The Impact of Internal Audit on Fraud Detection and Prevention
Objectives of the Study
As previously mentioned, audit quality is the output of audit practice, and one of the major elements of audit quality is fraud detection.
The objective of this study is to
- Determine the extent internal audit affects audit quality or audit fraud detection.
- Determine whether well organized internal audit could change orientation of workers towards frauds.
- Make possible recommendations.
This chapter reviews related literature under the following sub-headings:
- Conceptual Framework
- Empirical Review
- Theoretical Framework
Concept of Fraud
According to Adeniji (2004) and ICAN (2006), Fraud is an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 1998 and Bostley and Drover 1972). Fraud has increased considerably over the recent years and professionals believe this trend is likely to continue. According to Brink and Witt (1982), fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management. ISA 240 ‘The Auditor’s Responsibilities to consider Fraud in an Audit of Financial Statement (Revised)’ refers to fraud as ‘’an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage’’. Aderibigbe and Dada (2007) defined fraud as a deliberate deceit planned and executed with the intent to deprive of whether the perpetrator benefits from his/her actions.
Weirich and Reinstein (2000 and Cited in Allyne& Howard 2005), define fraud as “international deception, cheating and stealing’’. Some common types of fraud include creating fictitious creditors, ‘’ghosts’’ on the payroll, falsifying cash sales, undeclared stock, making unauthorized ‘’write-offs’’, and claiming excessive or never-incurred expenses. Pollick (2006)regards fraud as a ‘’deliberate misrepresentation, which causes one to suffer damages, usually monetary losses’’.
Albrecht et al (1995 cited in Allyne& Howard, 2005) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud, customer fraud, and miscellaneous fraud. Fraud also involves complicated financial transactions conducted by white collar criminals, business professionals with specialized knowledge and criminal intent (Pollick 2006).
Concept of Audit
The word audit is derived from a Latin word “audire” which means “to hear”. During the medieval times when manual book-keeping was prevalent, auditors in Britain used to hear the accounts read out for them and checked that the organisation’s personnel were not negligent or fraudulent (Derek Mathew, 1890). Moyer (1951) identified that the most important duty of the auditor was to detect fraud. Chatfield (1974) documented that early United States auditing was viewed mainly as verification of bookkeeping detail.
An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern (Power Michael, 1999). It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a ubiquitous phenomenon in the corporate and the public sector that academics started identifying an “Audit Society” (Power Michael, 1999). The auditor perceives and recognises the propositions before them for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgement which is communicated through their audit report.
Any subject matter may be audited. Auditing is a safeguard measure since ancient times (Loeb & Shamoo,1989). Audits provide third party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other areas which are commonly audited include: secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation.
As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of risk management, control, and the governance process over the subject matter.
AUDITORS’ RESPONSIBILITIES IN FRAUD DETECTION
The role of auditors has not been well defined from inception (Alleyne& Howard 2005). Porter (1997) reviews the historical development of the auditors’ duty to detect and report fraud over the centuries. Her study shows that there is an evaluation of auditing practices and shift in auditing paradigm through a number of stages. Poter’s study reveals that the primary objective of an audit in the pre-1920’s phase was to uncover fraud. However, by the 1930’s, the primary objective of an audit had changed to verification of accounts. This is most likely due to the increase in size and volume of companies’ transactions which in turn made it unlikely that auditors could examine all transactions.During this period, the auditing profession began to management. In addition, management should also have implemented appropriate internal control systems to prevent fraud in their companies.
In the 1960’s, the media and public were generally unhappy that auditors were refusing to accept the duties of fraud detection. The usefulness of an audit was frequently called into question as they generally failed to uncover fraud. However, despite the criticism, auditors continued to minimize the importance of their role in detecting fraud by stressing that such duty rested with the management. Due to the advancement of technology in the 80’s,the complexity and volume of fraud have posed severe problems for businesses. Poter (1997) asserts that, even though the case law has determined that in some circumstances auditors have a duty to detect fraud, the courts have attempted to maintain the auditors’ duties within reasonable limits. In contrast, Boynton et al (2005) argue that since the fall of Enron, auditing standards have been revamped to re-emphasize the auditors’ responsibilities to detect fraud. Their assertion is based on ISA 315 ‘Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement’ and Internal Audit Standards (IAS) 240 ‘The Auditor’s Responsibilities to consider Fraud in an Audit of Financial Statement (Revised). ISA 240 deals with auditor’s responsibilities relating to fraud in an audit of financial statements, Identifying and assessing the risks of material misstatement due to fraud. It have been effective on or 15 December 2009
ISA 240 objectives are; To identify and assess the risks of material misstatement of the financial statements due to fraud, To obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses and to respond appropriately to fraud or suspected fraud identified during the audit.
This section concerns itself on the investigator’s scope of procedural strategies to be employed in the research. These include; research design, sources of data collection, tools for data collection, the population of the study, validity and reliability of the data and test instruments, data analysis technique.
This study adopted a survey research design to answer the research questions of this study. The researcher selected a survey research design since primary data are collected using questionnaire from which the hypotheses were tested.
Sources of Data Collection
Primary Source of Data
These are original data collected basically for the purposes of the problem under investigation. According to Uzoagulu (1998), it contains the data originally assembled by the person who actually observed the phenomenon. Primary data mainly come from direct observation of event, manipulation of variables, contrivance of research situations including performance experiments and responses to questionnaire. Therefore, in this study data were obtained through distributed questionnaires designed for this purpose. In addition, oral interview were conducted briefly to supplement the information derived from the questionnaire. This is aimed at reducing the rigidity associated with the designed questionnaire and also to give the respondents the opportunity of supplying that information that the structured questionnaire did not accommodate.
DATA PRESENTATION AND ANALYSIS OF RESULTS
This chapter deals with the presentation, analysis and interpretation of data collected from the respondents in the course of carrying out the research. The responses were converted into scores and percentage distribution.
PRESENTATION OF DATA
This section deals with the analysis of the responses from the staff of PHCN. The researcher administered 8 copies of the questionnaire of which all the copies were returned, therefore all the copies were found useful.
ANALYSIS OF DATA
Descriptive statistics was used to summarize the demographic information and the research question in this study while the hypothesis was tested using t-test analysis
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
This chapter deals on the summary of the findings, conclusions of the study, recommendation, suggestions for further studies.
SUMMARY OF FINDINGS
This study was undertaken to examine the impact of internal audit on fraud detection and prevention. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and the hypotheses were tested using the chi square to test hypothesis. While the fifth chapter gives the study summary and conclusion.
CONCLUSION AND RECOMMENDATIONS
The research conducted has vividly opined to a reasonably extent the role of audit as an effective tool for fraud control in an organization. The failure of the management to adopt the services of the internal auditor in an organization can lead to fraud, loss of finance and lack of accountability. The growth of any economy depends to a large extent on the system of control adopted by the management and the success and sustenance of the internal control lies on internal auditing. Organization all round the world be it financial or otherwise needs auditing for proper assessment of their financial statements.
Having conducted this research and analyzed the field data, the researcher recommends the following points, which if adhered to will positively bridge the gender gap.
- Since services of a qualified internal auditor has statistical association on fraud prevention in manufacturing company, management should always adopt the services of the Internal auditors in the firm so as to ensure no financial leakages and accountability in the firm.
- Also, having discovered that service of qualified internal auditor has statistical association on fraud detection in a company, then the management should put in their best resources to ensure that experts in the field of auditing are employed to avoid biased result.
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