ABSTRACT

This research is an attempt to study and report on the appropriateness of Auditing on

Fraud control with particular focus given to Tanzania. The study is specially aimed at

showing to the extent possible, the relevance and reliability of auditing as a tool of

controlling fraud.

The study is intending to examine and evaluate the role and value of auditing as a

professional practice in detecting various forms of fraud at departmental/ divisional/and

organisation level; the extent to which auditing can work as a tool to prevent fraud; and

the authority at which auditing as a professional practice has on reporting or exposing or

disclosing fraud.

Primary data will be collected through self-administered questionnaires and interviews;

some secondary data will be taken and analysed from selected books, journal and

published auditing reports.

All data collect shall be processed using MS-excel. Testing of statistics results shall be

done using Regression analysis and correlation.

The study attempts to reveal that auditing has a paramount role to play in controlling

institutional fraud in Tanzania.

i

LIST OF ABREVIATIONS

CAG Controller and Auditor General (Tanzania)

BoT Bank of Tanzania

EPA External Payment Arrears

CD-ROM Cassette Disk – Read Only Memory

IFAC International Federation of Accountants

GAAPs Generally Accepted Accounting Standards

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TABLE OF CONTENTS

ABSTRACT........................................................................................................................iLIST OF ABREVIATIONS..............................................................................................iiCHAPTER ONE................................................................................................................1Background to the study...................................................................................................1

1.0 Introduction..............................................................................................................11.1 Background and research rationale.................................................................11.2 Statement of the problem..................................................................................21.3 Research Objectives...........................................................................................3

1.3.1 General Objectives.....................................................................................31.3.2 Specific Objectives.....................................................................................3

1.4 Research questions.............................................................................................31.5 Significance of the study....................................................................................41.6 Scope of the study..............................................................................................41.7 Limitation of the study......................................................................................5

CHAPTER TWO...............................................................................................................6Literature Review..............................................................................................................6

2.0 Introduction..............................................................................................................62.1 Theoretical Literature Review................................................................................6

2.1.1 Definition of terms............................................................................................62.1.2 Fraud Indicators...............................................................................................8

Fraud Control....................................................................................................................92.1.3 Strength and Weakness of Auditing in Fraud Control.................................92.2.3 Measures used to Control Fraud, Waste and Abuse of Fund in an Organisation.............................................................................................................10

2.2 Empirical Literature Review................................................................................10CHAPTER THREE.........................................................................................................13

3.0. Research Methodology.........................................................................................133.1. Research Design....................................................................................................133.2. Research Technique..............................................................................................133.3. Population Study...................................................................................................133.4. Sampling Procedure.............................................................................................13

3.4.1. Probability/Simple Random Sampling technique.................................133.4.2. Non probability/Judgemental Sampling Technique.............................13

3.5. Sample Size............................................................................................................143.6. Data Collection Method.......................................................................................14

3.6.1. Primary Source..............................................................................................143.6.2. Secondary Sources.........................................................................................15

3.7. Data Analysis.........................................................................................................15CHAPTER FOUR...........................................................................................................16ANNEXES........................................................................................................................16

4.1. RESEARCH BUDGET........................................................................................164.2 FIELD WORK SCHEDULE................................................................................174.3 QUESTIONNAIRES.............................................................................................18

References.........................................................................................................................21

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CHAPTER ONE

Background to the study

1.0 Introduction

Fraud at various levels in many organisations has been widely reported almost

everywhere in the word. In Tanzania various audit and other investigative reports have

been reporting various irregularities including fraud in both governmental and private

organisations. Huge amounts of money to the tune of billions and various movable and

fixed assets have been reported to have been stolen or misused. In many cases, however,

the audit reports uncovering such deceptive practices have not been well used to bring the

wrong-doers to task.

1.1 Background and research rationale

Frequency and amounts involved in various frauds reported in recent years in Tanzania

by Controller and Auditor General and private audit firms especially in the public sector

and parastatal, corporations are of such proportions that warrant a special study on this

matter. In the report of the CAG 2006/2007 for example money amounting to 32billions

could not be accounted for and some parts of that had no record at all.

