THE SIGNIFICANCE AND OBJECTIVES OF SOURCE DOCUMENTS IN AUDIT INVESTIGATION
A CASE STUDY OF ORJI CHUKWU AND CO CHARTERED ACCOUNTANCTS
The concept “source documents” is a familiar term with those involved in keeping accounting records or watch dogs of limited liability and public liability companies and organizations from time to item, most often on annual basis, the independent Auditors call to review the accounting records kept by their clients. This they do by studying and evaluating the internal control systems in the company. This approach makes it possible for lapses, discrepancies, deficiencies and bottlenecks to be discovered if any do exist. However, most people do not really understand the role of the auditors in public practice. To the layman, it’s a matter of detecting for fraud, which is more or less a secondary object f audit.This research has set out to review the role of the auditor in public practice, the statutory and regulatory frame work under which they operate and the procedures adopted in the course of their duties, to meet the standard required to them. This task has been carried out with a special reference to Orji Chukwu and co-chartered Accountants a relatively small firm of chartered accountants located at 57 chime Avenue new haven, Enugu
Chapter one of this work, takes a critical look at the background information relating to the concept of auditing and investigation procedures in auditing, while chapter two gives a detail tool of the concept of auditing and all other related issues under literature reviews
Chapter three, research methodologies, reviews the procedures used in carrying out the research, while chapter four gives details of data obtained during the research with brief comments on the facts that could be deduced there from. Chapter five looks at the inferences drawing from the analysis of data obtained, while the 0last chapter summarizes the results of research, finding in more general items.
1.2 The firm
1.3 Statement of the problems
1.4 Source document and investigation related to capital, reserves, directors and statutory work
1.5 Source document and investigations related to debenture, taxation, creditors and accrued charges.
1.6 Source document and investigations related to Hp creditors and short term loans
1.7 Source documents and investigations related to fixed asset
1.8 Source document and investigation related to current asset
1.9 Source document and investigation related to group and associate companies
1.9.1 Source document and investigation related to profit and loss or income expenditure
1.9.2 Scope and limitations
1.9.3 Definition of terms
2.1. Relationship between auditing and source document
2.2. Legal framework of auditing
2.3. Regulatory framework of auditing
3.1 Sources of data
3.2 Determination of sample size
3.3 Description of the instrument of data collection
3.4 Method of data analysis
4.1 Responses to questionnaires
Chapter five: FINDINGS, RECOMMENDATIONADN CONCLUSION
RELEVANCE OF INVESTIGATION
Every business entity, be it profitable or non profitable, have goals and objectives for which they were established example, most liability companies are established for profit optimization and charitable or non-profit organizations, example, government parastatates reestablished to subsidize costs to the governed.
However, its pertinent to note here that whether upon profitable or non profitable basis, its relevant that accounting records must be maintained Accounting is broadly defined as a process of recording analyzing and interpreting at business transactions in such a systematic and concise manners as to give full and detailed explanation to related parties who are interested in the financial statement. In every business organizations, it’s the duty of the chief accountant to keep records of all business transactions of the organization. However if thus records must be kept, it must follow norms principles, conventions and standards et out by various professional accounting bodies. In Nigeria, the Nigeria accounting standard board (NASB) is in charge of this duty.
Subject to the foregoing, section 357 of the company and allied matters decree,. Makes it mandatory for every limited liability company to appoint an Auditor to examine its accounts.
This now brings us to the question, who is an auditor? With reference to Walter N. Bigg, he sees an auditor as a person appointed by the directors (Shareholder authorize the directors to appoint) of a company to examine its books of account and stake whether it gives a true and fair view of the financial position of the entity and also see that there is compliance with statute and that accounting standard are strictly adhered to. In the light of the above, the auditor should be a professional and used in the accounting field, with high integrity profile and must be a member of a recognized professional body and must be licensed to practice. In Nigeria today, the institute of chartered accountants Nigeria takes care of this. If the auditor as a professional is a ware of the fact that his work is relied upon by related third parties, he owes it a duty to the reasonable care and skill in the discharge of his duty so as not to expose himself to liabilities associated with negligence out of misfeasance proceedings.
