The Impact And Challenges Of Internal And External Auditors In Manufacturing Companies

Project and Seminar material for Accountancy

Project and Seminar material for Accountancy


This work “THE IMPACT AND CHALLENGES OF INTERNAL AND EXTERNAL AUDITOR IN MANUFACTURING COMPANIES” was chosen by the researcher so as to enable and prove the essence why auditors are needed in companies. The study is aimed at investigating the behavior of both workers, auditors, employees, managers in the auditing of manufacturing companies. The study is divided into five (5) chapters.

The first chapter is the introductory chapter which gave definitions of auditing, manufacturing companies, internal auditor and external auditor. Chapter two gave us more about auditors i.e their qualification, impact, problems and challenges, their work with the law and companies. While chapter three gave practical example with data collection and illustrations and also chapter four, finally chapter five gave concluding remarks.

Table Of Contents

Preliminary Page(s)

  • Title page
  • Approval page
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of contents

Chapter One

1.0 Introduction

  • 1.1 Statement of research problem
  • 1.2 Research questions
  • 1.3 Objectives of the study
  • 1.4 Significance of the study
  • 1.5 Scope of the study
  • 1.6 Limitation of study
  • 1.7 Definition of terms

Chapter Two

2.0 Literature Review

  • 2.1 Concept of auditing
  • 2.2 Nature of internal and external auditing
  • 2.3 Methods of audit approach
  • 2.4 The necessity of external and internal auditors
  • 2.5 Auditors and the law
  • 2.6 Audit report
  • 2.7 Auditors liability
  • 2.8 The importance of audit in manufacturing companies
  • 2.9 Role of an auditor in a manufacturing company
  • 2.10 Principles of auditing

Chapter Three

3.0 Methodology

  • 3.1 Introduction
  • 3.2 Research design
  • 3.3 Rational for choice of variables
  • 3.4 The methodology
  • 3.5 Data selection of analysis

Chapter Four

4.1 Presentation and Analysis of Data

  • 4.2 Introduction
  • 4.3 Data presentation, classification and calculations
  • 4.4 Interpretation of result

Chapter Five

5.0 Summary, Recommendation and Conclusion

  • 5.1 Summary of findings
  • 5.2 Recommendation
  • 5.3 Conclusion
  • Bibliography
  • Appendix
  • Questionnaire

Chapter One

1.0 Introduction

Manufacturing companies are companies that transform raw materials or semi finished goods into commodities, goods usable by humans. Manufacturing companies are companies that produce commercially. Their main aim is to produce goods and render services to members of the public at a minimum cost to maximize profit.

In manufacturing companies, some various items of expenditure are allocated to sub division of the final account in accordance with the principles which govern cost accounts. However, when a manufacturing company produces more than one particular product, different accounts are to be prepared by the different departments.

In manufacturing company, company established by law is treated as a separate legal entity different from shareholders or subscribers. The owners or shareholders of a manufacturing company present their account to the auditors who audit and report if the account shows a true and fair view before it is been presented to the directors of the company. Without the report of the auditor in a manufacturing company the shareholders i.e the owners of the company finds it hard to accept the account given to them by the directors.

The auditors both internal and external auditors at times have problem in computing accounts and giving reports because it involves the strenuous method of bringing together all accounts of the company and summary of these accounts and control system.

An auditor is said to be an accountant who undergo a recognized professional course and a member of one of the recognized account bodies resident in Nigeria and who is carrying out a professional accountancy practice. For an auditor to audit a company account he must not be an employee or a body corporate of the company been audited. An auditor should be recognized in the context of the institute of chartered accountants of Nigeria.

An external auditors are auditors that are independent of the organization that are auditing. External auditors can be government auditors or an independent public accounting firm. They report to the company’s shareholders. They provide their experienced opinion on the truthfulness of company’s financial statements and perform work on a test basis to monitor system in place.

Internal auditor is an auditor that work within an organization and report to its audit committee and directors. They help to design the company’s organizing systems and help develop specific management policies. They also ensure that all policies implemented for risk management are operating effectively the work of the internal auditors tends to be continuous and based on the internal control system of a business of any size.

1.1 Statement Of Research Problem

It has been a generalized fact and knowledge to all and sundry that businesses are unable to control their affairs and existence in the longrun. This is due to some of the attribute of the administrative weakness and misappropriate that are inherent in business resulting to the controversy of the reality of the audit work in manufacturing companies.

