The Role of External Auditors in Fraud Detection


 The heritage illustrated dictionary of the English language defines fraud as “a deception deliberately practiced in order to secure unfair or awful gain”.  Fraud is simply an international wrongful act with the purpose of deceiving or causing harm to another company or party.  An important characteristic of fraud is the interest of the wrong does.

Internal Control System as a Means of Preventing Fraud in Nigeria Financial Institution

Accounting Project Topics for Nigeria Universities

[widget id=”related-posts-by-taxonomy-2″]

Osita Aguolu (FCA) in his fundamental, of auditing defined fraud as the intentional distortion of the financial statement, to obtain an illegal or unjust advantage.


According to K.M. Lawani (ACA) in book auditing and investigation identify the types of fraud which an auditor could come across in the course of the examination of the accounting records.

The various types of fraud are:

  • Fraud, usually by employees, involving the theft, misappropriation of embezzlement of the company’s funds usually in the form of cash, for its other assets no the following ways:
  1. wrong totals
  2. wrong brought primary
  • overstating expenditure or recording non existent expenditure
  1. non-recording of receipts
  2. store ledger
  3. salaries and wages
  • Fraud involving the in stipulation of the records and the accounts, usually by the company’s senior officers, with a view to benefiting. In some way from the false picture which they convey.
  1. overstretching the value of stock and assets
  2. understating liabilities
  • Carry – over fraud or teeming and lading. This is a situation where a cashier withdraws money from the day’s collections to meet his personal needs and now wants to make up the day’s collections with the following day’s collection.  There is the tendering for this practice to continue until the amount becomes so large that will make the cashier abscond.

An auditor could be defined as the accountant who has undergone the recognized professional course and is the member of one of the recognized accountancy bodies resident in Nigeria and who is carrying out a professional accountancy practice.


  1. To receive notice of all general meeting of the bank and to attend such meetings.
  1. To be heard in all annual generating meeting of which concern them in their capacity as auditors
  1. To be notified of any proposed to remove or replace them as required by section 364 of CAMD.
  1. To have access to vouchers, cashbooks, other financial books and documents etc. of the bank.
  1. To receive from the officers of the company or bank such information and explanation which they consider important and necessary for purpose of the audit.
  2. To receive their remuneration as seen in section 361 of CAMD.
  3. To required subsidiaries and or their auditors to provide such information and explanation as may be needed to discharge their duties.
  4. To exercise lien over books and documents of their clients for a non-payment of their fee.


          As indicated by the duties section 360 CAMD, the auditors should conduct such investigation us to enable them form opinion on the financial statements.

The duties are as follows:

  • To make a report to the members of a bank on the accounts examined by them and every balance sheet, profit and loss account presented to members of the bank in general meeting during their tenure of office.
  • To state whether in their opinion, the balance sheet, and profit and loss account have been prepared in accordance with relevant legal provisions. Also whether they have obtained all the information and explanations, which to the best of their knowledge and belief are necessary for the purpose of their audit.
  • To also report whether the balance sheet and profit and los account give a “true and fair view” of the state of affairs fo the bank and its results.
  • To report whether the directors’ report is consistent with the account as recommended by section 369 (5) of CAMD.
  • To carryout such investigation as to enable them to form an opinion on whether proper books of accounts have been kept and returns received from branches not visited by them and whether the balance sheet and profit and loss account are in agreement with the books and returns.

As identified by Osita Aguolu (FCA) in his book fundamentals of Auditing, the international auditing practice committee in association with the committee on banking regulation out the external auditors role in auditor of banks as follows:

  1. To determine the extent of his reliance on the work of the internal audit department which is very useful to his work. He therefore, evaluate the interest audit function in so far he believes that it will be relevant and sufficient determining the nature, timing and extended of his procedures.


  1. He is to use his best of judgement among other things in deciding upon the nature, timing and extent of his audit procedures in evaluation the results of those procedures and assessing the reasonableness of the judgement and estimates made by management in preparing the financial statement.


  1. The auditor is to plan, and conduct the audit so as to have reasonable expectation of detection misstatements in the banks in financial statement, which are material in relation to the financial information presented by those statements.


  1. He is also meant to carryout audit procedures designed to gain or obtain reasonable assurance that the financial statement are properly stated in all material respect. The auditor should plan and perform his audit with an attitude o professional skepticism, accepting that he may encounter conditioning or even during his examination that would lead him to question whether fraud or error exist.