In the light of the above, for the auditor to accept assurances or to give in opinion, he must certify himself beyond all reasonable doubt that the presentation made to hi gives a true and fair view of the financial position of the entity as at the date of his audit.
In these regards, he has access to all the company books and has unreserved rights as to question any maladministration, and gather all such information that would assist him in his work. However, for the auditor to formally accept assurances, has basis of acceptance must be dependent on the availability of reliable source of documents and explanations produced by the entity in question. At diverse levels of investigation Associate source documents checks and test are applied and evidences shown must be very authentic and satisfying. For example where bank balances are investigated, for the auditor to accept the stated figures, the certifying evidences should be, bank statements, check stamps, cash books, authorization vouchers, etc and all such reconciliation that would enable him accept the presented bank balances as shown on the account. It is pertinent to note that the presentation and figures without satisfactory evidence, or source document is like a student graduating without a certificate and thus bring us to one of the objectives of this text.
The investigation process involves making independent confirmation, example circulation of debtors, creditors and other related third parties to the entity in question. Generally the process of audit investigation is limited by so many factors which includes: cost consideration, time factors, unavailability of data. Distance and prevailing socio-economic and political climate, in as much as thus factors are political climate, in as much as thus factors are highlighted an noted, the auditor must not fail to certify himself beyond all reasonably doubts. This should be done by disclosing all lapses and discrepancies and must not fail to give qualifications when need be. In all circumstances, he, the audit should try to avoid damages associated with negligence as number of cases related to auditors liability has been recorded some of the case includes: CAPRO industries Vickman (1989) see SCDH. Group VMC farlance (1972) see JEP Fasteners Vmarts Bloom and Co (1981) also see security pacific business credit V peat MARWICK MAL & CO (1992).
This study is designed to examine the activities, responsibilities and legal framework under which the auditor in public practive operates. This is with the appraisal of a relatively small firm of charterd accountants in Nigeria today, Orji Chukwu and co. with Head Office at 57 Chime Avenue New haven Enugu and other offices in Enugu state and Lagos.
Orji chukwu and Co is a relatively small firm of chartered accountants, founded in Nigeira in the year 1987 as a partnership between Orji Orji Chukwu L and Onyemelukwe C. The firm today has offices in about three states of the federation and efforts are made to erect more offices in other stated. In its early years, its main objectives, was centered on Financial management consultancy and audit and investigations, but today it has grown broth in size and scope it services rendered. It is interesting to now that the following range of services are now available at Orji Chukwu and co-chartered accountants.
a. Tax consultancy
b. Information technique Enlargement
c. Business advisory services.
In each state, the firm is headed by
a. Resident partner (a qualified accountant) and two assistants also qualified person
b. 4 senior audit staffs
c. 3 junior audit staff
e. Industry trainees
f. Office assistants.
In the whole, the firm has about 32 staffs and efforts are onto recruit more employees to enable the firm meet with increasingly clientship.
1.3 STATEMENT OF THE PROBLEM
As has been mentioned earlier, there is a legal dimension to the auditors job. The duties of the auditors are outlines in section 360 (I) of the company and Allied Decree 1990). Any contravention of the requirement of this section of the decree attracts a penalty. Again the report of the auditor as an important document, not only, to the shareholders of a company, but also to related third parties. Cases have been recorded, where auditors have been convicted by courts of law for negligence resulting from misfeasance proceedings. Consequently, it is very important that an auditor should exercise due professional care in the discharge of his duties to minimize his exposure.
The problems now faced by the auditors in public practice, is how they can attain this standard required of them, and also the needs of other parties who may be interested in the financial statements they are auditing. This study aims at striking out the various source documents. Tests, and checks to be applied during the investigation on process. So as to guarantee the completeness of the audit investigation and the financial report three-on.
1.5 SOURCE DOCUMENTS AND INVESTIGATIONS RELATED TO CAPITAL RESERVES, DIRECTORS AND STATUTORY WORK OBJECTIVE OF THE AUDIT INVESTIGATION
The objectives is to form an opinion as to whether
1. The share capital has been properly classified and described in the account
2. The reserved have been properly described and only applied for the purposes permitted by the company’s articles, or companies Act.
