CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 CONCEPTUAL FRAMEWORK

Financial auditing is an independent, objective assurance and consulting activity designed to add value

and improve an organization’s operations. It helps an organization accomplish its objectives by

management, control and governance process. Financial auditing is a catalyst for improving an

organizations effectiveness and efficiency by providing insight and recommendations based on analysis

and assessments of data and business processes. With committing to integrity and accountability,

financial auditing proceeds value to governing bodies and senior management as an objective source of

independent advice. Professional called financial auditors are employed by organizations to perform the

financial auditing activity.

The scope of financial auditing within an organization is broad and may involve topics such as the

efficacy of operations, the reliability of financial reporting, determining and investigating fraud,

safeguarding assets and compliance with the laws and regulations.

Financial auditing frequently involves measuring compliance with the entity’s policies and procedures.

However, financial auditors are not responsible for the execution of company activities, they advise

management and the board of directors or a similar oversight body regarding how to better execute their

responsibilities. As a result of their broad scope of involvement financial auditors may have a variety of

higher educational and professional backgrounds.

Public traded corporations typically have a financial auditing department, led by a chief audit executive

(CAE) who generally reports to the audit committee of the board of directors, with administration

reporting to the chief executive differs.

A similar definition has been developed by the accounting and adopted by government auditors. The

International Standard on Auditing (ISA) 610 define the financial audit function as “an appraisal activity

established or provided as a service to an entity. Its functions include, among other things examining,

evaluating and monitoring the adequacy and effectiveness of financial control”.

Accounting to the auditing guideline (LLG) 204; defined financial control system as “the whole system of

controls, financial and otherwise, established by the management in order to carry on the business of the

organization in an orderly and efficient manner safeguard its assets and secure as far as possible the

completeness, accuracy and validity of the records.

2.2 AN OVERVIEW OF FINANCIAL AUDIT

The financial auditing profession evolved steadily with the progress of management science after world

II. It is conceptually similar in many ways to financial auditing by public accounting firms, quality

assurance and banking compliance activities. Much of the theory underlying financial auditing is derived

from management consulting and public accounting professions. With the implementation in the united

states of the Sarbanes – Oxley Act of 2002, the profession’s growth accelerated as many financial

auditors possess the skills required to help companies mixed the requirements of the law.

2.2.1 NATURE OF THE FINANCIAL AUDIT ACTIVITY

Based on a risk assessment of the organization, financial auditors, management and oversight boards

determine where to focus financial auditing efforts (the focus prioritization is part of the annual multi-

year audit planning, usually, the audit plan is proposed by the chief financial audit (sometimes with

several options or alternatives) to the approval of the audit committee or board of Directors). Financial

auditing activity is generally conducted as one or more discrete assignments.

A typical internal audit assignment involves the following steps:

1. Establish and communicate the scope and objectives for the audit to appropriate management.

2. Develop an understanding and business area under review. This includes objectives,

measurements and key transaction types, this involves review of documents and interviews, flow

charts and narratives may be created if necessary.

3. Describe the key risks facing the business activities within the scope of the audit.

4. Identity control procedures used to ensure each key risk and transaction type is properly

controlled and monitored.

5. Develop and execute a risk-based sampling and testing approach to determine whether the most

important controls are operating as intended.

6. Report problems identified and negotiate action plans with management to address the problems

7. Follow-up on reported findings at appropriate intervals. Financial audit departments maintain a

follow up database for this purpose. Audit assignment length varies based on the complexity of

the activity being audited and financial audit resources available many of the above steps are

literative and may not all occur in the sequence indicated.

By analyzing and recommending business improvements in critical areas, auditors help the

organization meet its objectives. In addition to assessing business processes, specialists called

information technology (IT) auditors review information technology controls.

2.2.2 FINANCIAL AUDIT FUNCTIONS

As an aid to management in the performance of their duties, the financial audit department will perform

the following functions:

a. Review and appraise the effectiveness, adequacy and application of accounting, financial and

other controls in order to promote effective control at the lowest possible cost.

b. Determine the reliability and integrity of financial and other data product within the organization.
 c. Test the extent to which establishment polices, plans and procedures are being complied with.

d. Access the effectiveness of the system and procedures for safeguarding the assets of the business

from all kinds of losses.

e. Inform management of the condition at the operative level.

f. Examine the reporting of progress against established strategic and operational objectives

g. Make recommendations through the submission of timely report.

h. Perform such other special assignments as may be directed by senior management.

