An Assesment of the Role of the Auditor in Fighting Corruption in an Organization Essay

CHAPTER TWOLITERATURE look back2.1 IntroductionReliable accounting and monetary brooding issued by canvasors help authoritiess in allocating resources from the association in an efficient manner. Although the pristine death of an brass section is profit do and to allocate limited enceinte resources to the fear of goods and services for which societys take on is great, a highly complex phenomenon which is decadency poses a threat to those goals and services. However, most organisations pass by huge sums of silver adopting strategies to support rottenness (Whittington et al., 2004). 2.2 History of auditingThe word audit originated from the Latin word analyzeus which means, a hearing. In the earlier days, whenever there was suspected putrescence in a profession transcription, the proprietor of the business would appoint a soulfulness to check the accounts and require hearing the explanations assumption by the person responsible for safekeeping the accounts and funds. In those days, the analyseed account was done to go on endow away whether the payments and receipts were properly accounted or non accounted for (http//www.eHow.com). During the advent of the Industrial Revolution, from 1750 to 1850, examineing evolved into a field of fraud detection and pecuniary accountability. Until then, visiting existed principally as a arranging to maintain authoritiesal accountancy and record-keeping. The incidence of the revolution resulted in businesses expanding thereby resulting in increased job slips mingled with owners to customers.Resultantly, trouble was hired to operate businesses in the owners absences, and owners pass on an increasing need to reminder their fiscal activities both for accuracy and fraud pr dismantletion. (http//www.eHow.com). In the early 20th century, the makeuping exercising of attendees, which involved lay outting reports of their duties and findings, was standardized as the strong-minded he arrs R eport. The increase in demand for audited accounted accountors led to the development of the testing process for accuracy and fraud prevention. attenders true a way to strategically selecting disclose founts as representative of the corporations performance. This was an affordable alternative to examining every case in detail, required less age and a good tool for trim back fraud (http//www.eHow.com). 2.3 Overviewof AuditingAuditing is a domineering interrogative sentence of the books and records of a business or the plaque in order to as sure or verify and to report upon the facts regarding the fiscal subprogram and the result thereof (Montgomery, 2010,p.6). A prep atomic number 18, Loughran (2010, p.5), defines auditing as, the process of home(a) information that is on the watch by soul else to determine whether the information is middling stated. On the other hand, Arens et al. (2006, p.7), defines auditing as the accumulation of turn out round information to determine and report on the degree of concord between the information and established criteria. Auditing is a systematic process of targetly obtaining and evaluating evidence regarding assertions intimately economic actions and events to as authorized the degree of correspondence between the assertions and established criteria and communicating the results to kindle users(Robertson et al., 2002,p.7).According to Knechel (2001,p.42), auditing is the process of providing assurance active the reliableness of the information contained in the financial statements prep atomic number 18d in accordance with in the main sealed Accounting Principles. 2.4 Types of Audit there be various ways in which the relieve oneself performed by the listener has been classified or categorized. Each classification or grammatical case of audit is unique in that, separately type of audit has its own perspective, objective and business organisation. Irrespective of the type of audit being conduc ted, the basic processes, guidelines and standards are fundamentally the same(p). However, Hall (2005) classifies the types of audits that auditors perform into quadruplet 2.4.1 innate AuditThe Institute of privileged Auditors defines national audit as an mugwump suffice established within an organisation to realise and treasure the audit activities as a service to the organisation. Internal audits are conducted by auditors who work for the organization (Ibid). 2.4.2 Information technology AuditThis is associated with auditors who use technical skills and cognition to audit through the figurer system, or provide audit services where processes or data, or both, are embedded in technologies. Hence, IT audit involves the auditing of information technology, computer system and the like. IT audit allows auditors to audit through the database and computer (Ibid).2.4.3 Fraud AuditThis is the newest area of auditing, arising out of both r angstromant employee theft of as narrow downs and major financial frauds. In such(prenominal) audits, materiality is irrelevant, and the master(a) goal is an investigation of anomalies not to give assurance. Hence, fraud audit aims at gathering evidence of fraud and where fitted evidence exist, fraud audit leads to doctrine (Ibid). 2.4.4 Financial AuditAlso referred to as outer audits, this involves auditors who work independent of the organisation being audited. The audit objective is to give an trust on the financial statements (Ibid). 2.5 Types of AuditorsThere are a number of antithetic types of auditors however, they can be classified chthonic four headings foreign auditors, upcountry auditors, political sympathies auditors, and forensic auditors. One important indispensableness of each type of auditor is independence, in some manner, from the entity being audited (Robertson et al., 2002). 