3. Movements on reserves are correctly stated in accordance with the appropriate resolutions
4. Dividends paid and payable are correctly states in accordance with he appropriate resolutions
5. Directors remuneration is correctly disclosed in the accounts, and is in accordance with the articles, Board and members resolutions, or any service agreements, that is, (PPIB).
6. The information required by companies act has been correctly recorded in the statutory books kept by the company for that purpose
7. Resolutions are in accordance with the articles and the accounts reflect the decisions.
SOURCE DOCUMENTS TO BE VERIFIED OR INVESTIGATED
a. Make a summary of authorized and issue share capital
b. Summarize the share holding
c. Directors shareholding
d. List of directors, secretaries and principal officers
e. Annual returns summarized
f. Extract from minutes, that is, directors meeting, AGM and other meetings
g. Movement on reserves and profit and loss account
h. Dividends proposed and paid, gross tax deducted
i. Directors emoluments
j. Preliminary expenses list.
a. Prepare a schedule showing opening and closing position and movement in share capital
b. Vouch movement with minutes
c. Bring up to date, the history of share capital in the paramount life
d. Ensure that he authorized capital accord with he memorandum and articles of association or amendments where to (see registrars, registration of increase).
a. Prepare statements of dividends paid and proposed showing payment lates
b. Agree to appropriate board, AGM, resolution
c. Ensue it is within statutory income guidelines limit
d. Non compliance or (b) or (c) should be noted as points on account
e. Check calculations, ensure that propsoed dividends are shown in accounts
f. Verily that withholding tax has been accounted for to appropriate revenue authorities.
g. Check total dividend paid in cash-book and posting to nominal ledger
a. Examine register of directors and prepare list of directors and their share and debenture holdings, showing the corresponding holding for previous year
b. Confirm new appointment and re-election of directors with board and members resolutions
c. Verify that director’s qualifying shares are held in accordance with articles of association of the company
d. Verify that the number of directors complied with the articles.
e. Verify that section of CAMD related to age limit of directors are complied with
f. Verify that returns of all changes in the appointment of directors and secretary have been made to the registrar of companies.
PRELIMINARY EXPENSES SHRE AND DEBENTURE ISSUE EXPENSES
a. Prepare a schedule reconciling opening and closing position of issuing share and debentures
i. preliminary expenses
ii. Commission paid in respects of shares, or debentures
iii. Discount issue of shares of debentures
b. Vouch with invoices etc. see that commission paid are in accordance with the terms of issue and section 54 of the companies Act 1968.
c. Vouch entries in cahs book and normal ledger
a. Verify that a return made up of 42nd day after AGM has been filed with the registrar of companies
b. Inspect copy and filing receipts
c. Confirm accounting references date, and if it has changed, ensure that appropriate notive has been given to the registrar of companies
A. Prepare a schedule reconciling the opening and closing positionfo reserves
i. Share premium account
ii. Revaluation surplus reserve account
iii. Other reserves
B. Vouchi movements during the year, and confirm with minutes.
1. Source(s) of any increase and applications of any decrease
C. Bring up to date the history of reserves in the permanent files
D. See that any restriction on the application of researves are complied with by reference to section 57 of companies act of 1968, the guidelines of the PPIB the company: Articles, debenture trust deeds,e tc.
TRANSFER OF SHARES
i. Check to Board resolutions
a. Ensure that share transfer forms have ben withnessed
b. Checked that correct entry has been made ion the register of members
DEPOSIT FOR SHARES
a. prepare detail schedule and vouchi items there on
b. check that they have been adopted by the board.