  1. The external auditor is to obtain insurance that appropriate accounting policies have been followed by the have and that they have been consistently employed. They should cause the financial statement, to be adjusted if he discovers any material error to financial statements.  He finally issues management with a letter as supplementary to his audit role containing commits on deficiencies in internal control of other errors and/or omission.  Primarily , the objective of the audit to express an opinions to whether the published financial statements of the bank give a true and fair view of the bank’s financial position and the results of operations for the period for which such statements are prepared.


When auditing a bank, the auditors would first examine the system of internal control.  It is vital with bank that there is a complete system of internal check, and the auditors must also carefully examine the work done by the internal audit department.

A part from satisfying himself as to the internal controls the auditors named work will be to verify the items appearing the balance sheet.  Verification procedures are as follows:

  1. Cash in hand: It should be counted and weighed.
  2. Balance with banks: Certifications should be obtained.
  • Cheques received too late to be cleared. There should be seen and it should be checked that they were cleared promptly.
  1. Money at call and short notice: Securities should be checked against this.
  2. Special deposits with Central bank: Also these certificates should be obtained.
  3. Investments: Proper care should be taken that all are produce at the same times values should be checked too.
  • Bills: They should be examined, ensuring, provision made for discount not enquired at date of balance sheet.
  • Ledger balance on Current, deposit and Loan Account: These should be checked it must be seen that adequate provision has been made for bad debt.

The existence of fraud is an indication that:

  1. Proper accounting records have not been kept
  2. Weakness exist in the system of internal control
  3. The financial statement do not show a true and fair view

The primary duty of prevention and detection of frauds zest out of statute and by control.  The duty of care and skill expected of the auditor requires that the should obtained relevant, reliable and sufficient evidence that no material errors of fraud had occurred and if they have occurred, that they had been corrected or appropriately disclosed in the financial.



According to Okorie Onovo (ACA) in this book understanding practical auditing and investigations, he identify the following factors as the good indication that errors and fraud exist in an organization.

  1. Unexplained missing vouchers and original documents of transactions
  2. Unexplained alterations and falsification of documents and records.
  3. Unsatisfactory explanation on the part of managements or staff of transactions, which they had initiated, executed and recorded.
  4. Disagreement between the records and third party documents available or received.
  5. Unexplained reconciliation items in the bank reconciliation statement or supplies or suppliers statements.
  6. long outstanding reconciling items
  7. Frequent departures from the established system of internal control.
  8. Evidence of lifestyles of official over the above known legitimate earning.
  9. Inconsistency of ratios obtained by a skillful analysis of the financial statements.
  10. Reports of police investigation or governments requiring into affairs of the company.



(a)     The international auditing guidelines 11 relate to fraud and errors.  The guide line indicates that the responsibility for the prevention of errors.

(b)     If circumstance possible the result f his evaluation of the system of internal control indicate the possible existence of fraud or errors, the auditor should consider the potential effect on the financial statements.  If these could be of a materials effect he should perform modified or additional procedures as is appropriate to detect such errors or frauds.  When confirmed, the auditor should satisfy counsel of that the effect of any fraud is properly reflected in the financial statement and any errors corrected.  When the auditor is unable to obtain evidence to confirm or dispel the suspend of fraud, the auditor should assess the possible effects on the financial statements and then modify his report as in appropriate.


(c)      When a fraud is uncovered, the auditor not assume that is it an isolated case.  If the error or frauds is such as would have been presented or detected by the existing system of control, the auditor should reconsider his earlier evaluation of the system and if necessary adjust the nature timing and extent of his sustain procedures.



  • In addition to his statutory duty to the members of the enterprises on the truth and fairness of the financial statements, the auditor should report to the management of that enterprise if the auditor has brought to light any fraud or irregularities.  The auditor has brought should ensure the management are informed promptly and that, in the case of a company a report is made to the board of director or, if appropriated the audit committee.  It is particularly important that the auditors report to a suitable senior level within the enterprise if he suspects that management may be involved in or are condoning irregularities legal advice may be required if be believes that his report may not be dated upon is unsure as to whom he should report.


  • If after taking account of any adjustments made an regulating materially affects the view given by the financial statements the auditor should qualify his opinion on those statemtn accordingly.  However except in certain parts of the public sector, he has no specific responsibility to report an irregularity in his audit report if the financial statements give a time and fair view despite the occurrence of the irregularity.


An auditor plans and conducts the audit before the report is issued to draws all the evidence together in order to form a conclusion as to the truth and fairness of the financial statements.

It is not unusual that sometimes things go wrong.