The report by Ernest & Young 2007 in ‘External Payment Arrears account (EPA)’ in the

Bank of Tanzania (BOT) revealed either outright theft or doubtful transactions leading to

total loss of Tshs 133 billion.

Such examples and many others of similar nature have been uncovered by Auditors in

doing their professional work. No other professional field in Tanzania has ever

reported/disclosed frauds of the amount that has been detected and uncovered by various

auditing engagements.

Relevance of audit as a technique to detect and control fraud comes into the focus when

considering the role that it has played in exposing the vice. The relevance and reliability

of auditing in this role pose a need to be studied and evaluated. Argument in support of

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the reliability of auditing in discovering and reporting fraud is supported by the fact that

no audit report to this regard has ever been proven wrong in Tanzania.

1.2 Statement of the problem

It is a legal requirement in Tanzania for all companies, private and public alike, to have

their financial statement audited by independent external auditor for every period that

such statements are published. The constitution of the united Republic of Tanzania, on its

part, requires all government ministries, departments, agencies, Parastatal organisations

and regions to be audited by the CAG or audit firm approved by the CAG.

Many entities in Tanzania, especially government ministries or its department, were not

properly audited in the past especially due to lack of will or funds to conduct auditing. In

the recent years until present the situation has improved. Where audits have been

conducted, only few government entities have been awarded clean (Unqualified)

certificates. This has been due to irregularities found by auditors in these entities

including misuse of assets, unauthorised transfer of funds, overspending, and lack of

proper procurement systems and improper accounting that does not meet the GAAPs.

Auditing in Tanzania has uncovered serious frauds, completed or in the process of being

committed.

The professional practice of auditing, however, has not received the value or recognition

it deserves and its appropriateness as a tool/weapon to fight fraud in all its forms has not

been fully appreciated.

The main focus this study will take Determining and evaluating the value and

appropriateness of Auditing in controlling fraud and seeing whether and the extent to

which this professional practice can be used as both a social and legal tool in fighting

fraud.

This study takes a case study of the CAG’s Head office, Dar Es Salaam.

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1.3 Research Objectives

This part will be divided into two subsections namely the general objectives and the

specific objectives of the study.

1.3.1 General Objectives

To examine and evaluate the appropriateness of auditing in controlling fraud and propose

ways in which this professional practice can be used as a tool to combating various

financial and financial- related vices including its use in the legal/ judicial system.

1.3.2 Specific Objectives

(1) To examine how reliable and strong is the professional auditing in detecting and

reporting fraud.

(2) To evaluate the relevance of audit and audit report in exposing various forms of

financial related institutional and non- institutional fraud.

(3) To understand and appreciate the role of auditing in prevention of frauds.

(4) To evaluate problems facing the work of auditing and its being accepted as

appropriate and valuable means of fighting fraud.

1.4 Research questions

This research will use the following basic questions together with other supportive

questions that may arise, especially in interviews, to gather relevant information from the

targeted respondents:

(1) What is the policy of the CAG office about fraud detection and prevention?

(2) Why should professional auditing be considered important in fighting against

fraud?

(3) To what extent should audit evidence/report be incorporated in the legal (laws)

system as sufficient and appropriate legal evidence against fraudulent practices in

both public and private organisations?

(4) What are the major problems facing the work of auditing with regards to

prevention, detection and reporting?

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(5) What benefits would the society get if auditing was to be given a greater legal

power?

1.5 Significance of the study

The results of this study are expected to deliver the following to various stake holders:

(1) The study will enable consolidation and expansion of knowledge to professionals,

the researchers includes academicians and other interested numbers of the public.

(2) The study will help the government machinery to appreciate in better terms the

values and role of auditing in the fight against frauds.

(3) The study will work as a ground for the CAG office and other auditors to base

their argument on the relevance and reliability of auditing in fraud control.