Manufacturing companies have been beclouded with puzzling circumstances like financial impropriety, lack of auditing control, lack of independence of the internal control, incomplete recording of business transactions over blow expenses to reckless spending, non compliance to accounting standards, mismanagement of scarce funds.
It has not be proven that auditors and audit report are not needed in manufacturing companies and the importance and effect of these auditors cannot be ruled out.

With this regard, the researcher want to investigate the importance and challenges of external and internal auditors in the management of manufacturing companies and attempts to answer the following questions

  1. Is there need for external and internal auditors in manufacturing companies
  2. Will management contribute to management efficiency
  3. Does the auditors have the right to access the company’s book of account and financial statement to get all relevant information.
  4. Does the auditors (internal and external) contribute to the detection of fraud.
  5. What type of challenges or problem do auditors encounter in delegating out their responsibilities.

1.2 Research Questions

To address the above mentioned problems, the following hypothesis are formulated

  1. To establish the necessity and challenges of internal and external auditorium manufacturing companies
    • Ho: There is need for internal and external auditors in manufacturing companies
    • Hi: There is need for internal and external auditors in manufacturing companies
  2. To find out if audit report has been hampered
    • Ho: Inefficient internal audit and internal control has hampered audit reports.
    • Hi: Efficient internal audit and internal control has hampered audit reports.
  3. To find out whether internal and external auditor improve the management of manufacturing companies
    • Ho: The internal and external auditors do not improve management.
    • Hi: The internal and external auditors improves management.
  4. To find out challenges faced by internal and external auditors
    • Ho: The internal and external auditors does not face some challenges.
    • Hi: The internal and external auditors does not face some challenges.
  5. To find out how internal and external auditors are opposed to the incursion of the external auditors
    • Ho: Internal auditors are opposed to the incursion of external auditor
    • Hi: Internal auditors are not opposed to the incursion of external auditor

1.3 Objectives Of Study

The objective of this study is to institute the need and affirm the important, effects, impacts, needs and challenges of external and internal auditors in the management of manufacturing companies.

It also has the objective of ascertaining if the audit records given by internal and external auditors about the financial statement if correct i.e it shows a true and fair view.

To also determine the extent to which internal and external audit helps in enforcing compliance to rule and regulations regulating manufacturing companies. Another important objective of the study is to find out if the internal and external auditors inspects, verifies organizational assets and liabilities, books of account and to check the maintenance of adequate control in the manufacturing companies encountered by the auditors while performing audit functions.

1.4 Significance Of Study

The research work is being carried out to enable the research to be more enlightened about external and internal auditors in the course of manufacturing companies.

The study will be of immense benefit to the shareholders who have contributed the funds for the business and needs a reward in form of dividends. It will also help a great deal by way of determining the type of policies which an auditor will use upon the process of auditing manufacturing companies.

Lastly, the relevant of the study is to ascertain the internal control system that is operational ion manufacturing companies so that it can be effectively administered saved from mal-administration. It is hoped that manufacturing research work by agreeing with the recommendations, the study and appreciates the need for external and internal auditors.

It will also be of immense help to future researcher who will find the study interesting in their research pertaining same things.

1.5 Scope Of Study

This research work has been confirmed to be the impact and challenges of internal and external auditors in manufacturing companies. In the course of the study, the researchers shall examine the record system.

This will enable the researcher to find out whether the manufacturing companies keep proper records and books of account. Analysis on test of accounts will be carried out to enable the study give an insight as to the corrections and accuracy of the records kept.

Furthermore, the research will identify the system of management and administration set up, the efficiency and effectiveness of the internal control system and finally where possible conduct compliance and substantive tests.

1.6 Limitation Of Study

The researchers in the course of carrying out the research was faced with a lot of problem. The research is limited to a particular area or vicinity due to its peculiarity and the limited available data, time factor; majority of the findings depends greatly on the writers efforts research the research work is limited to manufacturing companies. Hence, there is low possibility of generalizing the study to cover other classes of business organizations.

Time factor posed a very high limitation to the study due to the respondents who might not give quick response to questionnaire or interview they may be engaged in other activities company and when he seems available to answer the questions, the respondent gives limited time which might not be enough to answer all questions.

Finally, another great problem encountered in this research work is financial aids and assistant, the available fund was not enough to sustain the vast research proposals.

1.7 Definition Of Terms


An auditor can be defined as an independent professionally qualified accountant who has undergone a recognized professional course and is a member of the recognized accountancy bodies resident in Nigeria who is appointed for the purpose of examining the statement of accounts, assessing of assets and liabilities of the relevant organization with a view to ascertain the true and fair view of the financial statement.