  • An auditors may fail to discover a material fraud or error and deliver an unqualified opinion on a set of accounts which in reality is significantly misstated.

(b)     Alternatively an auditor may fail to recognize is not appropriate sometimes after the years end the company may go into liquidation and question may be asked about the absence of any warning in the auditors report. The failure to discover the fraud or error of financial

irregularities in the company may result from negligent behaviour on the part of the auditor.  On the other hand carried out in accordance with statutory auditing standard and the fault may be elsewhere, if management decides to commit fraud or conceal an error, so in rapidly changed financial circumstance after the singing of the unqualified and it report and the issue of the accounts the responsibility or accounting blame will always lie with the courts.  If negligence on this part of the auditor is upheld, the question then arises as to low compensation should occur, the most common source of liability for auditing function with the due care.  Those law suits often involve defalcations that the auditor would have uncovered these if he had not been negligent.  The  following cases throw more light on the auditors liabilities.

  1. Re the Wetiministed Road Construction and Engineering Company Ltd. (1937) failure to detect to misstatement in the financial statement. The auditor does not simply accept is certificate.  He must ask how the figures are aimed of.  It is his duty to check the accuracy of each figure. Because those were adequate records, which would have enable the auditor to carry out this check, he was held imphgent in simply accepting the certificate.
  1. Re London and General Bank (No.2) (1895) duty to report fails about balance sheet not properly drawn up. It was held that an auditor who does not report to the shareholders the facts of the case when the balance sheet is not properly drawn up is quality of misfeasance.

The liability of the auditor drives from the financial statements which he has audited and also from the report he has made.  Commencing any special investigations he has carried out.  In discussing auditor’s liability we shall consider his liability understood major source.


Liabilities of the auditor under common law.  The type and form of the duties will depend on the precise terms of his appointment.  Thus it is essential for he auditor on his own interest to define and acquainting himself with those terms and whenever possible, agree them with his clients, before he start of audit.  He ought also to insist upon such terms be reduce to writing so as to minimize the chances of any misunderstanding as to what is required of him.  If the auditor is appointed for the purpose of the companies acts or other similar legislation, the terms of his appointment will be thus spelt out within the act together with the except duties employment itself.  If the audit is not for purpose of the companies not the term of his appointment will be governed exclusively by his contract.  If the audit is limited in any way and the audit is carrying out duties not strictly these of auditing the audit should make the limitations clear in any report that he might issue in respect of the assignment.

Auditors duty of care.  The Companies and Allied Matter Decree No.1 of 1990 required the auditor to state whether a set of account fair and true and Fairview.

The act does not define the amount of work or degree of diligence required to express this opinion in order to establish the degree of care required of an auditor, the courts have pronounced various principles.

Justice Lindley in the London and General Bank (1895) made on attempt to define what is expected of the auditor and he says.

An auditor is not bound to do maintain exercise reasonable care and skill in making enquires and investigations.  He must be honest in other words.  He must not testify what he does not believes than what he certifies is true.  What is reasonable care skill and caution must depend on the circumstances of each case.

In it general acknowledged that the standard of care would improve as the techniques of auditing are improved.  In the case of RC: General and Son Ltd. 1967, the court stated that auditing standard had improved since 1896 when the Kingston cotton will case was decided that this was sufficient ground for distinguishing between the two cases.

It was further stated that it was not sufficient to sate that an auditor must approach his work with enquiring mind, not suspicious of dishonesty by suspecting that somebody may have made a mistake some where and that a check must be made to ensure that there has been none.

The opinion of most authorities is that cases presented before the courts today’s will be decided on the basis of goods and current auditing practice.

The accounting bodies in the UK have made their members to use the auditing standards because the courts may regain those principles is represented current good practice.

When an auditor is put on inquiring he must probe the mater exhaustively to the bottom.

  1. dishonesty of staff
  2. where deductions made one unreasonable
  3. When representations by management are unsatisfactory.

When put to inquiring the square principle is that if an auditor is put on inquiring he must to be the bottom means that he auditor must investigated the matter thoroughly until he is reasonable satisfied.

