A CRITICAL ANALYSIS OF THE IMPORTANCE OF AUDITING IN THE AUTHENTICATION OF FINANCIAL STATEMENT OF BUSINESS ORGANISATIONS IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The viability of every organisation depends on the implementation of efficient internal audits, which are necessary to prevent unethical actions involving intentional omission of crucial information to facilitate fraudulent operations. Typically, financial statements are manipulated, leading to scandals that might harm investors' trust and potentially undermine the capital market (Ajao & Oluwadamilola, 2020). Several instances of accounting scandals have taken place globally, including the Enron scandal in 2001, the Cadbury Nigeria crisis in 2006, the WorldCom scandal in 2002, the AIG scandal in 2005, and the Waste Management scandal in 1998. Some argue that the scandals happened because the organisation had a weak internal control system. This calls for strict regulations to improve standards for auditing, accounting, and corporate governance. Internal auditing is a crucial component for the efficient operation of any company, including insurance businesses, since it facilitates informed decision-making for the organisation. It provides the guarantee that well-informed choices have been made, aligning with the facts presented in financial statements, ensuring their reliability. This implies that assets are accurately valued and safeguarded, while all important responsibilities are carried out comprehensively. Without dependable internal auditing techniques, the strategic processes of goal-setting and communication procedures within organisations may be at risk, while information processes are likely to be compromised (Ajao & Oluwadamilola, 2020). 

Financial statements, also known as financial reports, are official documents that provide detailed information about the financial activities and status of a firm, individual, or other entity. The financial information is organised in a systematic way and presented in a clear and comprehensible format. Typically, financial statements are comprised of four fundamental components and are supplemented by a management discussion and analysis (Nyovest, 2018). The purpose of financial statements is to present information regarding the financial status, performance, and alterations in financial status of a business, which is valuable to a diverse group of individuals in making economic choices. Financial statements must possess qualities of comprehensibility, relevance, reliability, and comparability. The reported assets, liabilities, equity, revenue, and expenses are closely linked to the financial status of an organisation. Financial statements are designed to be comprehensible to readers who possess a "reasonable understanding of business and economic activities and accounting, and who are willing to diligently examine the information" (Jasper et al., 2020). 

Users may utilise financial statements for various objectives (Jimoh, 2020). Owners and managers rely on financial accounts to make crucial business choices that impact the ongoing operations of the company. Subsequently, a comprehensive financial analysis is conducted on these statements to furnish management with a more intricate comprehension of the numerical data. These remarks are also included in management's annual report to the stockholders (Sixtus et al., 2020). Employees also require these reports to facilitate collective bargaining agreements (CBA) with management, particularly in the context of labour unions. Additionally, individuals rely on these reports to debate their remuneration, advancement, and rankings. Prospective investors utilise financial statements to evaluate the feasibility of investing in a business. Financial studies are commonly utilised by investors and are developed by experts known as financial analysts. These analyses serve as the foundation for investors to make informed investment choices. Financial institutions, including banks and lending businesses, utilise these assessments to determine whether to provide a company with new working capital or issue debt securities, such as long-term bank loans or debentures, to support expansion and other major expenses. Shareholders occasionally seek information on the management of share capital, which can be provided through financial statements. This is important for shareholders to ensure that capital stock is being handled effectively and responsibly (Sixtus et al., 2020). 

Auditing is essential for ensuring the financial well-being and accountability of commercial organisations. Audit is the procedure by which an organization's financial statements are scrutinised to verify their accuracy, adherence to relevant rules and regulations, and the dependability of the reported financial information (Shakudeen, 2019). A financial statement audit is a meticulous evaluation conducted by professionals to scrutinise a company's financial statements. The objective is to ascertain whether the financial statements accurately and comprehensively depict a company's operations and financial status, in accordance with the Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (Ramsey et al., 2019). Auditors provide their professional assessment regarding the accuracy of an income statement, balance sheet, statement of cash flows, and all the other disclosures. According to Generally Accepted Accounting Principles (GAAP), financial statement audits must be conducted by external auditors who are independent of the organisation being audited (Sam, 2020).

A financial statement audit is distinct from other prevalent forms of audits, such as tax audits and internal audits. The IRS conducts tax audits to verify the precision of tax returns and the amount of taxes paid. Internal audits are conducted by corporate personnel and can assume various formats as directed by company management. When the internal audit department examines financial accounts, it does so to benefit business management and is not regarded as an impartial evaluation for external stakeholders (Sam, 2020). Companies generate financial statements to provide information regarding their financial status and operational effectiveness. Various stakeholders, such as investors, utilise this information to inform their economic decision-making processes. Usually, the individuals who possess a corporation, known as shareholders, are not the ones responsible for its management. Hence, the proprietors of these corporations (along with other interested parties like banks, suppliers, and consumers) find solace in the fact that an unbiased verification ensures that the financial statements accurately depict the company's financial status and achievements in significant aspects (Puth et al., 2019).

