AYO PROJECT
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THE SIGNIFICANCE OF EXTERNAL AUDITING IN THE BANKING INDUSTRY
(A STUDY OF FIRST BANK OF NIGERIA PLC IN LAGOS)
BY
ADENUGA, AYODELE SOLOMON
MATRIC NO: 080201012
A RESEARCH PROJECT SUBMITTED TO UNIVERSITY OF LAGOS, IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF SCIENCE (B.SC) IN ACCOUNTING.
JULY, 2011
1
CERTIFICATION
I hereby certify that this research work was carried out by
ADENUGA, AYODELE SOLOMON, matric no.: 080201012 under
my supervision.
---------------------------------- ----------------------MR. O. P.
OKPALA Date
(Project Supervisor)
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DEDICATION
This research work is dedicated to Almighty God, for His infinite
mercy and love throughout my programme.
ACKNOWLEDGEMENT
3
First and for most, I give thanks to Almighty God for His guidance
throughout the period of this programme.
I wish to express my profound and sincere gratitude to my able and
dynamic project supervisor, Mr. O. P. Okpala, for finding time out of
crowded schedule to supervise this work and whose love of reading
encouraged me to write without his motivation and aspiration, this
project would not have seen the light of the day.
Also recognized here, are the lecturers in the various departments in
University of Lagos, for their level of commitment to teaching is
highly appreciated.
Also to my beloved parents, Chief and Mrs. Adenuga, S. O. who show
love and concern toward my education. May the Almighty God
continue to bless them.
In a very special way, I must not fail to thank my siblings, Kemi
Adenuga and Abiola Adenuga for their love and moral support.
A host of others I would not like to omit for their contribution which
includes: Mr. Chidozie Nnewnihe, Mr. Godwin Mathew and others
whose names are not mention for lack of space.
Finally, special thank goes to the various authors whose works I was
privileged to consult in the course of preparing this project.
ABSTRACT
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The aim of the study was to examine the significance of external auditing in the banking industry. External Audit is the process of engaging a professional expert empowered to examine these financial statements, to determine whether all the accounting principles are followed and if the account shows a true and fair view of state of affairs. Survey research design was used. The population comprises the entire workers of First Bank of Nigeria Plc in Lagos. The questionnaires were issued to one hundred and twenty (120) respondents which formed the sample size. The samples were drawn using convenience sampling technique. Data collected were analyzed using frequency tables and percentages method. Formulated hypotheses were tested using chi-square (χ2) based on 0.05 probability level of significance.The study shows that external auditing enhances organizational effectiveness. Organizations engage external auditors in order to ensure credible financial statements. External auditing plays significant role in the detection of fraudulent practices in banking organization. Management encourages proper auditing of financial statement. There is a significant relationship between external auditing and the performance in the Nigerian banking industry. The survival and continuity of the organization depend on effective external auditing. The work of external auditor promotes orderly and efficient conduct of operation.It was recommended management of the organization should encourage credible external auditing of the various books of account to ensure credibility and transparency in operations in the banking industry. Management should also encourage periodic review or auditing of account to prevent fraudulent practices in the banking organizations. The organization should endeavour to promote those factors enhance good corporate governance regarding practice of professional auditing in the bank. Employees should show commitment to organizational goals by avoid unprofessional conducts and involvement in fraudulent acts in the banking hall.