REGISTER OF MEMBERS
a. List members and shareholder where practiceable, showing percentage holding
b. Agreed-issued capital with register of members registrar obtain certificate in a suitable form from the registrar.
c. Check that share certificates have been issued to all members
A. Obtain, or prepare a schedule of drectors remuneration under headings apporpriate for inclusion ion the accounts distinguished between the emoluments paid by company and company’s subsidiary
B. Vouch emoluments paid by reference to
i. Company’s articles
ii Device agreement or other evidence as agreed
iv. Board members resolution
v. The productivity prices and income board guiding
C. Obtain signed copy of statement from each of the directors setting out the information on directors emoluments.
BOARD AND MEMBERS MINUTES
a. Examine and make extract as necessary minutes of directors and numbers
b. Ensure AGM was held within statutory period
c. Note if decision had been implemented
1.5 SOURCE DOCUMENTS AND INVESTIGATION RELATED TO DEBENTURES, TAXATION, CREDITORS AND ACCRUED CAHRGES.
THE OBJECTIVE OF THE AUDIT INVESTIGATION
The objective is to form an opinion as to whether
i. Debentures, motgages and long term loans are fairly stated and are properly described and classified as requiared by he companies Act.
ii. Disclosure has been made of these loans which are secured on the assets of the company
iii. Aggregate borrowings (including where apropriate, overdrafts and other short term loans) are not in excess of the maximum permitted according to the articles or terms of any loans trusted
iv. The company has complied with requirements any sinking fund established under the terms of loan
v. The terms of conversion of any convertible loan stock have been complied with
vi. The register of mortgage and charges correctly records the informaiton required under the companies act.
vii. Interest has ben paid in accordance with the terms of loans agreements
viii. The balance sheet fairly states and porperly describeds the company’s aggregate liability for tax, or the extent of the tax recoverable at the accounting date.
ix. The liability for deferred taxation is correctly stated
x. The P and L account fairly states the charges for taxation on profits for the year, including any adjustment required to the charge for taxation in prior years and properly reflects tax attributable to extra ordinary items
xi. All mateira iability existing as at balance sheet date are all reflected in the accounts
xii. The libailities has been described and disclosed on statute basis
xiii. Adequate disclosure has ben made of any loans or other short term libailities, which are secured on the assets of the company.
SOURCE DOCUMENTS TO BE VERIFIED OR INVESTIGATED BORROWING
1a. Reconcile the opening and closing balance of debenture term loans
b Vouch redemption repayment during the year and new loans
2 Note the volume of security given
3 Verify that borrowings per article have not been exceeded, other wise note as points , on the accounts
4 Check that register of mortgages and charges are written up to date
5 Ensure that all borrowings and charges are subject of an appropraite resolution
6 Check that he terms of the debentures deed/loan are complied with
7 Obtain confirmation, where appropriate from leaders of the amounts outstanding and security held
1a Prepare a schedule of interest payable correlate opening liability, payment and closing liability
b. Vouch amount paid, check calculations and treatment of interest in the accounts
c. Check deduction of income tax and its payments to appropriate tax authorities
TAXATION – CURRENT YEAR
1. Prepare provisional computations for
i. Income tax, including capital allowance computations ensure that analysis of expenditures accounts, generally requested by the revenue are in the file
ii. Capital gain tax (statement) if any
iii. Vouch payment made during the year
iv. Ensure that where expenditure on fixed assets exceeds N2000 in the year, an acceptance certificates has been obtained from the inspectorate division of the federal ministry of industries in compliance with the industrial inspectorate act, 1970.
TAXATION – PREVIOUS YEAR
a. Obtain a copy of previous year tax computations
b. Compare amounts provided in respect of previous years with the computation sent to FBIR and adjust for under and over provisions
c. Determine the extent of other tax liabilities
d. Verily that the taxation effect of any extra-ordinary or prior year item has been correctly isolated, and has been dealt with as part of extra ordinary, or prior year items being separately disclosed
DEFERRED TAXATION ONREVALUATION OF ASSETS
1. Prepare a reconciliation of the opening and closing provision for tax equalization, taking accounts of the differences between
a. Accounts and tax, written down value of assets ranking for capital allowance
b. Cost and value arising from revaluation of any assets, example property.
c. Disallowable provisions and accruals in the accounts, allowable to different tax years.
CREDITORS AND ACCRUED CHARGES.
