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AUDITING AND PROFITABILITY OF PUBLIC LIMITED MANUFACTURING COMPANIES IN NIGERIA
This study is directed at investigating the extent to which auditing affects profitability in public limited manufacturing companies in Nigeria, specifically brewery industry. Four research questions were put forward to guide the study. Data were collected from (60) accounting staff of Nigeria breweries plc, Guinness Nigeria plc, champion breweries, international breweries Jos international breweries plc and premier breweries plc. The data were collected, presented on tables and converted to interval data. Four hypotheses were tested using simple regression model. This model was adopted because of the nature of the topic is based on cause and effect relationship. An econometric software called E-view version 3.1 was used to compute the necessary test statistics. This software was preferred to SPSS because of the simplicity of presentation of results and ease of interpretation. T-test was employed at 5% level of significance to determine the extent of significance. Finding shows that there is a significant positive relationship between financial control, administrative control and return on equity, between financial control, administrative control and return on equity, net profit margin. It is recommended that organizations should maintain sound internal control system to ensure that investors are adequately rewarded for their investment, those in internal control department should be constantly train and retrain to catch up current realities in auditing circle, to sustain return on equity and net profit margin, activities such as finding market for the firm’s products should be carried out to boost the turnover of the firms, management circle to protect the shareholders interest, versa vie return on equity and net profit margin, preparation of financial statement should endeavour to imbibe the code of best practices on sound financial reporting ethicize
TABLE OF CONTENTS
Title Page i
List of Tables vii
CHAPTER ONE: INTRODUCTION
1.1 Overview of the Study 1
1.2 Statement of the Problem 4
1.3 Purpose of the Study 7
1.4 Research Questions 7
1.5 Research Hypotheses 8
1.6 Significance of the Study 9
1.7 Definition of Terms 10
1.8 Limitation of the Study and Scope of the Study 11
1.9 Organization of the Study 12
CHAPTER TWO: RELATED LITERATURE REVIEW
2.1 Introduction 14
2.2 History of Audit 14
2.3 Early U.S. Auditing in the late 1800’s to early 1900’s 17
2.4 The computer would Shock the Auditing World 19
2.5 Internal Controls: The Roaring 1920’s
and the 1930’s 24
2.6 Voluntary Code of practice on Disclosure of
auditing profitability 29
2.7 Parties Responsibility for and affected by
Internal control 44
2.8 International Standards on Auditing 53
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 introduction 66
3.2 Research Design 66
3.3 Sample Procedure and sample size determination 67
3.4 Data collection method 68
3.4.1 Questionnaire Design 69
3.5 Operational measurers of variables 69
3.5.1 Variables in the Study 69
3.5.2 Model specification 70
3.6 validity and reliability of instruments 72
3.7 Data analysis techniques 72
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction 76
4.2 Data Presentation 76
4.3 Data Analysis 77
4.4 Test of Hypotheses 81
4.4.1 Hypotheses One 81
4.4.2 Hypotheses Two 83
4.4.3 Hypotheses Three 84
4.4.4 Hypotheses Four 85
CHAPTER FIVE: DISCUSSION OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 88
5.2 Discussion of findings 88
5.3 Conclusion 89
5.4 Recommendations 90
Appendix A: Sample cover letter
Appendix B: Questionnaire
Appendix C: Conversion of data from ordinal scale to interval scale.
LIST OF TABLES
Table 4.1: Questionnaire response rate 76
Table 4.2: Financial control and return on equity 77
Table 4.3: Financial control and net profit margin 78
Table 4.4: Administrative control and return on equity 79
Table 4.5: Administrative control and net profit margin 80
Table 4.6: A simple regression for forecasting the effect of
Financial control (FIC) and return on equity (ROE) 82
Table 4.7: A simple regression for forecasting the effect of
financial control (FIC) and net profit margin (NPM) 83
Table 4.8: A simple regression for forecasting the effect of
Administrative control (ATC) and return on equity (ROE) 85
Table 4.8: A simple regression for forecasting the effect of
administrative control (ATC) and net profit margin (NPM) 86
1.1 OVERVIEW OF THE STUDY
Aguolu (2002) defined auditing as the independent examination of the financial statements of an organization with a view to express an opinion as to whether these statements give a true and fair view and comply with relevant statutes. Audits are evaluations of the financial capability of a company. Companies prepare financial statements of their activities, which represent their overall performance. These financial statements are evaluated by auditors, who assess them according to the industry’s generally accepted standards. They are examined for accuracy and fairness in their reporting. Companies are expected to pass their audits, as the results are very important to the company affiliates, such as shareholders and investors, because they provide an extra reassurance of their choice in investments when issues arise.
