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PROJECT TOPIC AND MATERIAL ON STATUTORY AUDIT AN EFFECTIVE TOOL OF MANAGEMENT CONTROL IN A MANUFACTURING COMPANY
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- Name: Statutory Audit an Effective Tool of Management Control in a Manufacturing Company
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Nobody knows why the jinx has subsisted for so long? Sole and adequate management of capital has been impracticable for the owners of capital resources. For very obvious reasons capital owners require others to help in the management of such capital resources and this gives rise to the polarization of business. These brings about the ownership management relationship such as:
– Master and servant
– Master and Apprentice
– Landlord and peasant/tenant
– Entrepreneur and management
– Some others
In early days when businesses were handled solely by the owners who took all the risks and consequently the reward. There was no apparent need to involve third party to scrutinize the financial operation of such enterprises. Modern day development in business has necessitated separation of ownership from management and the use of borrowed funds for business. These has led to the appointment of unbiased, skillful and professional examiner who scrutinize the account of organisations. It is a legal requirement that account of limited liability companies be subjected to an audit of at least once a year. This form of business relationship naturally give rise to the need for stewardship accounting.The master often suspicious of the servant and as a result of the communication gap that exist require the servant to render its account of stewardship and when required to do so.
The joint stock company Act 1844 united kingdom was the first enactment to require all incorporated companies to have their annual financial statement audited. The appointed auditors was required by this account to examine and report on the financial statement presented by the company to its shareholders. The act did not require that the auditors should be independent of companies management nor that he had to be professional accountant. In most cases, it appears to have been a non accountant elected by the shareholders from their own body, for in those days professional accountant were few and far within reach.
The 1888 Act is considered the most crucial of all acts relating to auditing and the decisions are not far fetched. The Act define the attributing qualification of the auditor. This set the stage for philosophy of auditing requiring the auditor to be independent, to act with integrity, to put himself away from position of conflicts by not auditing the account. It allows not being a member of the management nor the shareholders, act impracticably between the two etc. The 1888 Act however, did not require the auditors to be professionally qualified ,it was the United Kingdom act of 1948 that first stipulated professional qualification for the auditor and went further to mentioning the Accounting bodies whose member could practice as auditor in UK.
THE NIGERIAN SCENE
The Nigerian scene is governed by the Nigerian company Act 1968 and stipulated that only members of the Institute of Chartered Accountant of Nigeria (ICAN) could act as auditors in Nigeria. The company and Allied Mater Decree (CAMD 1990) upheld this, Added a clause that member of any other accounting body recognize federal military government afforded recognition to association of National Accountants of Nigeria (ANAN) which by invitation of this clause can also licence it’s members to act as auditors.
An audit may therefore be defined as an independent examination of and the expression of an opinion on the financial statement of an enterprise by an appointed auditor in accordance with its terms of engagement and compliance of with the statutory provision and provisional requirement. This led to the definition of statutory audit which is defined as the audit carried out into a business affair compulsorily as required under the provision of the act. Laws requiring the fulfillment of an audit includes CAMD 1990, Insurance Decree 1991, BOFID 91 (BANKS AND OTHER FINANCIAL INSTITUTION DECREE) and Central Bank of Nigeria’s Decree 91.
1.3 OBJECTIVES OF AUDITORS (STATUTORY AUDIT)
From preceeding obvious facts, it is clear that the objectives of auditing is to carry out an impartial, objective examination, testing, review and reporting on the validity and reliability of an entity’s financial statements to the shareholders. In performance of this task, the auditor will be expected to exert all the skills and case at his disposal as he will be fully responsible to the shareholders for any lapses ordering on professional negligence. The auditor responsibilities also extends to the third party who he foresaw on ought to have foreseen that would rely on his audit report. Yet, this is not to imply that the auditors should be held to ransom for irregularities not detected by him. The auditors responsibility begins and ends with the expression of opinion on the truthfulness and fairness of the account presented to him. If there are errors in the accounts and which did not come to his notice he will not be held responsible as long as be acted with a reasonable level of care and autumn supportable verifiable by sufficient audit evidence compiled by him. The auditor is therefore neither a witch nor a blood bound. This is not to say that the auditor should go to sleep complacently on this decision, for although the directors are entirely responsible for the setting up of adequate internal controls in the system, yet it is the auditors duty to examine the adequacy and otherwise and report his finding thereon to the directors in his report. Otherwise, his failure to ascertain the level of the internal control on the system may hold him negligent.
This frightening situation where the auditor can be held responsible for certain irregularities which he did not detect has become a strange bed fellow which auditor had been trying to get rid of. With cognizance to the series of the development in the late sixties which shook the root of the auditing and accounting profession. The objective of the statutory auditor contain the primary and secondary or subsidiary objective. The secondary objective is borne by the primary. The primary objective is to present a report which make explicit the opinion on both the truthfulness and fairness of the financial statement. This is to serve as guide to all those who utilize and would utilize such report. The subsidiary objective has to do with the detection of errors and fraud by the deterrent and moral effect of the audit. Also auditor give more assistant on the accounting system, taxation and other areas.