1. Prepare a summary of creditors and accrued charges, showing corresponding amounts in the previous year
2. Prepare supporting schedules where necessary, and cross reference to summary
3. Compare amounts in current year with the previous year and enter into material variations or omission
4. Note as point on accounts of provisional appear to be material excessive or inadequate for their purpose, or have been utilized for other purposes
5. Note whether particular liabilities are secures
TRADE AND SUNDRY CREDITORS
With regards to trade and sundry creditors.
a. Trace balances to the ledger
b. Agree with control accounts
c. Reconcile balances with suppliers statements
d. Check payments there on made after year and to cash book / ledger of subsequent period
e. Select block of 25% of balances and analysis outstanding balances, as per supplier invoices and in particular enquire into no account payment, payment into recent bill
f. Select certain number of invoices received a few days before year end and those received a few days after year end date, carry out cut off text, ensure that liabilities are correctly recorded in the appropriate period.
Prepare or obtain a schedule of accruals at the year end
a. Check the evidence supporting the figures
b. Ensure all accruals are includes by examination of accruals in which they normally occur
c. Enquire whether there are any actions pending against the company for which provision should be made in the accounts
d. Consider whether confirmation should be sought from the company’s solicitors
Select balances at the year end and
a. prepare letters, and supervise reply
b. send second request after three months to those from whom no reply has been received
c. reconcile replies to balances on control schedule
d. prepare summary of circulerization and conclusion, there on
1.6 HP CREDITORS, SHORT TERM LOANS
1. Obtain or prepare a schedule reconciling opening and closing position and stating the basis of accounting for interest
a. Examine new agreements, and vouch entries in ledger accounts
b. Vouch repayments during the year and note those falling into arrears
c. Obtain certificates for balances outstanding of the year end.
d. Ensure correct interest accrual at the year end.
1. Prepare a schedule of bills payable at the year and
a. Ensure that correct accrual has been made for interest, and check payments in the year
b. Obtain certificate confirming bills outstanding from the banks
c. Inspects bills paid since the year end, and check entries in cash book.
DIRECTORS CURRENT ACCOUNT
a. prepare schedule showing movement in the year
b. vouch transaction with underlying documents/authorities
c. obtain confirmation of balance
a. Prepare a schedule of contingencies correlate to the previous year. Obtain confirmation from outside agencies where necessary summarize contingent liabilities at the year end, indicating their nature.
Prepare notes for inclusion in the accounts compare with previous year.
1.7 SOURCE DOCUMENTS AND INVESTIGATIONS RELATED TO FIXED ASSETS
THE OBJECTIVE OF THE AUDIT INVESTIGATION
Our objective, is to form an opinion as to whether
i. The assets are properly stated in form required by the companies act.
ii. The assets are still in existence and that the company has good title to them
iii. The balance of accumulated depreciation of the accounting date and the charge for depreciation for the year, are reasonable having regard to the cost of each assets, its expelled useful life and residual values, and that depreciation has been provide in accordance with the requirements of IASU
iv. The additions for the year are proper capital items and that no material capital items have been charged to revenue
v. Disposal have been correctly eliminated from the accounts
vi. The company’s committed and authorizes capital expenditure, are correctly stated in the notes to the accounts
vii. Acceptance certificate has been obtained in respect of qualifying additions to assets
SOURCE DOCUMENTS TO BE INVESTIGATED
i. Summary of fixed asset, cost valuation, depreciation and net book
ii Additions during the year.
iii Disposal and transfers during the year.
Iv Goodwill patents, trade marks
V Fixed asset at valuation.
Vi Asset being acquired under hire purchase agreement.
Vii Commitments for capital expenditure.
Viii Depreciation summary of charge in the accounts.
Ix Summary of profits/losses on disposal of fixed assets.
1.1 ASSETS SUMMARY.
a. Prepare a summary of fixed assets, reconciling lost and depreciation at the beginning and end of the year.
b. Note any assets used as security for liability.
a. Obtain or prepare a list of additions to fixed assets during the year, showing the date purchase and also broken into various assets categories, detailed on the summary schedule.
b. Vouch the items or reasonable percentage there of I with purchase invoice agreement / construction contract / value certificate /title, deeds, etc.
c. In respect of percentage of the above items, vouch further with capital authority and board minutes.
d. If company erects or manufactures its own plants, ensure that capitalization of overheads is on an reasonable basis, and no profit is included-update permanent file and ensure basis is consistent.
e. Review the list of repairs and renewal expenses for items of a capital nature to addiitons for the year.
f. If total additionbs exceed N20,000, ascertain whether acceptance certificate has been obtained.
a. Prepare a detailed statemetn of assets sold scraped /absolute
b. Vouch sales proceeds and complete profit or loss on sales
c. Check the authorization for disposal
d. Ensure they are appropriately dealt within the accounts and deleted from the assets register and update payment records.