TABLE OF CONTENTS
5
Page
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of content vi
Chapter One: Introduction
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 6
1.5 Research hypotheses 7
4
1.6 Significance of the Study 7
1.7 Scope of the Study 8
6
1.8 Limitation of the study 8
8
References
Chapter Two: Literature Review
2.1 History of Auditing
13
2.2 Definition of Auditing
14
2.3 Objectives of Auditing
15
2.4 Status of Auditor
16
2.5 Significant Roles of External Auditors
17
2.6 The Changing Roles of the Audit
20
2.7 Advantages Of Performing An Audit 20
2.8 Role of Auditing in Public Finance Management
21
7
2.9 Importance of Effective Auditing
23
2.10 Prerequisites for Effective Auditing 24
2.11 Fraud 26
2.12 Managing Risk of Fraud 29
2.13 Auditors Responsibility to Consider Fraud 30
2.14 The Cost of Fraud 32
References
Chapter Three: Research Methodology
3.1 Research Design
38
3.2 Population of the Study
38
3.3 Sampling and sampling technique
39
3.4 Research Instrument
39
3.5 Sources of Data Collection
39
3.6 Restatement of Research Questions and Hypotheses 40
3.7 Method of Data Analysis
41
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Chapter Four: Presentation and Analysis of Data
4.1 Analysis of Respondent’s Responses
43
4.2 Analysis of Respondents’ Bio-data
44
4.3 Analysis of Section B part of the questionnaire
48
4.4 Test of Hypothesis
60
Chapter Five: Summary, Conclusion and Recommendation
5.1 Summary of Findings
63
5.2 Conclusion
64
54
5.3 Recommendations
66
9
56
5.4 Suggestion for further studies
66
References
68
58
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
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Auditing was derived from the Latin word “audire” which means “to hear”. In
ancient times, owners of businesses heard the reports made by the auditors.
“Auditing as a branch of accounting is concerned with the efficient use of
resources to achieve a previously determined objective or set of objectives
contained in a plan” (Betty 1975).
A more enduring definition was given in the report of the committee on basic
auditing concepts of the American Accounting Association which defined
Auditing as “a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain
the degree of correspondence between those assertions and established criteria
and communicating the results to interested users.”
However, The International Federation of Accountants (IFAC) Handbook 1997
on Technical Pronouncements defines an audit as “a mechanism that enables the
auditor to express an opinion on whether the financial statements are prepared
in all material respects in accordance with an identified financial reporting
framework.” In Nigeria, the NASB has also offered some insights. For
instance, The Statement of Auditing Standards (SAS) No. 1 on Codification
sees audit in terms of the objectives of an audit. Thus, the objectives of the
ordinary examination of financial statements by the independent auditor is “the
expression of an opinion on the fairness with which the financial statements
represent the financial position, results of operations and changes in financial
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position in conformity with the GAAP (General Accepted Accounting
Principles).
External Audit is the process of engaging a professional expert empowered to
examine these financial statements, to determine whether all the accounting
principles are followed and if the account shows a true and fair view of state of
affairs.
A broader definition of a bank is any financial institution that receives, collects,
transfers, pays, exchanges, lends, invests, or safeguards money for its
customers. This broader definition includes many other financial institutions
that are not usually thought of as banks but which nevertheless provide one or
more of these broadly defined banking services. These institutions include
finance companies, investment companies, investment banks, insurance
companies, pension funds, security brokers and dealers, mortgage companies,
and real estate investment trusts. This research, however, focuses on the
narrower definition of a bank and the services provided by banks in Nigeria.
Banking is the business of providing financial services to customers and other
businesses.
The basic services a bank provides are checking accounts, which can be used
like money to make payments and purchase goods and services; savings
accounts and time deposits that can be used to save money for future use; loans
that customers and businesses can use to purchase goods and services; and basic
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cash management services such as check cashing and foreign currency
exchange. Four types of banks specialize in offering these basic banking
services: commercial banks, savings and loan associations, savings banks, and
credit unions.
Based on the CBN report of 2007, the cases of attempted fraud and forgery in
banks as at year 2007 have surpassed a total of 141. Fraudulent practices,
involving N5.4 billion, $35, 4061,150 were reported in January 2007. In 2006,
1,183 cases were reported involving N4.6 billion, $81.8 million and 14,389
Pound Sterling. The CBN also reported that the backwards development of the
banks was attributable to weaknesses in their internal control system. This
clearly painted the picture of how fraud has penetrated the financial strength of
Nigerian banks.
