Impact Of Auditing Control On Financial Management In A Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

Abstract

This paper aims to examine impact of auditing control on financial management in a manufacturing company.
The study employed the use of descriptive survey research design.

This study was conducted among management staffs of Nigerian Brewery, Ibadan in department of finance.

As a result of the inability of the researcher to effectively study the whole population strength, a representative number was chosen as the sample size population. 50 respondents was used as the sample size. Data was collected from primary and secondary sources. Primary data was obtained through questionnaire and personal interviews with the respondents. Tables and simple percentage was used as technique of analyzing the research questions.
Findings from the study revealed that there is a significant relationship between control activities and financial management of organizations

There is a significant relationship between measures of financial management and organizational performance. There is significant correlation between auditing and financial management

It is recommended that While there is an extent of continuing communication between internal auditors and management, internal auditors should not be controlled by the top management and must not be any manipulation by the management to undermine the audit outcomes.

Chapter One

Introduction

1.1 Background to the Study

The real reason behind financial responsibility and accountability for organizations to assign their trust of management of resources or institutions to one another, person or group of individuals to manage has been in existence for a long period of years. The suppliers of financial or business resources are usually not the same with those managing the institutions or businesses both in public and private establishments. The management of the organisations or businesses are tasked by the owners to report on financial performance of the organisations or institutions. Conversely, it is very cumbersome to monitor managers’ actions and information asymmetry between the managers and owners of institutions which results into the ‘‘agency problem’’ relating to the stewardship of institutions (Iain and Stuart, 2000). Agency theory, which is derived from financial economics literature, is part of the positivist group of theories (Adams, 1994). It maintains that a firm is made up of a nexus of agreement between the providers of resources (principals) and managers (agents) who are responsible for utilising for an economic, efficient and effective use of resources under their care. Again, it is of the view that managers posses more and detailed information than owners and that they would employ effective and efficient means to increase their capital or resources (Adams, 1994).

The public sector embodies an owner-manager (principal-agent relationship). The officer in charge of audit must occassionally report to the management for their performance regarding to the management of resources and the level to which the goals of the management have been attained. The managements do not believe in the performance reports provided by the management of public establishment and as a result demand for independent report. The principals are required to ensure that third party authenticates the integrity of financial reporting, compliance and financial performance reports. The stakeholders heavily rely on the auditor who is independent to provide an objective report on the true and fair view of the financial management reports by public officers and also to comment on whether the resources entrusted in their care have been efficiently utilized in accordance with the stakeholders’ interest. In conclusion, the functions of audit portray as an important monitory strategy of public financial management and increasingly as an activity for the improvement of public institution financial management.

Auditing today encompasses a wide range of activities, which have different set of objectives. Traditionally, it has been a control mechanism to provide assurance that the government officials or its ministries (internal audit) and the established legislature (external audit), that public funds are received and used in accordance with the required appropriate and established relevant laws and regulations (compliance audit) and that the government financial performance reports are true and fair and they are prepared from the underlying financial records and represents its financial position (financial audit). According to Diamond (2002), “The audit function has involved in many countries to take a more comprehensive view of the economic and social implication of government operations often termed as “value for money” or performance audit”.

Auditing practice is a foundation for effective financial management and it is important to ensure effective and efficient operations as well as the appropriate application of controls. It determines compliance with spelt out financial regulations and directives and also measures, the utilization of adopted internal controls; examines the value and importance with which resources are utilized; examines the dependency and credibility of records maintenance and reporting; examines abnormalities; guarantees that resources are brought together and reported and authenticates inventory records and their identity with physical inventory (INTOSAL, 2001). The auditing practice is value added if it achieves its objectives by improving the organization regarding to governance, risk management and internal controls. The work of internal auditor is not complete until irregularities are rectified and remain rectified (Sawyer, 1995). Van Gansberghe (2005) posited that the effectiveness of auditing in the organizations should be measured on the basis of their contribution to the effectiveness and efficiency of device delivery, which in turn propels for improved internal audit service.

