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THE EFFECTS OF QUALIFIED AUDIT REPORT ON A COMPANY

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A STUDY OF UACN PLC AND PZ CUSSONS PLC

Topic Description

CHAPTER ONE

INTRODUCTION

  • BACKGROUND OF THE STUDY

The practice of auditing in a primitive in form can be traced back to ancient times.  Auditing, as it exists today was established only in the latter part of the19th century.  Under company form of organization, the share holders as a body, delegated the management of the company, the board of directors and periodically the board submits to the shareholder the accounts of the company in order that the members may see the financial position and the profit or loss of the undertaking in which they are interested.

In these circumstance, the need arose for some means by which share holders as s body night be satisfied that the accounts presented to them by their board of directors show an objective view of the financial position and results of the company.

It was for these reasons, therefore, that the practice developed of appointing auditors whose duty it was to verify on behalf of the shareholders the accounts of the director and to report there on to the shareholders.  Obviously is imparacticable and impossible for every shareholder of a company to examine the brooks and records of company.

It was for these reasons, therefore that the practice developed of appointing auditors whose duty it was to verify on behalf of the shareholders and therefore the shareholder as a body of auditors to act for them.

Under the English companies act of 1900, the auditors appointed were one or two of the shareholders of the company.  However, the chosen auditors commonly had no technical qualifications, they were probably not able to carry out a very effective audit nor were they paid anything for the work they did.  A latter act did provide for them to employ a clerk to do some work, whose remuneration should be provided by the company.

It was the amended English companies act that first made it legally compulsory for every company to appoint independent auditors as we not know them and provide for their remuneration.

An audit cannot be s substitute for internal control over transactions exercised at the time, nevertheless, an assessment of these control must the made by the auditor so that he can determine the value of detailed checking necessary to enable the discharge of his primary audit function. This  also then provides services to management in putting out deficiencies in internal control and making recommendations for improvements.

Note that the responsibility for the prevention and detection of irregularities and fraud rest with the management who may obtain reasonable assurance that this responsibility will be discharged by instituting an adequate system of internal control.

The auditor should recognize the possibility of material [irregularities or fraud which could, unless adequately disclose distort the results or state of affairs shown by the financial statement.  The audit should there fore be carried out in such a way that it is planned so that the auditor has a reasonable expectation of detecting major misstatement in the financial statements resulting from irregularities or fraud.

The research study is therefore, an attempt to actually establish the effects of a qualified audit report on a company.  Considering the disagreement between the board of directors of UAC Nigeria plc and the company’s auditors regarding the amount of the revaluation surpluses included in capital reserves to be released to profit following the transfer of the company’s investment properties to the newly incorporated UACN property development company plc and the public offer for sale of 54% that company’s shares in UPDC Plc.

The company’s board was of the opinion that it would be imprudent to recognize a profit on the surpluses attributable to the 46% of properties it still equitably owned by virtue of its shareholding in UPDC.

In the opinion of the auditors, the total profit of N4.5 billion should have been recognized as the surplus arising from this transaction.  The company has no further direct ownership rights to the properties.  Accordingly profits is understated by N2.1 billion.

However, in the case of PZ Cussons Nigeria Plc payment was made out of profit arising from the use of the company’s property and fixed asset sold for divided payment.  But PZ Cussons Nigeria Plc was unable to pay its debts as they fall due thereby going against section 380 of the companies and allied matters act of 1990.

1.1.   STATEMENT OF THE PROBLEM

          The primary purpose of an audit is to produce a report by the auditor of his opinion of the truth and fairness of financial statements so that any person reading and using them can have believe in them.

The issue here is the effects a qualified opinion or report would have on a company. It is a known fact that many business organizations are in the habit of corporate deceit where financial statements are made to appear better than the true position of affairs in the business organization. As a result of this, many business organizations have been forced under after declaring fantastic results out year and.  This has been attributed to trying to stay in competition.  Qualified report or opinion could be due to certain reasons such as disagreement.

