The Impact Of Internal Audit Efficiency On The Financial Performance Of Companies (A Case Study Of Julius Berger Plc)

Project and Seminar Material for Accountancy / Accounting

The Impact Of Internal Audit Efficiency On The Financial Performance Of Companies (A Case Study Of Julius Berger Plc)


Chapter One


Introduction

1.1 Background to the Study

The Internal audits constitute an independent appraisal function which review the internal control system of the organization established. Auditing ensures the effective, proper, and economic use of resources in the organisation through the objective examination, evaluation and reporting on the adequacy of internal control. The effectiveness of the auditing functions lies on its independence; The independence in terms of organisational status and personal objectivity of the internal auditor facilitates the proper and effective performance of his duties .It is therefore essential that the internal audit unit be appropriately staffed with people with the right qualification and given the training necessary .The internal auditor must constructively align its functions with the management policy and maintain a good working relationship and mutual understanding with management, external auditors, and other review and exercise due care in executing its function of planning, controlling and recording of work. The internal control system must be properly evaluated to ensure its adequacy and effectiveness .The evidence obtained in the audit function should constitute the auditor’s report which must be communicated to the management for appropriate action. It is also the auditors role to ensure that all recommendations and conclusions are monitored to determine that action has been taken on them .The organisation terms of reference for the internal audit function should be clearly specified to enhance the auditors independence in the execution of his legitimate functions. A crucial function of internal auditing is to facilitate management in the creation of value for money. through economic, efficient and effective use of resources. Consequently the auditor must be objective in the presentation of its report to management

So as to exercise judgement, express opinions and present recommendations with impartiality. The problem confronting the research therefore is to determine the impact of internal audit efficiency on the financial performance of companies A case study of Julius Berger PLC


1.2 Statement of the Problem

The Internal audits constitute an independent appraisal function which review the internal control system of the organization established. Auditing ensures the effective, proper, and economic use of resources in the organisation through the objective examination, evaluation and reporting on the adequacy of internal control. The effectiveness of the auditing functions lies on its independence; The independence in terms of organisational status and personal objectivity of the internal auditor facilitates the proper and effective performance of his duties and of enhancing the financial performance of the organisation

But many instances reveal that the internal auditor is not given the freedom and independence to exercise his functions objectively. Unneccessary influences by some senior staff who are part of management some time digress the sense of objectivity of the internal auditor in presenting is report and recommendations to management. This as a result affects the objective of audit and that off the organisation in ensuring effective and economic use of the firm’s resources and of the firm financial performance. The problem confronting the research therefore is to determine the impact of internal audit efficiency on the financial performance of companies A case study of Julius Berger PLC


1.3 Research Question

  1. What is the impact of internal audit efficiency on the financial performance of companies?
  2. What is the impact of internal audit efficiency on the financial performance of Julius Berger Plc.?

1.4 Objective of the Study

  1. To determine the impact of internal audit efficiency on the financial performance of companies
  2. To determine the impact of internal audit efficiency on the financial performance of Julius Berger Plc.

1.5 Significance of the Study

The study intends to provide an appraisal of the impact of internal audit efficiency on the financial performance of companies A case study of Julius Berger Plc.

It shall also serve as a veritable source of information on the fundamental issues of auditing


1.5 Statement of the Hypothesis

  • Ho The impact of internal audit efficiency on the financial performance of Julius Berger Plc is low
  • Hi The impact of internal audit efficiency on the financial performance of Julius Berger Plc is high.

1.7 Scope of the Study

The study focuses on the appraisal of the impact of internal audit efficiency on the financial performance of companies. A case study of Julius Berger Plc.

It shall serve also serve as a veritable source of information to managers and other professionals.


1.8 Limitation of the Study

The research was confronted by some constraints which include geographical factor and logistics.


1.8 Definition Of Terms

Auditing Defined

The Internal audits constitute an independent appraisal function which review the internal control system of the organization established. Auditing ensures the effective, proper, and economic use of resources in the organisation through the objective examination, evaluation and reporting on the adequacy of internal control.

Organisation

The organisation consists of a group of people in the conduct of business activities of providing goods and services with the common purpose of achieving corporate aims and objective.

Audit Committee

A committee Instituted to carry out the external and internal audit plans, programs and reviews internal control arrangements.

Internal Auditor

A person whose function is the conduct of internal audit in the organisation.


Chapter Five


Summary, Conclusions and Recommendations

5.1 Summary

The importance of IA is demonstrated in the growing demand for this service in all organisations and in the rapid growth of its professional organisation, the IIA. However, researchers have paid little attention to this function and the effect it has on financial performance of organisations.The aim of this study was to establish if there is a relationship between internal audit efficiency and financial performance of manufacturing companies in Nigeria. The source of information was primary data collected from a sample of 20 banks of which one respondent was picked from each bank. Quantitative and regression analysis were used to analyse data collected.

