THE ROLE OF AUDIT IN SMALL AND MEDIUM ENTERPRISES (A CASE STUDY OF FEEDWELL SUPERMARKET, AJIBADE BRANCH, IBADAN, OYO STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Small and Medium Enterprises (SMEs) in Nigeria is the most important sector of the economy not just in the higher number of people employs but in its contribution to the GDP, tax revenue and fast dissemination of technology. In countries such as Indonesia, India and Taiwan, Small and Medium Enterprises contribute over 40% to the GDP growth of respective counties. In developed economy of Europe and America, SMEs make up 94 percent of all business in these countries. Berry et al 2015 outlined three reasons why developing countries should pay attention to SMEs. This includes:

1. SMEs performance is better on creating productive labour
2. The productivity increase through investment and changing technology
3. SMEs have more flexibility than big companies.

Despite of these sector contributions to poverty alleviation, sustainable development and employment generation, there are still some problems that limit the potentials of Small and Medium Enterprises in Nigeria to grow particularly in the area of book-keeping, internal control, auditing and risk assessment. Small and medium enterprises (SMEs) had emerged as an important area of research especially when it comes to financial and business management. Nigeria adopted a common definition of Small and Medium Enterprises to facilitate identification of Small and Medium Enterprises in the various sectors and subsectors. Due to the nature of this business which has a small amount of capital for investment purposes, it is impossible for them to invest and adopt such sophisticated internal control in monitoring their business activities. Therefore, Small and Medium Enterprises are unable to set up a proper control system by including a department such as compliance or audit department which could help in monitoring, preventing and detecting fraudulent activities that occur in the business. Absence of such controls in the small and medium businesses could cause the rate of fraud increasing every year and especially toward Small and Medium Enterprises which the market is growing exponentially. Most businesses are frailty in facing the losses caused by fraud and those which are less is able to absorb the losses may face bankruptcy which probably affecting the Small and Medium Enterprises as well. To help in preventing and detecting fraud, the Auditors plays a vital role which the process is affected by the management, the board of directors and other personnel that is designed to minimize risk exposures to an acceptable level given the company’s objectives. Hopwood, Leiner & Young (2012) noted that auditing is process oriented which focus more on business processes rather than on the outcomes of the processes. The main components of effective auditing process are the control environment, risk assessment and management, control activities, information and communication, and monitoring. Therefore, it is good that the business owner could establish a strong and efficient auditing system as well as an internal audit department to reduce the chances of fraud occur which may cause the company a huge loss (Shanmugam et al 2012). Thus, this research will be based on the roles of audit in Small and Medium Enterprises in Nigeria to determine the importance of the auditing system implementation towards Small and Medium Enterprises activities.

1.2 STATEMENT OF PROBLEM

The place of auditing in any business, irrespective of its size cannot be overemphasized. International Standards on Auditing (ISAs) require close examination of an entity and its environment, including the entity’s control environment and internal control. Auditors are required to assess how management identifies and mitigates risk as part of the audit-risk assessment. Audit of Small and Medium Enterprises have proven to be among the most worrisome for professional accountants because of the inadequacy of the auditing (Olatunji, 2013). Except for statutory demand, small and medium enterprise hardly give serious thought to process of sound accounting system, risk assessment and auditing hence the imminent and untimely collapse of many of these establishment.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the role of audit in small and medium enterprises. Other general objectives of the study are:

1. To examine the functions of auditors in Small and Medium Enterprises.

2. To examine the challenges facing small and Medium Enterprises (SMEs) in adopting effective auditing in Small and Medium Enterprises in Nigeria

3. To examine the impact of audit on the growth of small businesses in Nigeria.

4. To examine whether auditing affects the performance of small and medium Enterprises.

5. To examine the relationship between audit and the performance of Small and Medium Enterprises.

6. To suggest ways in which auditing will aid in assisting the Small and Medium Enterprises to achieve their goals and objectives.

1.4 RESEARCH QUESTIONS

1. What are the functions of auditors in Small and Medium Enterprises?

2. What are the challenges facing small and Medium Enterprises (SMEs) in adopting effective auditing in Small and Medium Enterprises in Nigeria?

3. What are the impacts of audit on the growth of small businesses in Nigeria?

4. How does auditing affect the performance of small and medium Enterprises?

5. What is the relationship between audit and the performance of Small and Medium Enterprises?

6. What are the ways in which auditing will aid in assisting the Small and Medium Enterprises to achieve their goals and objectives?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: Auditing has no impact on small and medium scale enterprises in Nigeria.

H1: Auditing has a significant impact on small and medium scale enterprises in Nigeria.

Hypothesis 2

H0: There is no significant relationship between auditing and SME performance in Nigeria.

H1: There is a significant relationship between auditing and SME performance in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study is intended to benefit the following:

The study findings will be of immense importance in the sense that they will assist management of small and medium enterprises to realize how auditing can affect its operations and performance.

Academicians and researchers- this study is intended to add knowledge to previous studies done on auditing by primarily focusing on small and medium enterprises and performance. The study shall therefore serve as a reference for further research on the topic of relationship between auditing and performance of Small and medium enterprises.

1.7    SCOPE OF THE STUDY 

The study is based on the role of audit in small and medium enterprises, a case study of feedwell supermarket Ajibade branch, Ibadan.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS  

Audit: according to Taylor (1982), an audit is the independence examination of the financial statement of an organization with a view to expressing an opinion as to whether these statements give a true and faire view and comply with the relevant statutes for the period under review and of the financial state of the organization at the end date so enabling the auditor to report thereon.

SMEs: Small and medium sized enterprises are commercial business entities that are generally distinguished from large companies by their size and turn-over. Medium-sized enterprises have fewer than 250 employees and annual turnover not exceeding EUR 40 million. Small enterprises have fewer than 50 employees and an annual turnover not exceeding EUR 7 million (European Commission, 2003).

Enterprise: Enterprise refers to a unit of economic organization or activity, especially a business organization (Merriam-Webster, 2008)