This is the systematic investigation and appraisal of transactions procedures operations and resulting financial statements.


This is defined as an independent examination of financial statement or related financial information of an enterprise by an appointer auditor in pursuance of that appointment and in compliance with any relevant statutory obligations.

Internal Control

This is the whole system of control, financial or otherwise established by management in other to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.

Internal Auditors

This is an auditor that works within an organization and report to its audit committee and directors. They help design the company’s organizing systems and help develop specific risk management policies.

External Auditors

These are auditors that are independent of the organization they are auditors. External auditors can be government auditors or an independent public accounting firms.

Compliance Test

These are those tests which seek to assure the auditors (i.e provide audit evidence) that the internal control procedures are being applied (i.e working as prescribed by management.

Substantive Test

These are those tests on transactions and balances and other procedures such as analytical review, which seek to provide audit evidence as to the completeness accuracy and validity of the information contained in the accounting records or financial statement.

Financial Statement

This is a statement that has been prepared by a firm to ascertain its profit and to know its financial positions. It is the final books of account known as profit and loss account and balance sheet.


The auditor profession emphasize on this doe of conduct because this is a position which will enable auditor express his opinion without biasness. An independent auditor is one which has no interests in the clients firm to such extent of tilting his opinion towards one side.

True And Fair View

The main objective of an auditor is to form an opinion as to the truth and fairness of the products accounts. Truth means exactness and accuracy and this could be applied to the existence, ownership, classification and valuation of assets and liabilities.

Fairness may be evaluated, statistical techniques, adopted, confidence limits and estimate taken in the light of available information. Therefore this auditor must take reasonable still and care in her judgement on fairness.

Chapter Five

5.0 Summary, Recommendation And Conclusion

This is the concluding chapter of this study. The finding and the result of the findings will be presented in this chapter and a general conclusion in respect to the outcomes of the study and recommendation for further research will be outlined.

5.1 Summary Of Findings

The concept of effectiveness in the performance of a particular duty of job depends on the individuals sense of judgement and the criterion available for such activity to be judged.

Audit is very important in manufacturing sector although effective still have problems which have constituted to unsatisfactory performance as expected of an audit. It is necessary for organization to engage the service of internal auditing improves management of manufacturing companies.

It was noticed that the problem ranges from inadequate record keeping of account books, inadequate staff or unqualified and not well trained staffs, lack of independence of auditors, misappropriation of information, mismanagement of funds, deliberate refusal to supply vital information on the pretense of confidentiality.

5.3 Recommendations

I would like to make mention of some key points I think will go a long way in providing answers to some of the problems faced by the auditors.

  1. Making available books of account, records as required by section 36 (3) of CAMA to auditors without withholding any information that will be of importance in the audit of the account.
  2. Staffs should be trained well and should have the qualification and also they should be developed. These training can be achieved by allowing staffs study leave and be given the chance to learn and attend public lectures.
  3. Firms should assist the auditors in providing all information at times third parties are needed to provide these information within the organization be audited so the firms should give their full cooperation to the auditors and not withhold any vital information all in the name of confidentiality.
  4. The use of computer and other data processing devices should be encouraged at the grass root level.
  5. The internal control system should be overhauled to forestall the weakness in the collection of money recording and the process of banking. There should also be separation of duties of offices responsible for each of the work.
  6. The Nigeria accounting standard board (NASB) should encourage literature write up in the area of auditing accounts.

5.4 Conclusion

A major problem of manufacturing companies is that some of them lack the finance or the willingness to engage the service of a qualified auditor that will help keep their books and records in a proper manner.

The importance of auditors are over looked in this part of the world. Apparently, most of our manufacturing companies and some government establishment never care to set up an internal auditors or department. However most times the make deal of internal auditors but still fail to take the advice of the internal auditors.

In drawing conclusion it is pertinent to emphasize that the contribution of auditing to the programs and development of manufacturing companies

  1. Auditing creates an atmosphere of confidence for the owners and creditors of the business this is due to the fact that they have access to all the information necessary for making decision.
  2. Auditing gives credibility to the financial statement which is a measure of ascertaining the economic performance of the operation of the company.
  3. Auditing gives commendation to areas of strength which enables activities in those areas to be consolidated and also highlight areas of weakness.

From the above mentioned, it can be seen that internal and external auditors has a great impact on manufacturing companies.

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