Internal controls are put in place to keep the company on course toward profitability goals and achievement of its mission, and to minimize surprises along the way. They enable management to deal with rapidly changing economic and competitive environments, shifting customer demands and priorities, and restructuring for future growth. Internal controls promote efficiency, reduce risk of asset loss, and help ensure the reliability of financial statements and compliance with laws and regulations.
Because internal control serves many important purposes, there are increasing calls for better internal control systems and reports cards on them. Internal control is looked upon more and more as a solution to a variety of potential problems.
In recent past, a significant number of studies on audit have accumulated, despite a background of intensive studies on this topic, something remain lacking: a comprehensive study of auditing and profitability of public limited manufacturing in Nigeria.
Auditing is a vital part of accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business. However, recent auditing has begun to include non-financial subject areas, such as safety, security, information systems performance, and environmental concerns.
Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system’s internal control. The goal of an audit is to express an opinion on the person, organization or system (etc.) in question, under evaluation based on work done on a test basis.
Due to practical constrains, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements – a concept influenced by both quantitative (numerical) and qualitative factors.
An audit must adhere to generally accepted standards established by governing bodies. These standards assure third parties or external users that they can rely upon the auditors’ opinion on the fairness of financial statements or other subjects on which the auditors express an opinion.
Auditing becomes a problem when the generally accepted standards established by the governing bodies are not adhering to. The avoidance of the adherence of the auditing standard could lead to the perpetuation of fraud which could affect the probability of the firm.
1.2 STATEMENT OF THE PROBLEM
Every organization exists to achieve a set of objectives. In pursuing these objectives, it has a lot of factors that are working in favour or against its mission. Its survival lies absolutely on how it responds to or uses these factors to its own advantage. In the present day competitive market, one of the greatest concerns of organizations is seeking means of survival.
In order for any organization to survive, it has to be able to use the available scare natural and human resources at its disposal optimally. An organization needs not only to be effective but also efficient so as to overcome the challenges ineffective audit pose on its operation. The impact of auditing on the life of organization in business cannot be neglected.
Severally, we hear of companies that have fraud issues, and some threatened the closure and sack of most officials involved, a typical example is the issue of the bank audit.
In most organizations fictitious profits are declared even when they are run on deficit. It is a clear issue that one of the prominent issues that lead to bank crisis in Nigeria, was when the central bank governor brought the issue of auditing the banks.
The poor management of the audit department in companies has led to loss of millions of naira if not billions by the companies; production reduced employee’s salary and welfare uncertain. These and similar problems are the like that audit neglect can create.
Within the organization, ineffective internal control system can also begin to constitute threat to the organization, where a person start and end a financial transaction. Hence there is need for constant monitoring and a proper division of labour.
In some extreme situations, some companies have folded because they were unable to handle the problems associated with fraud. Some have spent millions of naira trying to trap their fraudsters. Indeed numerous are the problems associated with auditing.
All the above issues predispose us to the problems in the manufacturing industry which we will look into in this study. We are to investigate the relationship that exists between audit and organizational profitability in the manufacturing industry. In doing this, we will consider any possible implication audit variables: financial control and administrative control can have on an organization’s, net profit margin, return on equity.
In doing that the audit should not be under looked. Frank (2009:10) noted that previously, the functions of the audit committee were handled by the finance or executive committee or the null board. As more organizations have formed audit committees, these committees have come to handle a growth list of roles and responsibilities, which has a major impact on how organizations view governance and fiscal transparency.