4. ASSET REGISTER
a. Ascertain wether the fixed assets register is kept up to date and ensure that it contains relevant date.
b. Ensure that all additions and disposal during the year are correctly recorded.
5. EXISTENCE AT YEAR END
a. Examine title deeds or certificate of occupancy for freehold and lease hold land and buildings, or obtain certificates from bank, or other third parties Ascertain whether deeds held by third parties are for saffe custody or to esecure liabilites of the company or for some other persons.
b. Examine registration receipts, isurance, certificates and licenses of motor vehicels.
c. Reconcile assets register, if and with fixed assets schedules, and carry out test physical inspection of selected items
6. ASSET REVALUATION
a. Obtain or prepare schedule of assets revalued indicating separately, the revluation surplus on each assets.
b. Examine Board resolution adopting the resolution
c. Examiner expert report on the bais of the revaluation
a. Enquire ofthere has been any change in the company’s depreciation policy since the last accounts, consisder of reasonable, and up date permanent file.
b. Prepare a statmetn of the depreciation charge for the year by fixed assets category and test as follows
i. Compare rates with those laid down, and enquire to any variations.
ii. Test calculation; and compare totals with calculation and enquire into any differnce adjsut accounts of material
c. Ensure that leases, including additions thereto, are written up over the unexpired period of the less
d. Test check individual items of depreciation to assess register where applicable.
e. Ascertain that only additions brought into use are depreciated
f. Ensure that additions are depreciated on a consistent basis example by months, six months a ravage, or on a similar basis.
g. Any charge in the company’s rates must be disclosed by way of notes in the accounts.
a. Obtain, or prepare a schedule of future capital expenditure, which has been committed at the balance sheet date, but not provided for in the account, distinguishing between.
i. Amount contracted for
ii. Authorized by the directors but not contracted for.
b. Vouch with orders placed, quotation accepted, and board minutes.
a. Consider in case, trading losses sustained by the company. Some provisions should be made to write down the value of fixed assets to break up value
NB: This point need only be considered where the company is in danger of becoming insolvent
b. Where a revaluation of fixed assets has taken during the year, consideration must be given to the taxation effect of this cross reference to section C.
c. Review insurance vale, and coverage, and consider if adequate.
1.8 SOURCE DOCUMENTS AND INVESTIGATIONS RELATED TO CURRENT ASSETS.
OBJECTIVES OF THE AUDIT INVESTIGATION
i. Investment as shown, represent bonafide assets to which the company has good title
ii. The investments are stated as fair value and on a basis consistent with previous years
iii. Disposal of investment have been properly recorded in the books on a basis consistent with previous years.
iv. The income from investments has been properly accounted for
v. The information required by the companies Act concerning the valuation of lsited, and unlisted investments is correctly stated together with the other detailes required for investments which exceed certain size
vi. The stated stocks and work in progress belonging to the company have been included.
vii. All stocks, and work in progres belonging to the company have been included
viii. Each item, or group of similar items have been properly valued at the lower of its cost and not realizable value, and acceptable basis in conformity with IAS 2, and consistent with previous years.
ix. Adequate provision has been made for expected losses on long term contracts, and for defective and obsolete items of stocks.
x. All stocks held free from lien, or pledge, or whether all, or part is charged as security for liabilities.
xi. The amounts shown represent genuine debts due to the company, or the prepayment of expenses and are correctly classified
xii. Adequate provision has been made for all amounts receivable, whose collectable is in doubt
xiii. The bank balances and cash in hand are correctly stated in the accounts
xiv. The amount shown as a bank overdraft correctly states the company’s indebtedness to the bank at the balance sheet date
xv. Proper disclosure is made of overdrafts that are secured
INVESTMENT HOLDINGS (STOCK AND SHARES)
1. Prepare a summary of opening a