CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Auditing is now regarded as a sophisticated professional assurance service performed in the interests of a wide variety of parties including companies, shareholders and investors. The practice of auditing has become increasingly important in the corporate market place. According to Maris (2012), the term ‘auditing’ is described as the accumulation and evaluation of information to determine whether a company’s financial report is in compliance with the established criteria and legislative requirements. By conducting an audit, an opinion is formed by the auditor as to the credibility of information contained in a company’s financial statement. Thus, the auditing process ensures that figures in the financial statements are materially correct, which in turn add value to such information. Henderson (2010) described an auditor as an independent professional person qualified to perform an audit. In accounting, an auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements. The term is sometimes synonymous with “comptroller”. In latin language the word is ‘audire’ which means ‘to hear’. The word ‘audit’ was derived from ‘audire’ and the person appointed to examine the accounts came to be known as the auditor. An audit of accounts is primarily intended for the use of the audit client, the company whose accounts have been audited. The auditor owes the audit client a duty of care in tort and also (usually) under the terms of the audit contract. Auditing plays an important role in the successful operation of a business unit. The impetus behind the emergence of an auditor on the business scene was the managerial revolution. Managerial revolution simply means the separation of ownership from management. This development was brought about by the advent of large business organizations that are jointly owned by several individuals where it became practically impossible for the owners to manage the companies on their own.
Consequently, the owners of such companies appointed other people to run the companies on their behalf. Thereupon, a need arose for periodic link between the owners (shareholders) and managers (management) of such corporations. The major link between the owners and management is the periodic reports on financial affairs and level of progress achieved by the business which are made by management (Board of Directors) to the owners (shareholders). The periodic reports referred to above are the financial statements. To the shareholders, the financial statements prepared by the management are nothing but assertions that need to be authenticated. For this reason, a qualified and independent accountant either as an individual or a firm, is required to examine and attest to the reliability of the information provided in the financial statements by management. Hence, Auditor gives credence to the financial statements in order to protect the interests of the shareholders. Furthermore, it is not only the shareholders that are interested in the reliability of the financial statements. Other parties like potential investors, lenders, security or financial analysts, customers, suppliers, employees, government and the general public are equally interested in the financial statements. On this account, the Auditor as a professional has a duty of care to protect the interests of all these parties in the course of performing his duties for a given client. What makes External Auditor unique to shareholders and users of financial statements is his “independence.” Furthermore, Auditor’s Report (opinion) is one of the most essential aspects in the Auditor’s work. This is because it is his ultimate opinion on the financial statements that will inform the degree of reliability that should be attached to such financial statements.
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