In order to increase the level of trust in the financial statements, a competent external entity, known as an auditor, is hired to scrutinise the financial statements and accompanying disclosures prepared by management. The auditor's role is to provide their expert judgement on whether the financial statements accurately represent, to a significant extent, the company's financial performance during a specific period (as shown in the income statement) and its financial status as of a specific date (as shown in the balance sheet), in accordance with the applicable Generally Accepted Accounting Principles (GAAP) (Sam, 2020). Legal obligations often need this. The business landscape in Cameroon offers distinct difficulties and prospects. The nation is distinguished by a combination of major businesses, small and medium-sized enterprises (SMEs), and an expanding entrepreneurial sector. Nevertheless, obstacles of considerable magnitude arise due to factors such as intricate regulatory frameworks, economic volatility, and the widespread adoption of informal business practices. Reliable financial reporting and competent auditing play a vital role in building investor confidence, facilitating access to capital, and promoting economic stability. This study will provide a valuable contribution to the continuous efforts aimed at enhancing financial reporting processes, bolstering investor trust, and promoting the general economic development of Cameroon by emphasising the importance of auditing.

1.2 Statement of the problem

In today's corporate world, the credibility and precision of financial statements are crucial for stakeholders, such as investors, regulators, and management. This requirement is especially urgent in emerging economies where financial reporting systems may be less developed. In Cameroon, like in many comparable situations, firms are making efforts to attain openness and accountability, although they face substantial obstacles in guaranteeing the dependability of financial accounts. The legitimacy and dependability of financial statements of commercial organisations in Cameroon are of utmost importance in order to cultivate investor confidence, guarantee adherence to regulations, and maintain economic stability. Nevertheless, the veracity of these financial accounts is sometimes doubted as a result of occurrences of financial misrepresentation, deceit, and insufficient compliance with accounting principles. This erodes stakeholder confidence and impedes the broader business climate.

An opinion does not provide a guarantee of a specific result, but rather represents a professional assessment or evaluation. Park (2017) contends that due to the inherent limits of an audit, the auditor is unable to achieve complete certainty that financial statements are devoid of significant errors. These are the result of various factors. For instance, numerous elements in financial statements need subjective judgements or involve a certain level of uncertainty, such as accounting estimations. Therefore, these things are inherently ambiguous and cannot be completely eradicated through the use of auditing techniques (Park, 2017). It cannot be presumed that all facts and details in audited financial accounts have been thoroughly examined and confirmed by auditors, and are thus guaranteed to be completely correct. The auditor acquires a satisfactory level of confidence by collecting evidence through the methodical examination of financial documents (Olsen, 2022).

In addition, fraud has a detrimental impact on the trust that is essential for organisations to engage in business transactions. The management is accountable for the operation and oversight of the company, as well as the prevention and detection of fraudulent activities. Preventing and detecting fraud poses challenges due to its deliberate concealment and potential involvement of several actors in collaboration (Allen, 2019). While audits conducted in compliance with applicable GAAS standards are executed correctly, they may nonetheless fail to uncover significant instances of fraud. Nevertheless, auditors have the duty to acquire reasonable certainty that the financial statements are not significantly incorrect due to fraudulent activities. Significantly, if the auditors develop suspicions of fraud during their work, several aspects will be altered. This includes their assessment of risk, the type and level of communication with those responsible for governance, the type and level of audit procedures, and the evaluation of the efficiency of the relevant internal controls and processes. The presence of an impartial external audit typically acts as a deterrent against fraudulent activities (Angel, 2021).

Although auditing plays a crucial role in evaluating and validating financial statements, there are notable obstacles that impede its efficacy in Cameroon. These factors comprise insufficient resources and training for auditors, inadequate enforcement of auditing standards, and possible conflicts of interest. Furthermore, the regulatory structure may lack the necessary strength to adequately support thorough and unbiased auditing methods. This issue is worsened by the heterogeneous composition of corporate entities in Cameroon, encompassing both expansive multinational corporations and smaller and medium-sized enterprises (SMEs), each with distinct levels of financial intricacy and auditing requirements. The variation in resources and capabilities among these organisations leads to varying levels of audit quality and financial reporting requirements. This study aims to thoroughly analyse the significance of auditing in verifying the financial statements of corporate organisations in Cameroon.