1.4 USERS AND USES OF THE STATUTORY AUDIT
Shareholders as owners of the business are interested in the audited financial statement. This is to ascertain facts on the level of profitability as a relation with management policies. And the relationship between dividend paid, bonus shares issued and the actual profit earned. Management as the operator of business require financial statement for the purpose of performance with cognizance to deducing efficiency level through the auditor’s opinion. Employees will be eager to obtain a copy of the audited financial statement to determine organisation’s ability to pay benefits. Employees of manufacturing companies could deduce the amount devoted to insurance as against accident encounterable during operations in the manufacturing process.
Potential investors require the audited financial statement for ascertaining profitability and liability of the business in question. Creditors (both corporate and individuals) require the financial statement of an organisation to check ability to meet debt obligations. Government utilize the audited financial statement for the purpose of assessing a company to tax. The process of denoting amount payable as tax is based on the audited financial statement. Finally everyone in the corporate world can be said to be users of the financial statement. Financial advisers investment analyst, financial journalist, labour bodies, trade unions, international organisations and the entire business environ use the financial statement for the satisfaction of various personal and corporate requirements.
1.5 CONCEPTS AND CONVENTIONS
There are basic assumption which form the basis for the preparation of the audited financial statement. They can be regarded as the rules and regulations governing the way audit, analysis and interpretation of audit statement is done. These includes:
The cost concept:- This implies that assets are normally shown at cost price and that this is basis for assessing the future usage.
The money measurement:- This principle connote that accounting is strictly concern with that parts of the business whose monetary value can be ascertained for instance, the dedication or lack of co-operation of workers in a manufacturing organisation has no monetary value, hence it cannot be covered by accounting on has no accounting recognition.
Stable Monetary Concept:- Auditing does not consider the effect of inflation in order words it assumes perpetual stability of monetary value.
The going concern concept:- Auditing assumes that once a business has been established, it will continue to operate indefinitely. But, it will be necessary to show how much an asset is going to fetch, if the business is to be sold.
Business Entity Concept:- This concept states the fact that auditing records are limited to the firm on the business organisation and do not extend to the personal resources of the proprietors. This implies that the business is a separate entity while the owners of the business are separate entities.
Realisation concept:- This concept explain the fact that once goods and / or services has been passed to the customer and he incure liability for them, then profit is regarded to been earned. Simply put, accounting should be considered valid as soon as hygiene incure liability for goods.
The Dual Aspect Concept:- This state that there are two are two aspects of accounting. One represented by assets and claims against them. The concept states that the two aspect the two aspect one always equal to each other.
Amongst the concept used in statutory audit are the accrual concept, periodicity etc. Concerning the conventions, these are mediators used to resolve conflict that arise in the application of a recording concept or simply put, auditing and accounting convention are general approach to the application of accounting and auditing principles. The convention include:
Materiality:- The concept of materiality states that any disclosure, omission in the audit will distort of the audited financial statement. The concept of materiality include:
– Description and questions of analysis
– Statute used
– The presentation
Fairness:- This states that auditor should bear in mind that there are various users of audited statements hence they should not be prepared in favour of some users in detriment to the other users. The convention by far is the most supreme of all the conventions.
Conservation of Prudency:- This convention means auditors should not anticipate profit but losses should be recognize and divided against awareness.
Substance Overflow:- Although financial participation are recorded in accordance with legality. But a situation in which this does not reflect the truth and fair position of an enterprise. Auditing should allow financial reality to prevail over legality.
1.6 RESEARCH QUESTIONS
In order for the study’s objective to be achieved, certain questions need to be answered. These answers will provide the much needed information for the research and will also assist in making recommendations and drawing conclusions.
Such research question include the following:
1. How efficient is the organisation’s system of statutory audit?
2. What is the firm’s policy in relation to the type of audit adopted?
3. What is the organisation’s approach to the measurement of actual activity levels.
4. How competent and qualified are the staff and internal auditors saddled with the task of auditing the financial statement?
5.In what way has the audited statement been beneficial to the organisation.
1.7 OBJECTIVES OF THE STUDY
This project work has been embarked upon to find out the following.
i. The study of the ways and manner of how statutory audit is applied.
ii. The extent to which statutory audit is applied in the manufacturing sector in solving and Improving the operation and other related problems like survival, growth and profitability.
iii. The effect of statutory audit on the employees, employer and changes brought about by these types and suggestions and/or recommendation for future improvement.
This is concern with the research approach used in the work. It shows the research design, instrument, the method of investigation and how the work was carried out. It also shows the treatment of data. The use of questionnaire is preferable.
1.9 DEFINITION OF TERMS
i. Blood hound- A perfect detector of mysteries.
ii. Enactment:- The process of law becoming officially useful.
iii. Irregularities:- Events that are abnormal occurrence.
iv. Philosophy:- System of beliefs.
v. Scrutunise:- To look critical into an item.