2.2.3 MEASURING THE FINANCIAL AUDIT FUNCTION

The measuring of the financial audit function can involve a balanced score and card approach.

Financial audit functions are primarily evaluated based on the quality of counsel and information

provided to the audit committee and top management. However, this is primarily qualitative and

therefore difficult to measure. “customer surveys” sent to the managers after each audit engagement

or report can be used to measure performance, with an animal survey to the audit committee. Scoring

on dimensions such as professionalism quality of counsel, timeliness of work product, utility of

meetings and quality of status updates are typical with such surveys. Understanding the expectations

of senior management and the audit committee represent important steps in developing performing

measurement process as well as the such measure help the audit function with organizational

priorities. Quantitative measures can also be used to measure the functions level of execution and

qualities of its personnel.

Key measures include:

a. Plan completion:

This is a measure of the degree to which the annual plan of engagements is completed, measured

at a point in time. This is completed, measured at a point in time. This may be measured using the

number of audit engagement completed, weighted by the planned size of each assignment, with
estimates for audits in progress. Measured throughout the year, it is compared against the

percentage of the year elapsed.

b. Report issuance:

This is a measure of the time elapsed from completion of testing to issuance of the time elapsed

from completion of testing to issuance of the final audit report, including managements actions

plans. This can be measured in average days or percentage of reports issued within a certain

standard, such as 30 days. Establishing expectations for the timing of management’s response to

report recommendations is critical. In addition, the scope and degree of change.

c. Issue closure:

Reported audit findings are often called audits functions to track reports findings to resolution,

which effectively requires the maintenance of an issue follow-up database. The number of days

that reported issue remain open, or open after their agreed-upon closure data, are key measures. In

addition, reporting database statistics such as the number of issues open (unresolved), closed

(resolved), and issues opened or closed during a given period and useful statistics.

d. Staff qualifications:

This can be measured through the percentage of staff with professional certification, graduate

degrees and overall years of experience.

e. Staff utilization Rate:

This measured as the percentage of time spent on audit engagements as opposed to administration

time such as training or vacations. Many financial audit departments track time by audit

engagements. This is typically captured in a database or spreadsheets.

f. Staffing level:
The number of positions filled relative to the authorized staffing level. Due to the challenge of finding

qualified staff, departments may have rotational programs to bring in managements to complete hours in

the function or be “guest” auditors. Auditor department also “co-source”, meaning they obtain contract

auditors from service providers.

DEVELOPING AND RETAINING STAFF

Developing and retaining quality professional is a key concern in the profession. Key methods for

developing and retaining financial audit staff personnel include;

i. Providing challenging, varied assignments.

ii. Ensuring quality supervisions

iii. Ensuring staff participates in audit engagements from start to finish to learn all phases of the

audit process.

iv. Providing opportunities to lead (in-charge) assignments, starting with move structured

engagement such as Sarbanes-Oxley work.

v. Participating on departmental improvement task forces, such as preparation for quality assurance

review.

vi. Participating in the recruiting and interviewing process for new hires

vii. Rotating through various audit teams (in large departments) or audits of various business.

viii. Providing both outside training (such as seminars) and in-house training (such as company

system) for two weeks or years.

ix. Participation in animal risk assessment activities whether asking key questions or just taking

risks.
2.3 EXECUTION OF FINANCIAL AUDITING AND CONTROL

The method of carrying out financial audit assignment depends on its nature, the qualifications experience

and caliber of the staff of the financial audit department. But basically, the following guides and

principles should be adopted in any type of audit.

i. Confidentiality: the auditor should respect the confidentiality of information acquired in the work

of his work and should not disclose any such information to a third party without specific

authority unless there is a legal or professional duty to disclose. It also has an obligation to take

steps to ensure that staff under his control and persons from whom he obtains advice and

assistance faithfully respect the principle of confidentiality.

ii. Work performed by others: When work is performed or delegated to assistants, the auditors

should ensure that such persons have adequate skills and competences to carry out their work.

iii. Documentation: the auditor should document matters which are important in providing evidence

that the audit was carried in accordance with the basic principles.

iv. Planning: the auditor should plan his work to enable him to conduct an effective audit in an

efficient and timely manner. Plans should based on a knowledge of entity’s operations and should

be further developed and revised as is necessary during the course of the audit.

v. Reviewing accounting system and financial control: the auditor should study and evaluate the

accounting system and financial controls to identify the controls and upon which reliance may be

placed to identify the controls upon which reliance may be placed and determine the nature,

extent and timing of the other audit procedures to be used.

vi. Obtaining evidence: the auditor should obtain and examine relevant and valid audit evidence

sufficient to enable him to draw reasonable conclusion therefore, the following general

presumptions concerning the validity of evidence in auditing are useful;

  Corroboration evidence obtained from independent sources outside on entity provide greater

assurance of reliability than evidence secured solely from within the entity.