2.5.1 extraneous AuditorsExternal Auditors are often referred to as independent auditors or certified ordinary acc ountants (certified creation accountants). much(prenominal) auditors are called away because they are not employed by the entity being audited. However, external auditors audit financial statements for domainly traded and undercover companies, partnerships, municipalities, privates, and other type of entities. An external auditor may practice as a sole proprietor or as a member of a CPA firm (Robertson et al., 2002). On the other hand, Boynton et al. (2001), describes external auditors as independent having education, training, and thus by virtue of their experience, external auditors are qualified to perform each of the types of activities being the in operation(p)(a) audit military action, the audit compliance, and the financial statements audit natural action.Operational audit bodily function has to do with obtaining and evaluating evidence  almost the efficiency and speciality of an entitys operate activities in sex act back to specified objectives. Furtherm ore, compliance audit activity has to do with obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity align to specified rules, or regulations (Boynton et al., 2001).Finally, the financial statements audit activity has to do with obtaining and evaluating evidence about an entitys financial statements for the purpose of expressing an tone on whether the financial statements are presented fairly in adaptity with established criteria-usually Generally sure Accounting Principles (Boynton et al.,2001). 2.5.2 Internal AuditorsInternal auditors are auditors employed by individual companies, partnerships, government agencies, individuals, and other entities (Messier et al., 2008). Additionally, internecine auditors are in addition employed extensively by government and nonprofit organisations with the principal goal of investigating and appraising the activities with which the various organisational units of the comp some(prenomina l) are carrying out their assigned functions (Whittington et al., 2004). However, in addition to the provision of consulting services to the organisation, ind heading auditors pay much attention to the study of inwrought chequer. Again, versed auditors are primarily involved with compliance and operating(a) audit activities. With the operational audit activity having to do with the obtaining and evaluating evidence about the efficiency and posture of an entitys operating activities in relation to specified objectives (Boynton et al., 2001).Furthermore, the compliance audit activity having to do with the obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity line up to specified conditions, rules, or regulations (Boynton et al., 2001). 2.5.3 organization Auditors administration auditors are employed by national, state, and local anaesthetic agencies. They cosmopolitanly can be considered a subset of the broader category of internal auditors. At the federal level, two agencies use auditors extensively the Government Accountability Office and the Internal evaluate Service. The Internal Revenue Agents contribute their function of enforcing tax laws as defined by congress of parliament and interoperated by the courts. However, the government auditors engage in a coarse range of audit activities, including financial statements audit activity, the compliance audit activity and the operational audit activity (Messier et al., 2008). Financial statements audit activity has to do with the obtaining and evaluating evidence about an entitys financial statements for the purpose of expressing an idea on whether they are presented fairly in conformity with established criteria-usually Generally Accepted Accounting Principles. The compliance audit activity having to do with the obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to specif ied conditions, rules, or regulations. Finally, the operational audit activity having to do with the obtaining and evaluating evidence about the efficiency and effectiveness of an entitys operating activities in relation to specified objectives (Boynton et al., 2001).2.5.4 forensic AuditorsForensic auditors are employed by corporations, government agencies, frequent accounting firms, and consulting and inquiring services firms. They are trained in detecting, investigating, and deterring fraud and rottenness (Boynton et al., 2001). 2.6 functions of the AuditorThe usance of both the internal and external auditor in the business and economic animateness of the society is very important. Modern business enterprises are quite large and in the main in corporate form wherein shareholders do not necessarily engage in the runningning of the anxiety team to run the business on behalf of the shareholders. As a result, management is required to prepare and submit accounts of their ste wardship to reflect the true financial position of the entitys activities (Yiadom, 2009). The Role of the Auditor in the Internal ControlInternal control is broadly defined as a process, executed by an entitys get along with of directors, management, and other personnel, designed to provide likely assurance regarding the achievement of objectives in the following(a) internal control categories 1.Effectiveness and efficiency of operations.2.Reliability of financial coverage.3.Compliance with laws and regulations.Management is responsible for internal control. Managers establish policies and processes to help the organization achieve ad hoc objectives in each of these categories. Auditors perform audits to gauge whether the policies and processes are designed and operating effectively and provide recommendations for improvement (Messier et al., 2008). The Role of the Auditor in embodied Governance corporal governance is a combination of processes and organisational structures i mplemented by the hop on of Directors to inform, direct, manage, and oversee the organizations resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the four pillars of corporate governance, the other pillars being the Board of Directors, management, and the external auditor(Business sack (online) 2006 http//www.allbusiness.com).A primary focus area of internal auditing as it relates to corporate governance is helping the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the Committee in private on the capabilities of key managers, suggesting questions or topics for the Audit Committees meeting agendas, and coordinate with the external auditor(Business weave (online) 2006 http//www.allbusiness.com). Role of the Auditor in Risk ManagementAuditing maestro standards require the function of the auditor to monitor and evaluate the effectiveness of the organizations insecurity management processes. Risk management relates to how an organization sets objectives, then identifies, analyzes, and responds to those risks that could potentially doctor its ability to realize its objectives. Management performs risk judicial decision activities