It is required by the law that every organization must be audited by an external
auditor, whose job is to look into the affairs of the organization. In this case, he
is to ensure that all the records of the bank are properly kept and all banking
rules are followed effectively such that their financial statements will show a
true and fair view of their operations. The external auditor needs to know the
internal control strength, so as to know the type of audit he will carry out.
Fraud and corruption in it effects reduces assets and increases the liability of
any company. In the case of banks, this may result in the loss of potential
customers or a crisis in the confidence of the banking public and in the long run
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it might result in another failed back situation. In the banking industry some are
in the industry because of their love for banking and all it stands for while
majorly some are there to enrich themselves by fraudulent means. Due to the
upsurge of great activities in the banking sector and its dynamic nature, banks
are faced with different kinds of challenges, among which is finding a way to
prevent various fraudulent intentions of both staff and customers. This is the
role that external auditing is expected to fill.
1.2 STATEMENT OF PROBLEM
In the banking industry, fraudulent practices exist and it is the internal auditor –
a worker in the organization – that is responsible for preventing this practice in
his organization. This fraudulent and corrupt practices cannot be fully prevented
by such auditor due to the fact that he is accountable to the organization – which
thereby limits his independence – hence, there is the need for an external auditor
to fully prevent and detect such practices in that organization.
The Nigerian banking sector is yet to come out of the financial sector crisis
facing the entire banks in the country. Banks in the country are faced with poor
liquidity management, poor funds management and poor corporate governance
in the sector. The present rescue mission carried out by the Central Bank of
Nigeria on the nine rescued banks in the country shows that the role external
audit, and other regulatory bodies as put in place by the Apex bank to monitor
the operations of banks in Nigeria is still in doubt.
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Managements of banks today in the Nigerian banking industry have decided to
enrich themselves at the expense of shareholders. This affects the returns on
investment, good social responsibility, good working environment, and efficient
and effective service delivery of the banks.
Finally, the ethics of the banking professions on good management, good audit
practice and implementation of banking policies is not yet at its best and this
can be noticed from the high form of mismanagement which the CBN has
uncovered in some banks.
Fraud and corruption in it effects reduces assets and increases the liability of
any company. In the case of bank this may result in the loss of potential
customers or crisis of confidence of banking public and in the long run and up
in another failed back situation.
1.3 OBJECTIVES OF THE STUDY
The aim of this study is to improve the quality of external auditing in the
banking industry in Nigeria. Specifically, the study intends to:
i. To investigate the effects of poor auditing in the banking industry in
Nigeria if any.
ii. To examine the various steps taken by the apex bank (Central Bank of
Nigeria) in improving the quality of auditing in banks in Nigeria
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iii. To identify how external auditing has been able to expose fraud,
financial mismanagement and fraudulent practices banking
organizations in Nigeria
iv. To make necessary recommendation that will be beneficial to the
banking industry and to the external auditors.
v. To proffer solution to the problem of fraudulent act and
misappropriation of funds in the banking industry.
1.4 RESEARCH QUESTIONS
The following questions were raised for the study:
i. Does external auditing have positive effect on the performance of
Nigerian banking industry?
ii. Is there significant relationship between effective auditing and bank
profitability?
iii. What are the various steps taken by the apex bank (Central Bank of
Nigeria) in improving the quality of auditing in banks in Nigeria?
iv. Do sound audit principles and practices have significant impact on
shareholders’ wealth?
v. How has auditing been able to expose financial mismanagement in
banking organizations?
1.5 RESEARCH HYPOTHESES
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To achieve the objectives of the study, the following hypotheses were
formulated:
Hypothesis 1
Ho: There is no significant relationship between external auditing and the
performance in the Nigerian banking industry.
H1: There is a significant relationship between external auditing and the
performance in the Nigerian banking industry.
Hypothesis 2
Ho: External auditing does not expose financial fraud and mismanagement in
banking organizations.
H1: External auditing does expose financial fraud and mismanagement in
banking organizations.