(4) The report to be compiled at the end of this study will build a foundation on

which other researchers may base their future studies and the same subject.

1.6 Scope of the study

The study will be conducted to the CAG’s Headquarters in Dar Es Salaam. The

department of audit of regional and local government, Parastatals and Government

authority and Agencies will be of more interest. The central Government Audit

department and all others will be only and just generally studied, only to get the

overview.

Due to broad work coverage of the departments identified for being studied and a big

volume of data available, the researchers will confine themselves to number, type and

value (in financial terms) of irregularities reported by the CAG for the period of

years and cases that have been taken to court or other method of bringing the implicated

persons to task, during the period under review.

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1.7 Limitation of the study

The study is expected to face the following drawbacks.

i. Time Limitation: Time available for this study is only 5 months. This is not well

enough to conduct exhaustive study and analysis of relevant massive

information / data that will be collected.

ii. Inadequate Resources: The research will face two major categories of resource

shortages.

(i) IT systems and experts to process and analyses data using appropriate

hardware and software that could notably simplify the work and take a

lot more data into the study in relatively much shorter period.

(ii) Financial inadequacy: The budget approved for study is only Tshs

10,000,000.This amount is not enough to cater for the all necessary

expenditures that the researchers are supposed to face in the course of

the study.

i. Bureaucratic delay and restrictions: since the study will be conducted in a

Government set up, all long and sometimes troublesome bureaucratic procedure

will have to be followed. Possible restrictions to some information are also

inevitable.

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CHAPTER TWO

Literature Review

2.0 Introduction

A literature review surveys scholarly articles, books and other sources including

dissertation, conference proceeding relevant to a particular issue area of research, or

theory, providing description summary and critical evaluation of each work. This is an

important process of research. It is a process of identifying or locating, reading,

summarizing and incorporating in researcher study documents having materials which are

related to the problem under investigation. Literature review includes the review of

books, research reports, journals, articles, papers and magazines, committee minutes,

audio and video tapes, internet publications and other electronic sources such as CD-

ROMs.

Literature review begins with theoretical literature review and thereafter an empirical

framework will be presented.

2.1 Theoretical Literature Review

This part of literature review provides definitions and meaning of terms and concepts

which are involved in the study. It surveys the main principles and theories already

established within the area of the research. It will explain the current state of the

knowledge in this field of study. It states what the other scholars said about the topic of

study according to their own perspective.

2.1.1 Definition of terms

Auditing

Mlondwa, E.B (1991) defines audit as an independent examination of and expression of

an opinion on the financial statement of an enterprise by an appointed auditor in

pursuance of that appointment and compliances with any relevant statutory obligation.

Howard, L.R. (1988) defines audit as an independent examination of and expression of

an opinion on the financial statement and in compliance with any relevant statutory

obligations.

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Fraud

IFAC (2005) page 277 under ISA 240 states that ‘fraud’ is an intentional act by one or

more individuals among management, those charged with governance, employees or third

parties, involving the use of deception to obtain an unjust or illegal advantage.

Msongole, (2005) defines fraud as: ‘intentional misrepresentation of financial

information is one or more individuals among management, those charged with

governance, employees or third parties.’

The term ‘fraud’ is defined in Black’s Law Dictionary (Sixth Edition, 1990) as:

“An intentional perversion of truth for the purpose of inducing another in reliance upon it

to part with some valuable thing belonging to him or to surrender a legal right. A false

representation of a matter of fact, whether by words or by conduct, by false or misleading

allegations, or by concealment of that which should have been disclosed, which deceives

and is intended to deceive another so that he shall act upon it to his legal injury... A

generic term, embracing all multifarious means which human ingenuity can devise, and

which are resorted to by one individual to get advantage over another by false

suggestions or by suppression of truth, and includes all surprise, trick, cunning,

dissembling, and any unfair way by which another is cheated.”