as part of the unexceptional course of business in each of these categories. Examples include strategic planning, marketing planning, capital planning, budgeting, hedging, incentive payout structure, and credit/lending practices. Sarbanes-Oxley regulations also require extensive risk assessment of financial reporting processes (Business web (online) 2006 http//www.allbusiness.com). Corporate legal counsel often prepares world-wide assessments of the current and potential litigation a company faces. Internal auditors may evaluate each of these activities, or focus on the processes used by management to report and m onitor the risks identified.For example, internal auditors can talk over management regarding the reporting of forward-looking operating measures to the Board, to help identify emerging risks (Business web (online) 2006 http//www.allbusiness.com). In larger organizations, major strategic initiatives are implemented to achieve objectives and hold changes. As a member of major(postnominal) management, the Chief Audit executive director may participate in status updates on these major initiatives. This bewilders the Chief Audit Executive in the position to report on many of the major risks the organization faces to the Audit Committee, or ensure managements reporting is effective for that purpose (Business web (online) 2006 http//www.allbusiness.com). 2.7 Overview of putridnessAlthough there is no widely distributed or comprehensive definition as to what constitutes corrupt behaviour, most definitions share a common emphasis upon the abuse of human race power or position for f ace-to-face advantage (Boadi, 2002 vol.4 no.2).The Oxford Unabridged Dictionary defines decadency as perversion or decease of justness in the discharge of public duties by transplant or favour. Websters Collegiate Dictionary defines it as inducing to wrong by improper or unlawful means (as bribery). A pithy definition of corruption used by the World Bank is the abuse of public office for private gain.Corruption is a complex multi-faceted social phenomenon with innumerable manifestations.It takes place as an outcome of deficiencies in the actual public administration apparatuses and systems as well as cultural, economic, political and social factors. Differences of opinion still exist as to the signification of the term corruption. This is primarily because individuals look at corruption from their own vantage points influenced by surrounding environment (Khan, 2004). Coherently, Swain& Dininio (2000), explains corruption as the abuse of public office for private gain. It encompasses unilateral abuses by government officials such as embezzlement and nepotism, as well as abuses linking public and private actors such as bribery extortion, influence peddling, and fraud. 2.8 Corruptive Issues in an transcriptionCorruptive issues arise in an organization where both employers and employees embark on any act classified as corruption (Balkaran, 2000). 2.8.1 Causes of Corruption Khan (2004), defines corruption as a phenomenon that takes place due to the armorial bearing of a number of factors. An understanding of such factors requires, among other things, a kind of general framework for a clearer understanding of the causes of corruption, oddly from a broader perspective. However, Goudie & Strange (2000), explained that the generation of corruption can be looked at from three levels being the international, the national and the individual institutional level.Competitiveness of international markets provides transnational companies of various si zes with an incentive to offer bribes to gain an advantage over competitors. At the national level basic development dodging of any government moulds opportunities and incentives for corruption. At the same level three relationships between the government and the civil service, between the government and the judicatory and between the government and the civil society also affect the nature and discussions of corruption. terce areas of government activity customs administration, business regulation and management of foreign care act as sources of corruption at the level of individual institutions (Goudie & Strange, 2000). 2.8.2 Forms of CorruptionCorruption takes many forms acceptance of money and other rewards for awarding contracts, violation of procedures to state personal interests, kickbacks from developmental programmes or multi-national corporations, pay-offs for legislative support, diversion of public resources for private use, bossy illegal activities, interven ing in the legal expert process, nepotism, common theft, overpricing, establishing non-existing projects and tax collection and tax assessment frauds (Khan, 2004). 2.9 The Auditors Role in Fighting Corruption in an Organisation Auditors are the first set of gatekeepers in fighting corruption in an organisation (Harding,2000,p.12).Auditors ensure that transactions are valid, at arms-length, captured, and properly recorded check to established standards which contributes to the fight of corruption. Secondly, As professionals with a duty to protect the public interest, auditors are bound by rigorous codes of professional and personal ethics calling for the highest levels of integrity and objectivity. Again, with key strategic positions within an enterprise or organization whether in an internal position or as an external position, mean that auditors very often piddle access to highly privileged and hole-and-corner(a) information (Harding, 2000). Furthermore, as Balkaran (2000), puts it, the auditor helps in fighting corruption in an organisation through the performance of the respective functions on the bases of national and international standards of practice which have clear guidelines identifying, for instance, indicators of fraud and other irregularities, and reporting these to the highest levels of authority.Scaling down to the types of auditors, Balkaran (2000), outlines that, the revised repartee of internal auditing, places more responsibility on internal auditors in helping to fight corruption. After all, as the eyes and ears of management, they are there year-round, understand the operations of a business, and are bound by even more in-depth standards of performance and conduct. Moreover, the work of the internal auditor is often relied upon by the external (independent) auditors and therefore subject to more taut requirements.