1.6 SIGNIFICANCE OF THE STUDY
The research study is expected to benefit the Nigerian students, the financial
sectors, the Nigerian business environment, the general public and the
academics environment. This study will help student to know why poor auditing
occurs in practice, especially in the banking industry and will improve their
knowledge so that they will be able to salvage this problem when they start
practicing. The study will help the financial sector to know how fraudulent act
are perpetrated in the banking industry and the way to prevent the act.
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The study will also be of benefit to the public as it will enlighten them to know
how fraud is carried out in the banking industry and the effect this on the
banking industry. This study will improve the body of knowledge with regards
to fraudulent practices in banking industry and also how external auditing can
serve as a means of checking this.
1.7 SCOPE OF THE STUDY
The study focuses on significance of external auditing in the banking industry in
Nigeria. The definition of external auditing, importance of external auditing,
and roles of external auditing in the detection of fraud and mismanagement of
funds in the banking industry would be reviewed in the study. The study is
limited to First Bank of Nigeria Plc in Lagos.
1.8 LIMITATIONS OF THE STUDY
The success of this research study has been threatened by so many set- backs
witnessed. First is the problem of finance, this is a problem because the money
budgeted for the research is not enough due to constant increase in the price of
things. The second set-back is this problem of combining both academic works
with research works. The third set-back is on transportation problem, there was
insufficient money needed to carry out the research which hinders the collection
of more information needed for the study. Time constraint was also
encountered. The time available to carry out the research was not enough due to
the period given.
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REFERENCES
Abel and Asenne. (2007): Mandatory Rotation of External Auditors, Journal
of the Nigerian Accountants P 20-23.
Aguolu .O (2002): Fundamentals of Auditing (2nd Ed) Keridian Associates.
CBN (2004): Central Bank of Nigeria Annual Report and Statement of
Accounts for theYear Ended 31st December, 2004. Abuja: Central
Bank of Nigeria.
CBN (2005): Central Bank of Nigeria Annual Report and Statement of
Accounts for the Year Ended 31st December, 2005. Abuja: Central
Bank of Nigeria.
CBN (2007): Central Bank of Nigeria Annual Report and Statement of
Accounts for the Year Ended 31st December, 2006. Abuja: Central Bank
of Nigeria.
Dike, V.E. (2004): “Corruption in Nigeria: A New Paradigm for Effective
Control”. Africa Economic Analysis. Retrieved on July 7, 2004 .
Howard, J., (2002): Principles of Auditing, USA: Donnelly and Son Co.
Pound, J (1988): “Proxy contests and the efficiency of shareholder oversight”
Journal of Financial Economics, 20,(1) 75-95
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CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
This chapter of the research work focuses on review of relevant literature
bordering on external auditing as a strategic tool for enhancing detection of
frauds and financial mismanagement in banking sectors.
The etymology dictionary explains that the term audit originates from the Latin
word audire, which means “to hear.” Audire in ancient Rome referred to the
“hearing of accounts,” a process in which one official compared his records
with those of another official. As many of the parties interested in the audit
findings were illiterate, audits were presented orally. In modern times, auditing
has evolved into a technical discipline practiced by professional auditors who
provide opinions on whether or not the annual financial statements of an entity
comply with set accounting standards (Abbott, Parker and Park, 2000).
Over the years, auditing has retained its significance in public finance and, as
such, Supreme Audit Institutions (SAI) receives constitutional recognition in
many countries around the world. As watchdogs of public finances, the public
auditors act as critical links in enforcing the accountability of executive
agencies to national and state legislatures and through them to the general
public (Anderson, Francis and Stokes, 1993). The public sector auditor reviews
financial management of public sector entities to ensure that transactions have
been undertaken with due regard to propriety and regularity.
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Recently, several public auditors have also assumed responsibility for assessing
value for money considerations in public projects and programs in recent years.
