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THE ROLE OF THE AUDITOR IN SMALL BUSINESS ORGANIZATIONS (CASE STUDY: SOME SMALL BUSINESSES IN CALABAR)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The auditor plays a pivotal and indispensable role in small business organizations, particularly in ensuring financial integrity, transparency, accountability, and sustainable growth. In Nigeria, where small businesses, often categorized as micro, small, and medium enterprises (MSMEs), form the cornerstone of economic activity, contributing significantly to employment, GDP, and poverty alleviation, the involvement of auditors addresses critical gaps in financial management and governance. Small businesses typically operate with limited resources, informal accounting systems, inadequate internal controls, and high vulnerability to errors, fraud, and mismanagement, making professional auditing essential for credibility and survival (Kelly & Venessa, 2023).
The primary functions of an auditor in small business contexts include independent verification of financial statements to confirm their accuracy and fairness, assessment of internal control systems to identify weaknesses and recommend improvements, detection and prevention of fraud through systematic reviews, and provision of advisory services on accounting practices, compliance, and operational efficiency. Unlike large corporations with mandatory statutory audits, small businesses in Nigeria often engage auditors voluntarily, for tax compliance, loan applications, or partnership requirements. This engagement enhances the bankability of these enterprises by producing credible financial reports that build trust with lenders, investors, suppliers, and regulators (Kelly & Venessa, 2023; The Role of Audit In Small And Medium Enterprises, 2025).
Empirical evidence underscores the positive contributions of auditing to small business performance. External audits help small enterprises avoid financial irregularities, improve record keeping, and strengthen internal controls, leading to better decision making and reduced risks of business failure (Agbaje et al., 2017; extended in recent contexts by Mogaji et al., 2025). For instance, internal auditing qualities such as independence, competence, and professionalism significantly enhance financial performance in SMEs by fostering accountability, efficient resource utilization, and poverty reduction through improved profitability and sustainability (Mogaji et al., 2025). Auditors’ systematic appraisals add value by evaluating risk management, safeguarding assets, and ensuring compliance with regulations, which is particularly vital in Nigeria’s environment of financial mismanagement and fraud risks (Ezinwa et al., 2020; updated in Arni et al., 2023).
In the specific context of Calabar, Cross River State, small businesses in sectors like trading, hospitality, and services face unique local challenges, including poor bookkeeping, limited professional accounting support, and exposure to fraud. Technology based forensic accounting techniques, often applied by auditors, have been shown to effectively prevent fraud in SMEs in Calabar, emphasizing the auditor’s evolving role in leveraging tools for risk mitigation and financial protection (Richtmann Publishing, 2025). Additionally, accounting services, including auditing elements like bookkeeping and financial reporting, positively correlate with financial performance in small and medium enterprises in Calabar South Local Government Area, highlighting how auditors’ involvement promotes accurate reporting, regulatory compliance, and strategic decision making (WISS Journals, 2024).
Tax audits further illustrate the auditor’s broader impact, as field and back duty audits significantly boost tax compliance and revenue generation among Nigerian SMEs, indirectly supporting business discipline and sustainability (Ajayi et al., 2025). Outsourcing internal audits is common among MSMEs, allowing small businesses to access expert oversight without in house capacity, thereby improving audit quality and overall performance in emerging economies like Nigeria.
Despite these benefits, barriers such as limited access to information, inadequate training, and perceived high costs often deter small businesses from regular auditing (Mogaji et al., 2025). However, when implemented, auditing fosters a culture of transparency, reduces operational inefficiencies, and positions small enterprises for growth amid economic volatility. This study, focusing on selected small businesses in Calabar, investigates the multifaceted role of the auditor in enhancing financial oversight, fraud prevention, compliance, and overall organizational resilience in Nigeria’s SME sector (Ochepo & Ikyanyon, contexts adapted; Ajayi et al., 2025). By bridging theory and practice, it highlights auditing as a strategic tool for small business success in developing economies.