Circumstances when an auditor is put on inquiry:

  1. Altered Documents: thus, it was held that where invoices have been altered.  The auditor should have been put on enquiring and he should have probed the matters objectively.  This failure to do this constituted negligence.
  1. Unusually large cash balances: Similarly where the company was keeping much more cash than would usually be required failure of the auditor to carry out a physical cash cannot was held to be neglected.
  1. Failure to make reasonable deductions if the auditor fails to make reasonable deductions from the facts before him, he will be liable.
  1. Reliance on management representations: The auditor is entitled to rely on management representation where there are an auditor or put on enquiring reliance on management representation is both a defect of law and common sense.
  1. Knowledge of dishonesty to servant it was held that the

auditor knows that the particular employee had previously been dishonesty, this should have put the auditor on enquiring and hence should affect the nature and details of the checks the auditor might wants to perform in relation to the matter with which the offer was concerned management responsibility.

The primary responsibility for the prevention and

irregularities rest with management.  This responsibility may be partly discharged by the institution of inadequate system of internal control.  The responsibility of management in this regard is even higher where assets are helping a fideucing capacity on behalf of the public or the third party, this is the case with bank and insurance companies.   In advising the directors of a company are regarded in law as acting in a stewardship capacity concerning the property, which is under their control.

Consequently they have a duty to take steps to ensures the safety of the company assets.


The legal position is that it is not the auditor responsibility to detect or present frauds and other irregularities (Rc. King Sons Cotton Mill. 1896).

The auditor’s duty is to state whether is set of accounts give a true and fair view and comply with the relevant legislation.  The auditors these possibility is to design and invaluable his work with a view to detecting those error and regulations, which might impair, the truth and fairness of the financial statement.  Thereafter in obtaining audit evidence, the auditor should satisfy himself the those errors or irregularities which may be material to the financial statement have not occurred and that if they have occurred they are either corrected out his responsibility the auditor should exercise reasonable care and skill and apply current auditing stand ads and principles.  In the audit of some ministries and parietals, in audit may be mistrusted to look fore rows and irregularities.  In such cares, the auditor obliviously have the responsibility the draft guidance, fraud and other irregularities provides some general assistance to identify circumstances, which are possible indicative of irregularities.

  1. Missing vouchers or documents
  2. Evidence of falsified documents
  • Unsatisfactory explanation
  1. Figures, trends, or results which do not records, or results which do not record with explanation.
  2. Unexplained items on reconciliations or suspense account
  3. Evidence of disputes
  • Unusual investment of funds held in a confederacy capacity
  • Evidence that the system of internal control Is not operating as it was believed or intended to.

As regards to be taken at the discovery of potential errors and

irregularities, the guideline states if during the course of existence of errors or irregularities the following action should be taken:

  • Unless it is possible to conclude that with additional testing the circumstances encountered could not give rise to an irregularities or errors having the material effect on the financial statements the auditor should perform additional test.
  • If after additional testing has been performed and it appear that an error or irregularity has occurred, the auditor should considered statement analyzing and projecting the result of his test.
  • Where the auditor is satisfied that irregularities are not material to the financial statement he should consider discussing it with the appropriate level of management I order to determine what further action should be taken.  Reporting on frauds and irregularities. In addition to the statutory duty to report to the shareholders of a company on the truthfulness and fairness of the account the auditor should report to the management of the company if the audit has brought to light any irregularities.

In his report to management, the auditor may consider it

appropriate to make recommendation for improvement in internal controls so as to prevent such irregularities in future.

It taking account of any adjustments and irregularities materially affects the view given by the accounts the auditors should quality his opinion accordingly however, he has no specific responsibility to report on irregularity on his audit report if the financial statements give a true and fair view despite the occurrence of  the irregularity.


In the course of his audit, the auditor may discover fraud or other irregularity perpetuated by his client.  Normally, the auditor’s duty of confidentially precludes from him reporting any matter to third parties without his clients permission.  However in certain circumstances the auditor may disregards auditor may be legally bound to disclose the commission of criminal offense if ordered to do so by the court or by a government officer empowered to request such information further more an auditor may elect to disclose information voluntarily where there is public duty involved.  A public duty arises if the auditor is aware of an act of intended criminal offenses likely to cause serious harm to an individual or affect a large number of people where the auditor is not sure of his position he should take legal advice and if his efforts are frustrated by management he may considered resigning his appointment under the provision of the company’s Act.

The auditors duty is varying out his audit is to exercise reasonable care in all he does using generally receipted auditing techniques to satisfy himself that he accounts accurately reflect the true financial position of the clients business where the auditors discover any mater which puts him on inquiring, he is bound to investigate such matter until he resolves it to his own reasonable satisfaction it would be an imprudent auditor who accept any explanation without having to investigate the matter sufficiently to enable him assess whether such explanation is in fact reasonable.

[simple-links category=”3206″]

Leave a Reply

Your email address will not be published. Required fields are marked *