However, the role of SAIs as public finance watchdogs is still limited in many
developing countries around the world. This state of affairs is the result of
several factors, including financial and skill constraints, SAIs’ lack of
independence from the executive, and poor communication between the SAI
and the legislature and civil society organizations (Carey, Craswell and Simnett,
2000).
Although, public budgeting processes have traditionally excluded civil society
organizations, in the last 10 years or so, civil society organizations in many
developing countries have built effective capacities to analyze and influence
public budgets. Generally, however, civil society engagement in public
budgeting has focused on examining the executive budget presented to the
legislature and monitoring the subsequent implementation of the budget. There
has been much less civil society engagement with the auditing of expenditures
after a budget has been implemented and there has thus been limited interaction
between civil society organizations and SAIs.
In recent years the importance of good corporate governance has received
significant public and regulatory attention. A crucial part of an entity’s
corporate governance is its external audit function (Nestor, 2004). In association
with this, there has also been significant public concern about the level of fraud
within organizations.
21
Banks play a central role in the economy. They hold the savings of the public
provide a means of payment for goods and services and finance the
development of business and trade. To perform these functions securely and
efficiently, individual banks must command the confidence of the public and
those with whom they do business. The stability of the banking system, both
nationally and internationally, has therefore come to be recognized as a matter
of general public interest. This public interest is reflected in the way banks in
almost all countries, unlike most other commercial enterprises, are subject to
prudential supervision by central banks or specific official agencies.
Banks’ financial statements are also subject to audit by external auditors. The
external auditor conducts the audit in accordance with applicable ethical and
auditing standards, including those calling for independence, objectivity,
professional competence and due care, and adequate planning and supervision.
The auditor’s opinion lends credibility to the financial statements and promotes
confidence in the banking system.
As the business of banking grows in complexity, both nationally and
internationally, the tasks of banking supervisors and external auditors are
becoming more and more demanding. In many respects, banking supervisors
and external auditors face similar challenges and, increasingly, their roles are
being perceived as complementary. Not only do banking supervisors benefit
from the results of the auditors’ work, but they may also turn to the external
auditor to undertake additional tasks when these tasks contribute to the
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performance of their supervisory roles. At the same time, external auditors, in
carrying out their role, also look to banking supervisors for information that can
help in discharging their responsibilities more effectively.
The International Auditing Practices Committee and the Basel Committee share
the view that greater mutual understanding about the respective roles and
responsibilities of banking supervisors and external auditors and, where
appropriate, communication between them improves the effectiveness of audits
of banks’ financial statements and supervision to the benefit of both disciplines.
2.1 HISTORY OF AUDITING
The introduction of Joint Stock Companies increased the supply of capital to
industry and commerce. The small privately owned business financed by sole
trader and partnership gave way to the forms of organization now referred to as
limited companies.
The body of shareholders delegated some of their members to act as a “board of
directors” to manage the business and then periodically submit accounts of their
stewardship to the shareholders so that they could be aware of the state of
affairs of the enterprise. It was therefore necessary for the shareholders to be
satisfied that the accounts presented by the directors did provide an objective
view of the state of affairs of the company.
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The Joint Stock Act 1844 was the first legislation in Britain to require all
incorporated businesses to have their annual financial statements examined by
an auditor.
Early auditors were in most cases non-accountants who were required to show
whether the accounts show “true and correct” views of the state of affairs of the
company. It was the Companies Act of 1900 that require the auditors to be
independent and it was not until 1948 Companies Act that he was required to be
professionally qualified.
Business and not-for-profit organizations in Nigeria engage chartered
accountants to perform audit examinations. Large private and public enterprise
sometimes also maintain internal audit staff to conduct audit-like examinations,
including some that is more concerned with operating efficiency and managerial
effectiveness than with the accuracy of the accounting data.
2.2 DEFINITION OF AUDITING
Auditing is the examination, by an independent accountant, of the financial
data, accounting records, business documents, and other pertinent financial
statement. It is a systematic examination of financial statements records and
related operations to determine adherence to generally accepted accounting
principles, management policies of stated requirements (Dunn, 2004).