 Satisfactory conditions of financial control provide more assurance as to reliability of according

data than unsatisfactory conditions.

 Direct personal knowledge obtained for physical examination, observation computation and

inspection is more conclusive than information obtained indirectly.

 Reviewing financial information: the auditor should carry out a review of the financial

information on which he is to express an opinion in conjunction with his conclusions draw from

the other auditor evidence obtained during the course of the audit.

 The financial information has been prepared using acceptable accounting policies which have

been consistently applied and are appropriate to the entities business.

2.4 QUALITIES OF FINANCIAL AUDITORS

There are various qualities that are attributed to on financial auditor as follows:

 The first and foremost quality that is expected is every financial auditor is that he should audit so

subtly that there should be no room for error to find for the person whose come from outside the

organization to audit the company if the outside auditor consistently finding that is no flow in the

work in the particular company, he will later tend to avoid even if he finds some minor errors.

 The other quality that is expected in an auditor is the proper coordination with the outside and

also to find amicable solution to the problem if there is any

 Another aspect on which he should work is that he should be well aware of all the latest

happenings of his profession.

 He must possess and adequate qualitative and technical experience on the job.

 He must be conversant with the objectives procedures and according system of the organization.
2.5 THE NEED FOR FINANCIAL AUDIT AND CONTROL IN THE
PUBLIC SECTOR
The type of controls that are needed to ensure accuracy and reliability in the information sector provides

includes the following;

 Regular reconciliation of accounts

 The number of documents is sequentially set out to avoid duplication

 Constant comparison between budgeted and actual figures

 Full segregation of duties

 Making sure that there are independent checks

 Making sure that are procedures for proper authorization of any payments

 Making sure that there are proper authorities required for certain levels and access.

Therefore, financial control is the process, effected by an entity’s board of trustees, management and

other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the

following categories:

a. Reliability of financial reporting

b. Effectiveness and efficiency of operations

c. Compliance with applicable laws and regulations

2.6 TYPES OF FINANCIAL CONTROLS

There are basically two (2) types of financial controls such as;

i. Administrative controls: these are primarily made to enable the company to partake on it

business activities is an orderly and efficiency manner and they include the entire

organizational structure (chart), procedures and records which management use when

authority transactions therefore, function directly associated with the responsibility of

achieving the objectives of the organization. Thus, it is starting point in the process of
 establishing the accounting controls in order to prevent and eliminate the risk of fraud, errors,

irregularities and mismanagement.

ii. Accounting controls: these are on the other hand primarily designed to both safeguard protect

and custody of the assets of the organization and to maintain accurate and reliable financial

records, and valid transaction. Moreover, the other forms of financial controls are;

iii. Physical control: This is concern with the custody of assets and involves procedure and

security measure made to ensure that the assets authorized to the appropriate personnel

iv. Authorization and approval controls: These are controls to all transactions are required to

made recorded and processed by the appropriate and authorized by the person responsible for

that and the limit should be specified.

v. Personal control: these entail to assure that all required personnel have capacities compare

with their responsibilities in setting up any control system, the qualifications, selection,

recruitment and training as well as personalized characteristics of the personnel involved are

important.

vi. Arithmetical and accounting: These entail to ensure that all transactions to be recorded and

processed have been authorized and approved and they are correctly and accurately

processed. Therefore, the control involves checking the authentical, accuracy of records

(ledgers), maintenance and checking of totals and checking of totals reconciliation, control

accounts and trial balance.

vii. Management control – this is normally exercised by the management outside the day-to-day

routine activities of the systems. For example, the overall supervising control exercised by

management s reviews of management account and their comparison with budgets, and the

financial audit function.

viii. Organizational control: A business enterprise should have a structural plan of their

organization. Defining and accounting responsibility and identifying lines of reporting for all

aspects of the enterprise operation.

