THE IMPACT OF AUDIT IN THE PROFITABILITY OF PUBLIC LIMITED LIABILITY COMPANIES: A STUDY OF SOME SELECTED MANUFACTURING COMPANIES IN NIGERIA.
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THE IMPACT OF
AUDIT IN THE PROFITABILITY OF PUBLIC LIMITED LIABILITY COMPANIES: A STUDY OF
SOME SELECTED MANUFACTURING COMPANIES IN NIGERIA.
CHAPTER ONE
INTRODUCTION
1.1 INTRODUCTION
Auditing
is a branch of financial management concerned with assessing the internal
financial status of a business. 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’s reputation and success.
Audits
are very valuable to external company affiliates, such as shareholders and
investors, because they provide an extra reassurance of their choice in
investments when issues arise. (Thomas, 2008.12).
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 managements 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 report 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 the impact of audit on the profitability of public
limited liability companies within Nigeria bottling company of Nigeria.
Auditing
is a vital part of accounting. Traditionally, audits were mainly associated
with gaining information about financial systems and financial record 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.
(The IIA Research Foundation, 2004)
Audits
are performed to ascertain the validity and reliability of information; also to
provide an assessment of a systems internal control. The goal of an audit is to
express an opinion on the person/organization/system (etc) in question, under
evaluation based on work done on a test basis.
Due
to practical constraints, an audit seeks to provide only reasonable assurance
that the statements are free from material error. 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.
As
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 auditor expresses and opinion.
Audit
becomes a problem when the generally accepted standards established by the
governing bodies are not adhered to. The avoidance of the adherence of the
audit standard could lead to the perpetuation of fraud which could affect the
profitability of the firm.
1.2 STATEMENT OF THE PROBLEM
Every
organization exists to achieve a set of objectives. In pursing 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
scarce 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 audit 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 (sansin lamido sanisu)
brought the issue of auditing the banks.
The
poor management of the audit department in companies has led to lose 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 audit.
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, gross profit margin, net profit margin, return on investment,
operating expense ratio, return on equity.
In
doing that the audit should not be under looked. Previously, the functions of
the audit committee were handled by the finance or executive committees or the
full board. As more organizations have formed audit committee, this committee
has come to handle a growing list of role and responsibilities, which has a
major impact on how organizations view governance and fiscal transparency.
(Frank L.K, 2009.10).
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 administrative control affects gross profit
margin.
2. To
investigate how effective administrative control affect net profit margin of a
manufacturing industries.
3. To
determine the extent effective administrative control affects return on
investment of manufacturing industries.
4. To
examine the extent administrative control affects operating expense ratio.
5. To
investigate if effective administrative control has effect on the company’s
return on equity.
6. To
examine the extent effective financial control affects gross profit margin.
7. To investigate
how effective financial control affect net profit margin of a manufacturing
industries.
8. To
investigate how effective financial control affects return on investment.
9. To
investigate if effective financial control affects has effect on the operating
expenses ratio.
10. To
investigate if effective financial control has effect on the company’s return
on equity.
1.4 RESEARCH QUESTIONS
Based
on the above state purpose for the study, the following research questions are
considered fitting here:
i. Does
our companies have well defined audit procedure practice and policies?
ii. Does
effective administrative control affects a firm’s gross profit margin?
iii. Does
effective administrative control system affect the company’s net profit margin?
iv. Does effective
administrative control system affects the company’s return on investment?
v. Does
effective administrative control system affects a manufacturing firms operating
expense ratio?
vi. Does
effective administrative control system affects the company’s return on equity?
vii. Does
effective financial control affect the company’s gross profit margin?
viii. Does
effective financial control affect the company’s net profit margin?
ix. Does
effective financial control affects the company’s return on investment?
x. Does
effective financial control affects a manufacturing firms operating expense
ratio?
xi. Does
effective financial control affects a firm’s return on equity?
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 assumption agree or
disagree with facts available in our Nigeria organizations.
H01:
Effective Administrative control does not significantly effective gross profit
margin.
H02:
effective Administrative control does not significantly affective net profit
margin.
H03:
Effective Administrative control does not significantly affective return on
investment.
H04:
Effective Administrative control does not significantly affective operating
expenses ratio.
H05:
Effective Administrative control does not significantly affective return on
equity.
H06:
Effective financial control does not significantly affective gross profit
margin.
H07:
Effective financial control does not significantly affective net profit margin.
H08:
Effective financial control does not significantly affective return on
investment.
H09:
Effective financial control does not significantly affect operating expense
ratio.
H010:
Effective financial control does not significantly affect operating expense
ratio.
1.6 SIGNIFICANCE OF THE STUDY
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 organization 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.
1.7 SCOPE OF THE STUDY
This
work wills to some extent X-ray the meaning of effective audit and profit in
general, a number of public limited liability companies in the manufacturing
sector, specially the study will focus mainly on brewery manufacturing
companies.
1.8 LIMITATION 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 responses to question 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.
1.9 DEFINITION OF TERMS
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 organizations operations.
1.10 ORGANIZATION OF THE STUDY
This
work is divided into three chapters. Chapter one centres on the introduction to
the work 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, significance of the study, definition of terms, and organization of
study.
Chapter two dwells on literature review.
Here relevant literatures are used to give an understanding of what the topic
of study is all about. The terms; 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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