Objectives of the study

The primary objective of this study is to critically analyze the importance of auditing in the authentication of financial statement of business organizations sin Cameroon. Specific objectives of this study are to:

To ascertain the current state of auditing practices in Cameroon's business organizations

To determine the impact of auditing on the authenticity and reliability of financial statements in Cameroon's business organizations

To identify the challenges faced by auditors in ensuring the authenticity of financial statements.

To offer measures to enhance the effectiveness of auditing practices in Cameroon's business organizations.

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the current state of auditing practices in Cameroon's business organizations?

What is the impact of auditing on the authenticity and reliability of financial statements in Cameroon's business organizations?

What are the key challenges faced by auditors in ensuring the authenticity of financial statements?

What measures can be implemented to enhance the effectiveness of auditing practices in Cameroon?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: Auditing has no significant impact on the authenticity and reliability of financial statements in Cameroon's business organizations.

Ha: Auditing has significant impact on the authenticity and reliability of financial statements in Cameroon's business organizations.

1.6 Significance of the study

The study's importance rests in its capacity to improve the comprehension and execution of auditing practices in Cameroon, with extensive consequences for multiple stakeholders. The study's results seek to improve the efficiency of auditing methods in Cameroon, encourage financial openness, and contribute to the establishment of a stronger and more trustworthy financial reporting system.

This study examines the function of auditing in verifying the accuracy of financial accounts, providing businesses with insights into how audits can enhance financial integrity and credibility. This can result in improved financial oversight and enhanced accuracy in reporting. Precise and clear financial statements are essential for making well-informed decisions. This study emphasises the need of auditing in offering confidence regarding the dependability of these assertions, therefore safeguarding the interests of investors and creditors. 

Moreover, the study highlights the difficulties and constraints in existing auditing procedures, providing valuable perspectives that might contribute to the development of improved and streamlined auditing techniques. This might assist auditors in improving their methodologies and adjusting to the distinct requirements of the Cameroonian market. It serves as a foundation for assessing and modifying auditing rules and regulations to more effectively tackle the identified difficulties, guaranteeing that auditing practices remain strong and efficient.

Moreover, the report provides empirically supported suggestions for enhancing auditing standards and processes. This information can be used to make policy decisions and implement regulatory reforms that aim to improve financial reporting and governance in Cameroon. 

Moreover, the study enhances comprehension of the significance of auditing in attaining financial transparency and accountability, hence augmenting their reputation and appeal to potential investors and partners. Robust auditing procedures enhance economic stability by guaranteeing that financial statements precisely depict the financial well-being of organisations, thereby enticing foreign investment and fostering sustainable economic expansion.

This study offers a significant case study that is helpful for academic research and education in the areas of auditing, accounting, and business management. This resource might serve as a valuable reference for instructing and conducting additional study on auditing techniques specifically in developing economies.

1.7 Scope of the study

Broadly, this study focus is to critically analyze the importance of auditing in the authentication of financial statement of business organizations in Cameroon. Specifically, this study seeks to ascertain the current state of auditing practices in Cameroon's business organizations and determine the impact of auditing on the authenticity and reliability of financial statements in Cameroon's business organizations. 

Further, this study will focus on identifying the challenges faced by auditors in ensuring the authenticity of financial statements and it also seeks to suggest measures to enhance the effectiveness of auditing practices in Cameroon's business organizations.

 The study is carried out in Cameroon.

1.8 Limitations of the study

As with any human endeavour, the researchers experienced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the topic, due to the limited availability of data about a thorough examination of the significance of auditing in verifying the financial statements of corporate organizations in Cameroon. Hence, a significant allocation of time and exertion was necessary to ascertain the appropriate materials, books, or information and amass data. 

Furthermore, this study is constrained by its small sample size and narrow geographical scope, focusing solely on Yaounde, Cameroon. Therefore, the conclusions of this study cannot be extended to other situations, thus requiring further investigation. 

Moreover, the researcher's restrictions were primarily due to financial constraints, as they are a student without any source of income to sustain themselves. The exorbitant transportation charges at the research location posed a challenge in meeting the expenses for transportation fees.

Furthermore, the researcher faced a time constraint due to the need to do this research while simultaneously fulfilling the obligations of attending lectures and participating in other educational activities.

1.9 Definition of terms

Audit: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

Corporate governance: Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance.

Accountability: Accountability is the practice of being held to a certain standard of excellence. It is the idea that an individual is responsible for their actions and, if that individual chooses unfavorable actions, they will face consequences.

---

---