Forms of Fraud

Fraud takes many forms. Some examples include embezzlement, kickbacks, theft,

fraudulent financial reporting, environmental crimes, software piracy, bid rigging,

computer related crime, money laundering, identity theft, credit card fraud, check fraud,

fraudulent compensation claims, ghost employees schemes, exposure report schemes,

dummy vendors, unreported conflicts of interest and the like.

Fraudulent financial reporting involves intentional misstatements including omissions of

amounts or disclosures in financial statements to deceive.

It may be accomplished by the following;

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i. Manipulation, falsification (including forgery), or alteration of accounting

records or supporting documentation from which the financial statements are

prepared.

ii. Misrepresentation in or intentional omission from, the financial statements of

events, transactions or other significant information.

iii. Intentional misapplication of accounting principles relating to amounts,

classification, manner of presentation, or disclosure.

Reasons for Occurrence of Fraud

There are many reasons why some management of various entities or even individuals

commit fraud. Some of these are:

i. Manage earnings so as to deceive users of financial statements to perceive

positively about the profitability and performance of the entity. This is much so if

it is a business enterprise.

ii. Pressure and incentives e.g. pressure to meet market expectations or a desire to

maximize own compensation if compensation is based on performance.

iii. Reducing earnings so that tax liability is also minimized; this applies to

businesses especially private.

iv. Inflate earnings in order to get finance from the banks or other financial

institutions.

v. Greed and ill desire to make easy money at any cost.

2.1.2 Fraud Indicators

Barce, M A (2001), outlines the potential fraud indicators in organisations. Some of many

indicators of fraud outlined are:

i. Excessive changes in accounting principles or disregard for GAAPs

ii. Excessive or unjustified changes in accounting personnel

iii. The refusal or hesitation to allow an independent audit or subtle attempts to direct

the audit or investigation

iv. Excessive destruction of controlled documents

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v. Inappropriate wealth of those charged with management or governance

vi. Protective behaviour, which is trying to hold close and sensitive papers as

personal and at times avoiding getting help from workers even at times of

illnesses or absence.

vii. Lack of sufficient vouchers and supporting documents

viii. Excessive bad debts written off

ix. Too many and common post-dated cheques

x. Excessive spoilage or damaged goods which may indicate a scheme between

some employees and shippers

xi. Failure to reconcile bank statements on time or a conflict of the duties on the part

of the person performing reconciliation.

xii. A significant lack of internal control which indicates that questionable practice

may be hidden.

It is important to note here that the indicators of fraud are not all pervasive and there is a

need to study each entity separately rather taking these indicators a blanket proof. In

many cases the indicators are observed in group or sequence.

Fraud Control

2.1.3 Strength and Weakness of Auditing in Fraud Control

Millichamp (2002) pg 350 and 351 states that; the audit plays a big role on making sure

that the entire organisation funds are proper controlled.

The strength of audit and investigation are;

i. To reduce the chance of fraud, waste and abuse

ii. Lead to proper maintenance of books of accounts and other documents.

iii. Regulation and procedures of public regulations are abided

iv. Proper segregation of duties

Despite of the strength, the audit and investigation has also some weaknesses which

include

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i. Possibility of mutual contact between accountants and auditors lead to corruption

during conducting the audit work.

ii. It needs more competent staffs

iii. It is complicate as it needs frequently rotation of staffs to different position

2.2.3 Measures used to Control Fraud, Waste and Abuse of Fund in an

Organisation

Mhilu, F.M.H (2002), outlines the measures used for fraud control, by putting more

emphasis that in controlling the organisation funds, different measures can be adopted.

These measures differ from place to place depending on nature of organisation.

The following measures can be employed by organisation to control its funds:

Fraud Awareness Programs

Fraud awareness program is an effective tool deterring fraud and helps to ensure that all

employees know what is expected from them by demonstrating that all employees have a

role to play in detecting and deterring fraud, and by addressing various types of fraud, the

programme fosters confidence and trust. The programme should cover the company`s

prevention measures and tell employees what to do if they suspect fraudulent activities.