 ix. Supervisor control: This includes supervision by responsible officials of day to day

transactions and heir recording. Therefore, this is normally carried out by the superior officers

and that carried out by the supervisor officers and that management.

x. Segregation Control: This entails the division of tasks in order to be performed by different

individuals. Therefore, the basic aim of segregation of duties is to reduce the risk of financial

manipulation of errors, frauds, irregularities and mismanagement.

xi. Acknowledgement of performance: The individuals or persons performing data processing

operations should acknowledge their activities by means of signature, stamps etc.

xii. Budgeting: A common technique adopted in an organization is budget which involve

qualitative plans of action. Budgets having been validated can be compared with actual

turnout and different investigated.

Finally, the area that financial controls cover and take care of are;

i. Detecting – Designed to detect errors, or regulations that may have occurred

ii. Corrective – Designed to correct errors or irregularities that have detected

iii. Preventive – Designed to keep errors or irregularities from occurring in the first place.

2.7 TYPES OF AUDIT

a. Final or complete audit – This implies that the audit is carried through and completed in one

continued session although the audit may commence before. The end of the accounting period.

b. Interim Audit – This refers “for the time being” it is when an audit is concluded to a particular

date within the accounting period. Attention may be to audit the accounting period. Attention

may be to audit the figure monthly or quarterly as the work may require.

c. Continuous audit – this is when the work is audited throughout the course of a financial year, but

it is not taken to a specific accounting period or date as it is done in an interim audit. Here the
 auditor will be engaged persistency or work that is on a regular financial which makes errors and

fraud to be easily prevented.

d. Balance sheet audit – This involves auditing the balance is order to produced documentary

evidence of the balance sheet prepared.

e. Management audit – this refers to the investigation of managerial activities to ensure strict

adherence of management policies and day to day transactions.

f. Procedural audit – This entails an examination and review of the financial procedure and rewards

of an organization in order to ascertain their reliability and primary bared on the compilation of

the final accounts and balance sheet.

2.8 LIMITATION OF FINANCIAL CONTROLS

No matter how well financial controls are designed, they can only provide reasonable assurance that

objectives have been achieved some limitations are interest in all financial control systems. These

include:

1. Judgment – the effectiveness of controls will be limited by decisions made with human judgment

under pressures to conduct business based on the information at hand.

2. Breakdown –Even well-designed financial controls can breakdown employees sometimes

misunderstand instructions or simple make mistakes. Errors may also result from new technology

and the complexity of computerized information systems.

3. Management override – High level personnel may be able to override prescribe policies and

procedures for personal gain or advantage. This should not be confused with management

intervention, which represents management actions to depart from prescribed policies and

procedures for legitimate purpose.

4. Collusion – Control systems can be circumvented by employee collusion. Individuals acting

collectively can alter financial data or other management information in a manner that cannot be

identified by control systems.

2.9 THE OBJECTIVES OF FINANCIAL AUDIT AND CONTROLS

Financial control objectives are desired goals or conditions for a specific even cycle, which if achieved,

minimize the potential that waste, loss, unauthorized use or misappropriation will occur. They are

conditions which are want the system of financial control to satisfy for a control objective to be effective,

compliance with it must be measurable and observable financial audit evaluates mercer’s system of

financial control by accessing the ability of individuals. The control objectives include; authorization,

completeness, accuracy, validity, physical safeguards and security, error handling and segregation of

duties.

Authorization – the objective is to ensure that all transactions are approved by responsible personnel in

accordance with specific or general authority before the transaction is recorded.

Completeness – the objective is to ensure that no valid transactions have been omitted from the

accounting records.

Accuracy – the objective is to ensure that all valid transactions are accurate, consistent with the

originating transaction date and information is recorded in a timely manner.

Validity – the objective is to ensure that all recorded transactions fairly represent the economic events that

actively occurred, are lawful in nature and have been executed in accordance with managements general

authorization

Physical safeguarding and security – the objective is to ensure that access to physical assets and

information systems are controlled and properly restricted to authorized personnel.

Error handling – the objective is to ensure that error detected at any stage of processing receive prompt

corrective action and are reported to the appropriate level of management.

Segregation of duties – The objective is to ensure that duties are assigned to individuals in a manner that

ensures that no one individual can control both the recording function and the procedures relation to

processing the transaction.

A well-designed process with appropriate financial controls should meet most, if not all of these control
objectives.