1.3 PURPOSE OF THE STUDY
The purpose of this study is to investigate the impact of audit in the profitability of public limited companies.
This work is undertaken to realize the following objectives.
1. To examine the extent effective financial control affects return on equity.
2. To investigate how effective financial control affect net profit margin of a manufacturing industries
3. To determine the extent effective administrative control affects return on equity of a manufacturing industry.
4. To examine the extent effective administrative control affects profit margin net.
1.4 RESEARCH QUESTIONS
Based on the above state purpose for the study, the following research questions are considered fitting here:
i. Does effective financial control affects a firm’s return on equity?
ii. Does effective financial control affect the company’s net profit margin?
iii Does effective administrative control system affects the company’s return on equity?
iv. Does effective administrative control system affect the company’s net profit margin?
1.5 RESEARCH HYPOTHESES
In order to verify the information contained herein, we need to propound some hypotheses to enable us ascertain the extent to which our assumptions agree or disagree with facts available in our Nigeria organizations. For this study, four hypotheses were stated directionally as follows:
H01: There is no significant relationship between financial control and return on equity.
H02: There is no significant relationship between financial control and net profit margin.
H03: There is no significant relationship between Administrative control and return on equity.
H04: There is no significant relationship between administrative control and net profit margin.
1.6 SIGNIFICANCE OF THE STUDY
The significance of the research of this nature cannot be overemphasized. This is in view of the fact that the outcome of the study will be of immense benefit for decision makers in the organizations as well as the stakeholders.
The present day Worldwide economic recession has posed a serious challenge to every organization to seek for means on how best to utilize available human and scare material resources, to achieve its organizational goals. How to realize this has remained a problem that no one answers lays to rest. It calls for an integration of various useful approaches.
Auditing however, does appear to be one of these useful approaches. This necessitated the choice of the topic of this work. This work is aimed at improving our understanding of the effect of auditing on organizational efficiency within the manufacturing industry in Nigeria particular and in all organizations in general. Secondly, it will also aim at bringing to light the implication of auditing to the economic life of the stake holders and the need to take auditing serious in organization policies. Finally, it will also aim at creating the awareness of the great impact auditing has on the performance of a company.
1.7 DEFINITION OF TERMS
RETURN ON EQUITY: Is net profit after taxes divided by shareholders’ equity.
NET PROFIT MARGIN: Net profit margin is obtained when operating expenses, interest and taxes are subtracted from the gross profit.
FINANCIAL CONTROL: This involves management of a firm’s costs and expenses in relation to budget.
ADMINISTRATIVE CONTROL: Is plan of organization, methods and procedures adopted by management to ensure that its goals are met.
C.A.E: The Chief Audit Executive
Auditing: Is a branch of financial management concerned with assessing the internal financial status of a business.
INTERNAL CONTROL: Can be described as any action taken by an organization to help enhance the likelihood that the objectives of the organization will be achieved.
QUALITY AUDIT: Quality audits are performed to verify conformance to standards through review of objective evidence. A system of quality audits may verify the effectiveness of a quality management system.
INTERNAL AUDITING: Is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.
1.8 LIMITATION OF THE STUDY AND SCOPE OF THE STUDY
In the execution of this research, different difficulties were faced. The first constraint was the uncooperative attitude of some respondents in supplying accurate response to questions they were asked. Again, the disappearance of some books and journals in the organizations denied this work of some materials which when referenced would have added more value to the findings. The scope of study of this research is quoted breweries in Nigeria.
1.9 ORGANIZATION OF THE STUDY
This work is divided into three chapters, Chapter one centres on the introduction to the work and what is aimed at in the study. In it we look at the overview, statement of problem, purpose of the study, research questions, limitation of the study, significant of the study, definition of terms, and organization of study.
Chapter two dwells on literature review. Hence relevant literatures are used to give an understanding of what the topic of study is all about. The term; audit, profitability and other related issues are discussed.
Chapter three treats the research methodology. Here we looked at the research design, sampling procedure, questionnaire, data collection, method operational measures of variables and data analysis techniques.