Chepkorir (2010) noted that auditing assists organizations to accomplish their objectives by putting in place an orderly, controlled approach to review and enhance the effectiveness of risk management, control and governance processes. The auditing activity investigates exposure of risk with regards to the organization’s governance, operations and information systems. The auditors are required to give recommendations for better financial management in those areas where opportunities or weaknesses are identified.

Conversely, the 2008-2009 global economic crises (Credit crunch) has weakened the above all, lessened the credibility of the internal audit units in advancing good corporate governance. Many organizations in all countries are associated with misappropriation of funds and corruption resulting from feeble internal control system (Van Gansberghe, 2005). It is on the basis of this that this study sets to investigate the impact of auditing control on financial management in a manufacturing company in Nigeria.

1.2 Statement of the Problem

Efficiency in internal controls will bring about confidence in organization’s ability to perform tasks and cut all its excesses and losses through proper monitoring and enhancing organizational and financial management processes as well as ensuring compliance with important laws and regulations (Kirsty 2008). Muio (2012) in his study on the impact of internal control on the financial performance of private hospitals in Kenya revealed that there is significant relationship between internal control system and financial performance.

In Nigeria today, a number of important trends have recently emerged within the manufacturing sector. It is important to categorically state that manufacturing sector is a major contributor to the economic growth of the country. According to the Economic Survey 2015, Nigeria’s National Bureau of Statistics revealed that manufacturing sector contribution to Gross Domestic Product of the country. Several studies have been carried out on auditing and financial management as well as on the profitability of diverse firms. For example; globally studies by Abu-Musa (2004); Chunlan (2009); Wittayapoom (2011); and regionally Kakucha (2009) and Nyakundi & Nyamita (2014) have established there exist a relationship between effective internal control and financial performance of the firm. However, majority of these studies have concentrated on different industries, while others have concentrated on a mix of listed firms in their localities. Ndifon and Patrick, (2014) study on the impact of internal controls activities on financial performance of tertiary institutions in Nigeria, Ironkwe Uwaoma (2015) researched on the impact of internal control on the financial management; a case of production companies in Nigeria. The findings were that though various internal controls systems do exist in the organizations more weight had been given to operational controls compared to other types of controls. There has been no research done on effects of auditing on financial management of manufacturing companies in Nigeria. Certainly, that is what this study seeks to investigate b using the Nigerian Brewery Company, Ibadan as a case study.

1.3 Research Objectives

The main objective of the study was to establish the impact of auditing control on financial management in a manufacturing company in Nigeria.

The specific objectives included;

To determine the effects of control activities on financial management of manufacturing companies in Nigeria
To establish the measures of financial management in manufacturing companies in Nigeria
To find out the techniques of financial management in manufacturing companies in Nigeria
To establish the determinants of auditing and financial management in manufacturing companies in Nigeria

1.4 Research Questions

This study sought to answer the following research questions in view of the specific objectives

What are the effects of control activities on financial management of manufacturing companies in Nigeria?
What are the measures of financial management in manufacturing companies in Nigeria?
What are the techniques of financial management in manufacturing companies in Nigeria?
What are the determinants of auditing and financial management in manufacturing companies in Nigeria?

1.5 Research Hypotheses

The followings are the research hypotheses that were tested for this study:

There is a significant relationship between control activities and financial management of organizations
There is no significant between measures of financial management and organizational performance
There is significant correlation between auditing and financial management

1.6 Significance of the Study

The findings of the current study may help identify gaps within the systems of financial controls in manufacturing organizations. Consequently, the research findings may be important in addressing these gaps. The findings may also be of invaluable benefits to the management and those charged with governance since they are bound to enable them streamline the systems of financial controls. Ultimately, the findings are likely to ensure improved financial management and also attainment of the organizations’ objectives. The study may also add to the existing knowledge regarding auditing and financial management particularly in the manufacturing sector. The study may generate knowledge to link auditing and financial management which may guide policy makers in the planning for the public resources. The findings of the study may be helpful to all academicians in finance and accounting, management, legal, and other pertinent fields.

