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AUDITING AND
PROFITABILITY OF PUBLIC LIMITED MANUFACTURING COMPANIES IN NIGERIA
ABSTRACT
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
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
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
Bibliography
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
CHPATER ONE
INTRODUCTION
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.
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