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PROJECT TOPIC AND MATERIAL ON AUDITING OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA
The Project File Details
- Name: Auditing Of Small And Medium Enterprises In Nigeria
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CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY
The principle purpose of independent auditing is to form an opinion on the accuracy, reliability and fairness of representations in the financial statements of enterprises and to make this available to external users (Okwena, Okioma, and Onsongo, 2010).
According to Hayes, (2005)report the next definition of auditing: “Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and establishedcriteria. Auditing should be done by a competent, independent person.”
Small business (i.e. not more than 10 shareholders) purchases auditing services mostly because theywould like to acquire credit from banks. It has been established that bankers seek audited financial statements in their lending decisions (Okwena, Okioma, and Onsongo, 2010).
An external auditor is an audit professional who performs an audit in accordance with specific laws or rules on the financial statements of a company, government entity and other legal entities or organization and who is independent of the entity being audited. (Institute of internal auditors) The concept of SMEs varies from one country to another depending on the indicators used, (Kitindi, Iwsi and Mganya, 2000).The first criteria, based on the number of employees, defines SMEs as those enterprises below a certain number of workers (i.e. can range from less than10 to less than 50 employees).The second criterion defines the SMEs as the degree of legal formality, and has been used to distinguish between the formal and informal sectors. Here, Micro, small and medium enterprises (MSMEs) are considered as enterprises which are not registered and do not comply with the legal obligations concerning safety, taxes and labour laws. The third criterion defines SMEs as based on the limited amounts of capital and skills per worker.Aritho, (2010) categorize the micro, small and medium enterprises as follows: a micro enterprise as one with 1-5 workers, a very small enterprise with 6-9 workers and a small enterprise as one with less than 30 workers, and medium enterprise having as many as 250 workers.
Even though the definition varies from one country to another (depending on the economic structure), the regulatory and institutional framework for the Nigerian SMEs has been based on the number of employees and the company‟s annual turnover. For instance, the micro enterprises have been defined as those employing less than 10 workers with annual turnover of less than N500,000 and capital formation of less than N5 million for services, or less than N10 million for enterprises doing manufacturing. Small enterprises are defined as those that employ between 10 and 50 workers with annual turnovers between N500,000 and N5 million and capital formation between N5 million and Kshs20 million for services or between N5 million and N50 million for enterprises doing manufacturing.
The contribution of SMEs is more than double that of the large manufacturing sector, which stands at7% of the GDP (Katwei, (2009). Overall, SMEs create 75% of all new jobs. Estimates based on the 1999 baseline survey show that, in the year 2002, the SME sector employed about 5086400 people, up from 4624400 in 2001. This was an increase of 462000 persons and consisted of 74.2% of total national employment (Hodge, 2003).
EU members have had individual definitions of what constitutes an SMEs for example, the traditional definition in Germany had a limit of two hundred and fifty five employees, while for example in Belgium it could have been one hundred employees. In July 2011, the European commission said that it would open a consultation on the definition of SMEs in 2011. In Europe, currently there are three broad parameters which define SMEs are companies up to 10 employees; small companies employ up to fifty workers, whilst medium sized contain up to two fifty employees. (Hodge, 2003) Furthermore, SMEs are defined as firms with either a turnover of ten to fifty (10-50) million or a balance sheet ten to forty three (10-43) million.
Carmichael, (2004), SMEs are unable to carry out the accounting functions internally because of inadequate knowledge and unqualified employees. For example, SMEs lack the necessary skills and resources to perform accounting functions in-house; access to the expertise and specialized knowledge of a professional accountant was evidently the most important reason to outsource (Baltaci, &Yilmaz, 2006). Indeed, majority of SME owner/managers have no professional, management and other formal qualifications (Baltaci, &Yilmaz, 2006). One possible way for a smaller firm to acquire competencies is to engage professional accountant (Jokipii, (2010). Therefore, by relying on professional accountant, smaller firms can get the competence that they need (Jokipii, (2010). Therefore, this study seeks to examine auditing of Small and Medium Scale enterpreises in Nigeria.