful source of information to managers and accounts of firms

1.6. STATEMENT OF THE HYPOTHESIS

Ho The level of fraud in uniliver is low

Hi The level of fraud in uniliver is high

Ho Audit in uniliver is not significant

Hi Audit in uniliveris significant

Ho The role of audit in managing fraud in uniliveris notefective

HI The role of audit in managing fraud in uniliver is effective

1.7. SCOPE OF THE STUDY

The study focuses on the evaluation of the role of audit in managing fraud in the organization With a case study of uniliverplc

1.8. DEFINITION OF TERMS

AUDIT DEFINED

Auditing is an independent appraisal process often governed by statute for examining, investigating and verifying the financial statements of any organization or entity by a qualified person appointed to do the job who seeks to established an opinion concerning the

truth, accuracy, validity, reliability and fairness of the statements and the records on which the statements are based and concerned with any statutory or other requirements

FRAUD

From the auditor’s point of view, “fraud may be broadly classified as deliberate steps by one or more individuals to deceive or mislead with the objective of misappropriating assets of business, distorting organization’s apparent financial performance or strength, or otherwise obtaining an unfair advantage”.It may start as a genuine mistake, be successfully covered up and develop there after into a full fledged long-terms fraud. Alternatively, it may be a “one-time walk in rip-off”. It ray engineered from within (i.e. employees or managers or both) or from outside Economy and Efficiency: audit

This type of audit attempts to identify whether the entity is managing and utilizing its resources

economically and efficiently and addresses areas of uneconomical or inefficient tendencies for management information.

Programme Results

This type of audit identifies whether desired results and objectives are being achieved and recommend alternative where necessary.

Financial and Regularities Audit

this type ensures that system of account and financial controls are efficient and operating properly and transactions have been correctly authorized and accounted for, it is also to verify that expenditure has been incurred or approved services in accordance with the regulations guiding the entity.

Value for Money Audit

this examines whether programmes or project under meets the goals and objectives establishing the entity. Audit types are further classified into:

Statutory Audit: These are auditing carried out in compliance with the provision of the companies and allied matters Act, 1990. It is a compulsory requirement for some selected firms registered under the act.

Non-statutory Audit: these are the ones carried out by the company itself using its own employees. It can be grouped by

references to instruction such as complete audit etc.(i)CompleteAudit: This can be described as one in which the auditor is given

unrestricted scope as to work which he is to perform and in which he uses his own discretion as to the extent of the detailed work. The auditor may be held liable for anyloss arising through his neglect in any such case.

(ii)Partial Audit: The idea of this means that the auditor is restricted to a particular area of work only or is restricted in any way as to his power of enquiry.

(iii)Continuous audit: A continuous audit is one where the auditoror his staff is constantly engaged in checking the

accounts during the which period or where the auditor or his staff attends at regular or irregular intervals during the period.

(iv)Final audit: This is one which is not commenced until after the book have been closed at the end of the financial year or which is only commenced towards the end of the financial year carried through to completion after the end of the year.

(v)Internal and External audit: The basic difference is the body been whose behalf the auditwork is concluded. In an external audit, a report is made to a person external to the audited entity especially the shareholder and members of the legislature. In an internal audit, it is an independent appraisal of the activities within an organizationfor the review of accounting financial statements and other operations basic form for the service to management. It is a managerial control, measuring and evaluating the effectiveness of other operational controls.

(vi)Annual audit and Ad-Hoc: Annual audit is the regular audit usually governed by statute, while ad-hoc audit is as a result of needs for investigation.

REFERENCES

Adeniyi, A.A.. (2004), AUDITING And Investigation. Value Analysis Consult, Lagos.

Agbadudu, A.B. (1994), Statistics for Business and the Social Sciences,Uri Publishing Ltd., Benin City, Edo State.

Alvin, A.S. & James, K.L. (1984), Auditing And Investigation Approach. Longman Group Limited, London.

Asika, N. (1991), Research Methodology in the BehaviouralSciences.Longman Nigeria Plc, Lagos State.

Baridam, D.M. (2001), Research Methods in Administrative Science.Third Edition, Associates, Port Harcourt.

Clive de Paula, F. and Attwood, F.a. (1983), Auditing Principles and Practice. Sixteenth Edition., Pitman Book Limited, London.

Companies and Allied Matters Decree (1990), Federal government Printers, Lagos.

Howlard, R. (1982), AuditingSeventh Edition, Macdonald and Evans Limited, London. Managing Fraud

Millichamp, A.H. (2002), Auditing.Eight Edition, Continum Tower Building, New York. Managing Fraud

Ngagi, J.O. (1999), Essentials of Research Methodology for Educators, University Press Plc. Ibadan. Evans Brothers Nigeria Limited, Ibadan. Managing Fraud

Omorokpe, R.O. (2003), Dictionary of financial Accounting terms. Mindex Publishing Company

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