Screening Job Applications

Screening job application is a simple and effective way to reduce the risk of employee

fraud. The programme is aimed at insuring employees recruited are those candidates who

were honest during training and employment. History references should be consulted and

verified, where necessary a search for criminal record be conducted. A protracted

screening of job applicants helps sending a message to outcomers that the company is

serious about the importance of honesty and truthfulness and lets all employees know that

they are valued and trusted.

2.2 Empirical Literature Review

This takes an overview of research findings and conclusions reached by some

researchers.

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Mwantembe, E. (2002), research report on “Detection and Prevention of Fraud and

Embezzlement” concluded that fraud occurs because of the non-observance of the

existing regulations not necessarily for lack of systems and procedures. Fraud will be

kept to the minimum if governing procedures are regularly reviewed and strictly

observed.

Wells, Joseph T. (2001), contends that it is important for the professionals and the public

in general to understand what motivates people to commit fraud so that they can be better

in assessing risk and assist employers or clients in implementing appropriate preventive

and detective measures.

Facing the fact, one must ask the logical question, how do good people go badly? An

obvious answer is greed. But not all so called greedy people do lie, cheat and steal to get

what they want.

Another reason is related to financial pressure. In the late research it was found that the

great majority committed fraud to meet their financial obligation.

Baree, M. A. (2001) points out the reason as to why employees commit fraud. A

perceived opportunity such as the absence of or circumvention of controls that enable to

be prevented or detected.

An offender with motivation to steal money, whether through cupidity, living beyond

one’s means and the existence of debts sometimes associated with drug or gambling

addiction, presence of financial crisis or various work related pressure.

Farrell, B.R and Franco, J.R (1999), stresses out that, it is the trusted and valid

employee who generally commits fraud. When frauds are discovered there is often shock

and disbelieve that they could have committed such an act.

In most cases, offenders do not view stealing from companies as harmful, they may think

that the crime was victimless, and they do not view their theft as being devastating or

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costly to the business. Many frauds occur because the opportunity exists and the

perpetrator does not believe he or she will be caught.

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CHAPTER THREE

3.0. Research Methodology

This chapter outlines sequence in which the study will be conducted. It includes research

design, research techniques, population study, sampling procedure, sample size, data

collection and data analysis.

3.1. Research Design

This research design is to be used for the study at the office of CAG as a case study about

“appropriateness of audit in fraud control” since it is less expensive as compared to other

methodologies such as survey. Also, due to time factor as time is too limited.

3.2. Research Technique

The research techniques to be used in this study will be both, qualitative and quantitative

techniques in collecting data which will be helpful.

3.3. Population Study

The population of our study will base much from the CAG’s staffs and others non staff

who link directly with CAG’s office.

3.4. Sampling Procedure

The researcher will use the following techniques;

3.4.1. Probability/Simple Random Sampling technique

In this technique, every member of the CAG office will have an equal chance of being

selected from the accounting and finance department in seeking relevant information.

3.4.2. Non probability/Judgemental Sampling Technique

In this technique, the researcher will select any member from the population according to

his/her own judgement. This might be a key person who should disclose certain

13

information regarding the accounting and finance department. It might be the head of

department.

3.5. Sample Size

A sample will be selected at random from the population. It will be of a reasonable size.

In our case, a sample of about fifteen will be taken. But for non probability sampling, it

will base mostly from among auditors. Some of them will be interviewed while others

will be given questionnaires to fill in.

3.6. Data Collection Method

Data will be collected from two mainly different sources: primary sources and secondary

sources.

3.6.1. Primary Source

These are the sources which gives the first hand information obtained direct from the

original sources (information which have been stated but not interpreted by others). For

example Interview, observation, questionnaire etc

3.6.1.1. Interview

This will focus much on the staffs who are working in the auditing department.

Interviewing these people will help in getting relevant information regarding the fraud

control in auditing.

3.6.1.2. Observation

This will involve observing how the auditing process is being carried by CAG’s staffs.