From the analysis the study established that professional competence of internal auditor affects performance of manufacturing companies in Nigeria to a great extent. This established that measures that can enhance the efficiency of auditors are important for effective fraud detection, In manufacturing companies frauds are identified by the internal audit function ,fraud detection, and fraudulent activities are inherently unpredictable and difficult to detect and they affect the performance of the bank, conscientiousness correlates with task performance just as strongly as cognitive ability, the study established the auditors in the organization are qualified to undertake audit function.

The study established the internal controls affect financial performance of manufacturing companies in Nigeria to a great extent. The study also revealed that internal Controls audits in the organization have features built into them to ensure that fraudulent truncations are flagged or made difficult to transact, that intentional errors are concentrated in relatively few audits and these are fairly predictable by industry, others agreed that cash receipts bear fairly strong controls, firms that disclose an internal control problem experience a significant increase in market-adjusted cost of capital, the greater the degree of competition, the greater would be the need to control costs as, and that intentional errors are concentrated in relatively few audits and these are fairly predictable by industry.

The study established that internal audits standard affects the financial performance of manufacturing companies in Nigeria to a great extent. The study also revealed that complying with professional standards is the most important contributor to IA‘s added value formal auditing standards recognise that internal auditors also provide services regarding information other than financial reports formal auditing standards recognise that internal auditors also provide services regarding information other than financial reports, auditors to carry out their role objectively and in compliance with accepted criteria for professional practice, Standards for audits and audit-related services influence the performance of manufacturing companies, performing auditing work according to internal auditing standards contributes significantly influence the effectiveness of auditing, and finally that internal audit evaluate and contribute to the improvement of risk management, control and governance using a systematic and disciplined approach in the banking.

The study sought to establish that Independence of Internal Audit affect the financial performance of manufacturing companies in Nigeria to a great extent. The study further revealed that, an internal auditor must be independent of both the personnel and operational activities of an organization, the internal audit department in a banking institution must be independent from the activities which it controls and must likewise be independent from the day-to-day internal control processes, each bank should have formalised principles of internal audit providing for its position and powers in the framework of the bank. Independence is the essence of auditing, the integrity of the auditor‘s opinions, conclusions and recommendations would be suspect, internal auditors may not have a conflict of interests with the bank and finally that independence is necessary for the effective achievement of the function and objective of internal audit.


5.2 Conclusion

The study revealed that there was greater variation in financial performance of manufacturing companies due to changes in internal audit standards, independence of internal audit, professional competency and internal control; this shows that changes in financial performance of manufacturing companies could be accounted for by changes in internal audit standards, independence of internal audit, professional competency and internal control. The study also established that there was a strong positive relationship between financial performance of manufacturing companies and internal audit standards, independence of internal audit, professional competency and internal control.

The study revealed that internal audit standards, independence of internal audit, professional competency and internal control had a positive relationship with financial performance of manufacturing companies, the study found that a unit increase in internal audit standards would lead to increase in financial performance of manufacturing companies, a unit increase in independence of internal audit would lead to increase in financial performance of manufacturing companies, a unit increase in professional competency would lead to increase in financial performance of manufacturing companies and further unit increase in internal control would lead to increase in financial performance of manufacturing companies.

The study found that measures that can enhance the efficiency of auditors are important for effective fraud detection. The study concluded internal Controls audits in the organization have features built into them to ensure that fraudulent transactions are flagged or made difficult to transact. The study further concludes that an internal auditor must be independent of both the personnel and operational activities of an organization.


5.3 Recommendations

  1. There is need for the internal auditors to continuously update themselves with the changing times and technologies and sharpen their skills. By applying skills to the most critical points, building personal and professional credibility and recognising and responding to the needs, internal auditors can become indispensable thus speeding good governance and enhancing efficiency of internal audit.
  2. The management of manufacturing companies should keep organizing seminars and workshops whereby these internal auditors would be trained frequently by experts either internally or externally. Internal Auditors must have sufficient proficiency and training to carry out the tasks assigned to them. The auditor’s work must be carefully directed, supervised and reviewed. The amount of supervision required corresponds to the experience and skill of the auditor.
  3. The head of the internal audit department should be responsible to the management/board in the organisation with sufficient authority to promote independence and to ensure broad audit coverage, adequate consideration of audit reports, and appropriate action on audit recommendations.
  4. The management of manufacturing companies should also procure the latest ICT audit software’s. This would enhance fast delivery of services and detection of frauds or any mischief in this field. Internal auditors should be fully trained on how to use the software and fresher courses should also be increased in this regard. Frequent upgrading of the software should be done to keep abreast with the changing technology.

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