1.7 Scope of the Study

The conceptual scope of this study lies on the impact of auditing control on financial management in a manufacturing company in Nigeria. The specific context of interest was the Nigerian Brewery, Ibadan. The management staffs of the organization in the department of finance were involved since they have knowledge and would provide information on finance reports in relation to auditing control system of manufacturing sector in Nigeria. It is believed that this would provide adequate information for the study and therefore give reliable results and findings.

1.8 Limitations of the Study

The respondents approached were reluctant in giving information fearing that the information sought would be used to intimidate them or print a negative image about them or their enterprises. Some even turned down the request to fill questionnaires. The study had an introduction letter from the institution and assured them that the information they gave was to be treated confidentially and it was to be used purely for academic purposes.

The researcher also encountered problems in eliciting information from the respondents as the information required was subjected to areas of feelings, emotions, attitudes and perceptions, which could not be accurately quantified and/or verified objectively. The researcher encouraged the respondents to participate without holding back the information they had since the research instruments would not bear their names.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Preamble

This chapter presents the summary and conclusion that can be drawn from the study. It also presents the researchers recommendations with regards to the findings of the study and proposed areas for further studies by other researcher.

5.2 Summary

The main objective of the study was to establish the impact of auditing control on financial management in a manufacturing company in Nigeria.

The specific objectives included;

To determine the effects of control activities on financial management of manufacturing companies in Nigeria.
To establish the measures of financial management in manufacturing companies in Nigeria.
To find out the techniques of financial management in manufacturing companies in Nigeria.
To establish the determinants of auditing and financial management in manufacturing companies in Nigeria

Findings from the study reveal that there is a significant relationship between control activities and financial management of organizations. Internal controls provide that complete and accurate records are kept of transactions involving customers and that the firm assets are secured. There is no significant relationship between measures of financial management and organizational performance. Managers’ report to owners on the results of their stewardship for the resources entrusted to them through financial statements which reveal the financial performance of an entity. There is significant correlation between auditing and financial management.

Support from management for internal audit unit work is one of the essential factors that determine the extent to which the unit can carry out its activity and achieve the set audit objectives.

5.3 Conclusion

This paper aims to examine impact of auditing control on financial management in a manufacturing company.
The study employed the use of descriptive survey research design.

This study was conducted among management staffs of Nigerian Brewery, Ibadan in department of finance.
As a result of the inability of the researcher to effectively study the whole population strength, a representative number was chosen as the sample size population. 50 respondents was used as the sample size. Data was collected from primary and secondary sources. Primary data was obtained through questionnaire and personal interviews with the respondents. Tables and simple percentage was used as technique of analyzing the research questions.
Findings from the study revealed that there is a significant relationship between control activities and financial management of organizations

There is a significant relationship between measures of financial management and organizational performance. There is significant correlation between auditing and financial management

5.4 Recommendations

Arising from the study, the following under listed points are herewith recommended:

The findings of the above studies shown that people would appreciate internal audit profession to be very attractive to them and even those who accept and practice internal audit may not perform their duties with high professionalism if they do not see the value added to the overall achievement of an organizational objectives in relation to corporate governance, risk management and controls.

While there is an extent of continuing communication between internal auditors and management, internal auditors should not be controlled by the top management and must not be any manipulation by the management to undermine the audit outcomes.

Internal audit practices in organization/institution must be objective and impartial, explaining that it should perform its activity free of doubts and interference.

It is also instructive to revolve individual auditors in the framework of the department, so that the routine performance of work activities is avoided. The chief internal audit executive should be responsible that the department executes its activities in accordance with the due principles and code of the profession. The professional competences of the department staff must always be ensured by ensuring that staff attends continue professional development programmes. The internal audit department is accountable to the institution’s management, and its board of directors, possibly to the audit committee. These units or organs of the organization or institution should largely be informed as to the progress of the audit plan and the performance of the internal audit department or unit objectives.

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