3.6.1.3. Questionnaire

This is the list of questions prepared by the researcher and distributed to the population

sample requesting them to give more information. The questionnaire will also be sent to

those who link with CAG’s office for getting more information.

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3.6.2. Secondary Sources

These are the sources which give information obtained not from the original sources, as

they come from research and studies others have done. For example books, manuals,

journals, articles, etc

3.6.2.1. Documentation

This method involves gathering data from the various books of auditing, manuals and

other related documents concerning fraud control.

3.7. Data Analysis

Data will be collected, analysed and compiled in a logical manner to give meaningful

and complete information. They will be presented in tables, figures and percentages.

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CHAPTER FOUR

ANNEXES

4.1. RESEARCH BUDGET

The researchers will need enough funds so as to conduct the study. The funds will be

provided by HESLB for eleven (11) researchers.

ACTIVITY Cost Est. (Tshs.)

Meals allowances and accommodation 7,500,000

Transport cost 2,000,000

Stationary 300,000

Miscellaneous expenses 200,000

Budgeted Total Cost 10,000,000

Table 1: Research Budget

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4.2 FIELD WORK SCHEDULE

This study will take 17 weeks from October to January. The activities which will be done

for the whole period have been summarized below;

Activity

Weeks

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Proposal

writing

Structuring

questionnaire

Data

collection

Literature

review

Data entry

Data

presentation

Hypothesis

testing

Interpreting

findings

Report

writing

Binding and

Submission

Table 2: Gant Chart for the Time Management

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4.3 QUESTIONNAIRES

Dear Interviewee,

We are kindly requesting you to answer the under mentioned questions as part of the

fulfillment of my research for academic award in Advanced Diploma in Accountancy

(ADA). The questions are purely for academic demand and not otherwise against you.

The questionnaires include spaces in which to indicate positive (Y) or negative (N)

answers.

This paper consists of two sections A and B. Section A is about research questions and

section B is about comments.

We wish to express sincere appreciation for the assistance you will extend to me in this

regard.

SECTION A:

Questions;

1) Do you know any factors which influence the appropriateness of audit in fraud

control?

Y…….. N……… N/A ………

If Yes, What are they?

Explain

………………………………………………………………………………………

………………………………………………………………………………………

2) Do you know any important role of auditor in fraud control?

Y………, N ………., N/A ………..

If Yes, What are they?

………………………………………………………………………………………

………………………………………………………………………………………

3) Does the auditor meet the directors at least annually to discuss written reports of

audit?

18

Y ………, N ………., N/A …………

If No,

Explain

………………………………………………………………………………............

………………………………………………………………………………………

4) Do you know any challenges facing the work of auditor in fraud control?

Y………, N ...…, N/A …………

If Yes, What are they?

………………………………………………………………………………………………

………………………………………………………………………………

5) Does the auditor determine the accuracy of financial reporting systems and other

management systems?

Y……., N ………, N/A …………

If No,

Explain ……………………………………………………………………………..

………………………………………………………………………………………

6) Does the auditor review insurance coverage and determine that property damage

coverage is adequate in relation to book?

Y ………., N ………., N/A ………

If No,

Explain

………………………………………………………………………………………

……………………………………………………………………………………....

7) Does the auditor determine the validity and completeness of out standings?

Y …………., N …………, N/A ……………….

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If No,

Explain

………………………………………………………………………………………………

………………………………………………………………………………

8) Does the auditor perform periodic audit procedures for significant automated

applications to determine that workflow is processed accurately and is in

conformity with operating manuals?

Y …………, N ………., N/A …………..

If No,

Explain……………………………………………………………………………..

………..…………………………………………………………………………….

SECTION B:

Comments;

Please include your own comment in the blank space provided below on the subject of

the role of auditor in fraud control in the organization.

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………

Thank you in advance for sparing your valuable time to fill in this questionnaire.

&&&&&&&&THANKS FOR YOUR COOPERATION&&&&&&&&

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References

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