1.2 STATEMENT OF THE PROBLEM
Despite the recognized importance of SMEs in Nigeria, many small business organizations in Calabar and similar areas suffer from poor financial management practices. Owners often maintain inadequate or no proper accounting records, rely on manual systems, and lack internal controls, leading to errors, fraud, mismanagement of funds, and inaccurate financial reporting. These issues hinder access to credit, expose businesses to tax penalties, and limit growth potential.
The absence or ineffective involvement of auditors exacerbates these problems. Many small business proprietors view auditing as an unnecessary expense rather than a value-adding service, resulting in undetected irregularities and weak governance. Studies indicate that challenges in financial reporting for SMEs include manpower shortages, poor record-keeping, and non-use of banking channels, which auditing could address (Financial Reporting in SMEs in Nigeria, Challenges and Options).
In Calabar, local SMEs face additional hurdles such as fraud risks and compliance with state-level regulations, where forensic and traditional auditing could prevent losses but are underutilized (Effect of Technology-Based Forensic Accounting Techniques on Fraud Prevention in SMEs in Calabar, 2025). Without regular auditing, businesses risk insolvency, reduced profitability, and inability to attract investment.
This study addresses the gap by investigating the role of auditors in mitigating these challenges, enhancing financial integrity, and supporting the sustainability of small businesses in Calabar.
1.3 OBJECTIVES OF THE STUDY
The main objective is to examine the role of the auditor in small business organizations, using some small businesses in Calabar as a case study.
Specific objectives include:
- To assess the contributions of auditors to accurate financial record-keeping in small businesses.
- To evaluate how auditing improves internal controls and fraud prevention.
- To determine the impact of auditing on business performance and access to finance.
- To identify challenges in auditing small businesses and suggest solutions.
1.4 RESEARCH QUESTIONS
i. What contributions do auditors make to financial record-keeping in small businesses in Calabar?
ii. How does auditing enhance internal controls and reduce fraud risks?
iii. What is the impact of auditing on business performance and financing opportunities?
iv. What challenges hinder effective auditing in small businesses, and how can they be addressed?
1.5 RESEARCH HYPOTHESES
H01: There is no significant role of auditors in improving financial record-keeping in small businesses in Calabar.
H02: Auditing does not significantly enhance internal controls and fraud prevention in small businesses.
H03: There is no significant impact of auditing on business performance and access to finance.
1.6 SIGNIFICANCE OF THE STUDY
This study provides valuable insights for small business owners in Calabar on the benefits of engaging auditors for better financial management and sustainability. It offers practical recommendations to enhance auditing practices and overcome barriers.
For policymakers and regulatory bodies like the Corporate Affairs Commission (CAC) or state revenue services, it highlights the need to promote auditing awareness among SMEs to improve compliance and economic contributions.
Academically, it contributes to the literature on auditing in SMEs in developing economies, particularly in regional contexts like Calabar, serving as a reference for future research.
Overall, the study underscores auditing as a tool for transparency, efficiency, and growth in Nigeria’s small business sector.
1.7 SCOPE OF THE STUDY
The study is limited to the role of auditors in selected small businesses operating in Calabar, Cross River State. It focuses on external auditing practices, covering aspects like financial verification, control assessment, and advisory roles, with data from owners, managers, and auditors.
In Calabar, the capital of Cross River State in South-South Nigeria, small businesses thrive in sectors such as trading, hospitality, agriculture, services, and artisanal production. The city’s strategic location as a commercial hub, with ports and tourism potential, fosters entrepreneurial activities.
1.8 LIMITATIONS OF THE STUDY
Potential limitations include respondent bias, limited access to sensitive financial records, and generalizability beyond Calabar. Resource and time constraints may affect sample size.
1.9 DEFINITION OF TERMS
- Auditor: An independent professional who examines financial records to provide assurance on their accuracy.
- Small Business Organizations: Enterprises with limited capital, employees (typically under 50), and turnover, as per Nigerian definitions.
- Internal Controls: Systems and procedures to ensure reliable financial reporting and safeguard assets.
- Fraud Prevention: Measures to detect and deter intentional misstatements or misappropriation.