In our study, there is the case of disagreement between the companies board and the company auditors of UAC Nigeria plc regarding the capital reserves; to be realized to profit, following the transfer of the company’s investment properties to the newly incorporated UACN property development  company Plc [UPDC] and the public offer for sale of 54% of the company’s shares in UPDC.

The board of UNCN Plc was of the opinion that it would be imprudent to recognizes a profit on the surpluses attributable to the 46% of properties it still equitably owned by virtue of its shareholding in UPDC.

He company’s auditors have stated in their reports that the UANC Plc should have recognized the entire n4.5 billion as profit in their financial statements instead of recognizing only N2.4 billion interest it has in UPDC and retaining the other 46% interest in UPDC.

The auditors therefore stated in their report that profit was understated in the financial statements of UACN Plc by N2.1 billion representing 46% of the surplus n4.5 billion that was note included as income in the financial statement of UACN Plc.

In the case of PZ Cussions Nigeria Plc, PZ Cussons was unable to pay its debts as they fall due when technical analysis were carried out on the stock for the period ended December 1998.  this lead to a qualified opinion report by the auditors as the auditors stated that it would constitute a branch of section 380 of the companies and allied matter act of 1990 which states that unless a company can pay its debts as at when due, payment should not be made of out profits arising form the use of the company’s property and fixed asset sold for dividend payment which the company PZ Cussons has done already. This lead to a disagreement between the board of PZ Cussons Plc and the company’s auditors leading to a qualified report as a auditors stated that the company finances in the loss position would not allow the company declare dividend.

 

  • OBJECTIVES OF THE STUDY
  1. To compare the market share prices and the earnings per share of UACN Nigeria Plc and PZ Cussons Nigeria Plc form 1992 to 1997.
  2. To determine the relationship between the market share price and the earning s per share of UAC Nigeria Plc and PZ Cussons Nigeria Plc from 1998 to 2003.
  3. To compare the PE ratio of the two companies for the periods 1992 to 1997 and 1998 to 2003.
  • RESEARCH QUESTIONS
  1. Does the market share price and earnings per share of UAC Nigeria Plc have any relationship with the market share price and earning per share of PZ Cussons Nigeria Plc 1992 to 1997?
  2. Does the market share price and earning per share of UAC Nigeria Plc have any relationship with her market share price and earnings per share of PZ Cussons Nig. Plc 1998 to 2003?
  3. Is there any relationship between the market share prices and the price-earning ratio of UAC Nigeria Plc and market share price and price earning ratio of Pz Cussons Nig plc from 1992 to 1997?
  4. Is there any relationship betwent he market share price and the price and the price earning ratio of UACN Plc and the market share price and PE ratio of PZ Cussons Plc from 1998 to 2003?

 

  • STATEMENT OF HYPOTHESES
  1. The market share price and earnings per share of UAN Nig. Plc have no significant relationship with the market share price and earnings per share of PZ Cussons Nig plc form 1992 to 1997.
  2. The market share price and earning per share of UAC Nig. Plc have no significant relationship with the market share price and earning per share of PZ Cussons Nig. Plc 1998 to 2003.
  3. There is no significant relationship between the market share prices and price earnings ratio of UAC Nig. Plc and the market share price and price earnings ratio of PZ Cussons Plc from 1992 to 2003.
  4. There is no significant relationship between the market share price and price earnings ratio at UAC Nig Plc and the market share price and price earnings ratio of PZ Cussons Nig plc from 1998 to 2003.
  • DEFINITION OF TERMS USED IN THE STUDY
  • Auditors report: a report made by auditors of a company, after examination of the company’s books of accounts.
  • Qualified audit report: when an auditor is unable to give a clean, clear or unqualified opinion
  • Investment properties: according to IAS 40, investment property is property [land or building or part of a building or both] held [by the owner or by the losses under a fiancé] to earn rentals or for capital appreciation or both.
  • Disagreement means that the auditors do not agree with the accounting treatment, or disclosures of some item in the accounts.
  • Market share price: this is actually the opening or closing amount of a particular stock as at any reference date.
  • Earnings per share: this is actually derived by subtracting preference share from profit after tax and dividing the result by the number of ordinary shares.

PROJECT SAMPLE/DEPARTMENTS

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