The Role of External Auditors in the Detection of Fraud: Case of Bamenda Municipality in Cameroon

Project Details

Department
ACCOUNTING
Project ID
ACC025
Price
5000XAF
International: $20
No of pages
50
Instruments/method
Quantitative method
Reference
YES
Analytical tool
Descriptive statistics
Format
 MS Word & PDF
Chapters
1-5

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Abstract

This is a study that was carried out under the topic “The role of external auditors in the detection of fraud: Case of Bamenda municipality in Cameroon”.

The main objective of this study was to find out the role of external auditors in the detection of fraud. Primary and secondary data were used in this study.

The data was gotten through questionnaires for primary data while textbooks, websites, lecture notes,  Association of Certified Fraud Examiners amongst others were used to obtain secondary data. The purpose of this study was to find out what external auditors do as concerns the detection of fraud.

Fraud is unlawful and detrimental to all businesses. Fraud can take the following forms: financial and accounting fraud, investment fraud, public sector embezzlement, management fraud, etc. Also, the term Fraud is differentiated from the error.

Fraud is intentional while the error is unintentional. Issues related to the role of external auditors in the detection of fraud and the audit procedures applied by the external auditors are discussed.

The testing of the hypothesis was done using the Chi-Square method. Also, recommendations are made that could go a long way to improve the performance of businesses upon implementation.

Recommendations include the following: inclusion of training courses both in schools and at the workplace, and that the authorities in place should expand the scope of audit in other to meet up with the high expectations in the real business world. From the recommendations, suggestions are made for further studies.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The term audit which originated from a Latin word “audire” meaning to hear was first used in ancient countries like Mesopotamia, Greece, Egypt, Rome, United Kingdom, and India. The audit had as objective the detection and prevention of fraud. In a study published in India, auditing evolved and grew rapidly after the industrial revolution in the 18th century.

With the growth of the joint-stock companies, ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees. Anthropologists found records of auditing activities as far back as the early 3000BC, Hayes and RICK (2005).

Also, according to McNamee (1995), the earliest records ever audited were Babylon Clay tablets some 5000 years ago. Auditing has undergone remarkable changes in the past few years.  There are different types of auditing (internal, external, tax assessment).

          Auditing has grown from listening to accounts being read to owners to taking the help of computers to examine computerized accounts. Auditing has two main objectives: the primary objectives and the secondary or incidental objective which is the focus of this study.

  1. According to section 227 of the company’s Act 1956, the primary objective(duty) of the auditor is to report to the owners of the organization whether the balance sheet gives a true and fair view of the company’s state of affairs and the profit and loss account give a correct figure of the profit or loss for the financial year.
  2. The secondary objective also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objectives of auditing include the detection and prevention of fraud and the detection and prevention of errors. From the above, it is clear that the detection of fraud and errors comes as a result of the determination of the Fair view of the accounts.

After the auditing is completed, there comes the final and a very important part of the audit process called the “express of opinion” done with reference to the circumstances, feasibility, and constraints. In money matters, fraud and errors are usually very common.  This explains why a statement by the auditor of the fairness of the account is very important for reliability.

This state of affairs came up for consideration in the Royal  Mail Steam Packet Company’s case as a result of which the companies acts of England and India were amended in 1948 and 1956 respectively to require the auditor to state inter alia whether the statement of account is true and fair.

Over the last two decades, there have been developments concerning fraud which some have seen as making a significant extension to audit responsibilities. The business community, especially the accounting profession, has become increasingly concerned about the rise in management fraud.

Recent internal reports suggest that employee fraud is pervasive, plaguing both large and small organizations alike. According to the 1996 report in the nation on occupation fraud and abuse, fraud and abuse cost US organization more than 3.9 billion annually (Hillison, 1999). Furthermore, the Association of Certified Fraud Examiners (ACFE, 2008) in their survey for 2008 estimated that US companies lose 7 percent of their annual income to fraud.

Auditing lately has suffered a lot. This explains why the media has been hot about this topic of auditing. The abuses in USA such as Enronhave indicated the lack of independence and objectivity at the executive levels(Agacer, Vehmaneh and Valcarcel, 1997).

In the past years, fraud crime has greatly increased over the world and from all indications, experts in this domain believe that this will continue in the same trend into the future. From the case of Enron and Worldcom, One can say that there are many cases of fraud that have occurred throughout.

It has been noticed that organizations often try to hide scandals from outsiders. Many business frauds are happening in everyday practices, but they are not noticed. Unfortunately, scandals are the tip of the iceberg and represent visible failures. These companies could really go down for such setbacks. In addition, the development of technology, especially in its expansion with the introduction of computers could rather make them more vulnerable.

Cameroon organizations have failed in the last decades because of improper auditing. Evidence is clear and practical in the case of banks and microfinance institutions such as COFINEST, AMITY BANK and UNION BANK OF CAMEROON.

Due to the foregoing principles, external auditors are required to maintain their independence and objectivity so that they will issue unbiased and reliable audit reports. However, it has become largely doubtful if this profession can really maintain independence in their work. Due to this, the researcher will discuss more detailed information relating to fraud and the role of auditors most especially external auditors in the prevention and detection of fraud.

1.2 Statement of the Problem

As already mentioned, this research is tilted toward the concept of fraud which has been the talk of the day in recent centuries. For a better understanding of the concept, the following definitions of fraud will be presented:

According to Spicer and Pegler, auditing is such an examination of books of accounts and vouchers of businesses, as will enable the auditors to satisfy themselves that the balance sheet is properly drawn up, so as to show a true and fair view of the state of affairs of the business and that the profit and loss account gives a true and fair view of the profit and loss for the financial period, according to the best of information and the explanations given to him and as shown by the books; and if not, in what respect he is not satisfied.

Also, “auditing is an examination of accounting records undertaken by with a view to establishing whether they correctly and completely reflect the transactions to which they relate”, Prof. L.R.Dicksee.in legal terms, the criminal law, fraud is defined as a cheat, misguidance, and delusion for-profit purposes by inducing damage (Boroi, Dictionary of criminal law, 2000).

As society becomes more and more complex, there is an increased likelihood that unreliable and manipulated information will be provided to decision-makers. There are several reasons for this: remoteness of the information, voluminous data and the existence of complex exchange transactions.

This becomes a serious threat given the fact that every decision made in deciding if to invest or not depends on the information available. This explains why microfinance institutions in Cameroon have formed networks where the sanctions and restructuring are offered to affiliated members found guilty.

          This study is structured to provide answers to the following questions:

  1. What is the role of external auditors in the detection of fraud
  2. What is the responsibility of external auditors
  • What is the importance of fraud detection in an organization’s success

1.3 Objectives of the Study

The main objective of the study is to find out the role of external auditors in the detection of fraud. The specific objectives of the study encompass the following:

  1. To identify the challenges that external auditors encounter in carrying out their job
  2. To assess the independence and objectivity of external auditors
  • To provide recommendations based on our findings on this topic.

1.4 Research Hypothesis

The hypothesis is created for testing, where H0 is the null hypothesis and H1 the alternative hypothesis

H0- External auditors play no great role in the detection of fraud

H1- External auditors play a great role in the detection of fraud

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