The auditing standard defined audit as “the independent examination of, and
expression of opinion on, the financial statements of an enterprise by an
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appointed auditor in accordance with the terms of his engagement and in
compliance with any relevant statutory obligations and professional
requirements.
Lowe, Geiger and Pany (2001) defined auditing is an independent function with
the main objective of ascertaining the truth and fairness with which financial
statements have been presented with a view of enabling the auditor to issue a
report.
2.3 OBJECTIVES OF AUDITING
The primary objective of an auditor under CAMA 1990, is for an appointed
auditor to express a professional opinion on the financial statement of an
enterprise prepared by the management so that any person reading and using
them may have faith in them. The appointed auditor is to express an opinion:
i. Whether or not the financial statements show a true and fair view of the
enterprise’s financial positions; and
ii. Whether the accounts have been properly prepared in accordance with the
company and allied matter act (CAMA) 1990 and other statutory
regulations.
Other secondary objectives include:
a. To prevent errors and fraud by the deterrent and moral effect of the audit;
b. To detect any form of irregularities;
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c. To evaluate the effectiveness or otherwise, of the internal control system
within the enterprise;
d. To provide spin-off effects. The auditor will be able to assist his clients
with accounting systems, taxation, receivership, and other problems.
e. To advice on financial matters for efficient decision making by the
management.
f. To ascertain and ensure that an enterprise conform to statutory and
professional requirements.
2.4 STATUS OFAUDITOR
According to McMullen (1996) there are two types of audit:
i. External Audit: This is independent examination of the financial
statements of an organization by an auditor who is appointed by the
shareholders. The report goes to the shareholders.
ii. Internal Audit: This is the review of the transactions of a business which
may be in many respects, similar to the statutory audit, but which is
carried out by employees of the business who are responsible to the
management.
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2.5 SIGNIFICANT ROLES OF EXTERNAL AUDITORS
Anderson, Francis and Stokes (1993) stated that the external auditors perform
the following roles:
i. Examines the financial records (i.e. books of accounts prepared by the
directors of the company). It is not the duty of auditor to prepare financial
statements.
ii. He serves as the watchdog on behalf of the shareholders of the enterprise.
iii. The auditor ensures uprightness on the part of the management of the
enterprise.
2.5.1 The Role of the Bank’s External Auditor
The objective of an audit of a bank’s financial statements by an external auditor
is to enable an independent auditor to express an opinion as to whether the
bank’s financial statements are prepared, in all material respects, in accordance
with an identified financial reporting framework (Huepkes, 2005).
The auditor assesses control risk as being high unless the auditor is able to
identify controls that are likely to prevent or detect and correct a material
misstatement and conducts tests of the controls that support a lower assessment
of control risk (Dewing and Russell, 2005).
A detailed audit of all transactions of a bank would be not only time-consuming
and expensive but also impracticable. The external auditor therefore bases the
audit on the assessment of the inherent risk of material misstatement, the
assessment of control risk and testing of the internal controls designed to
27
prevent or detect and correct material misstatements, and on substantive
procedures performed on a test basis.
While the external auditor has the sole responsibility for the audit report and for
determining the nature, timing and extent of audit procedures, much of the work
of internal auditing can be useful to the external auditor in the audit of the
financial statements.
Judgment permeates the auditor’s work. The auditor uses professional judgment
in areas such as:
i. Assessing inherent and control risk and the risk of material misstatement
due to fraud and error;
ii. Deciding upon the nature, timing and extent of the audit procedures;
iii. Evaluating the results of those procedures; and
iv. Assessing the reasonableness of the judgments and estimates made by
management in preparing the financial statements.
An external auditor plans and conducts the audit to obtain reasonable assurance
that misstatements in the bank’s financial statements which, individually or in
aggregate, are material in relation to the financial information presented by
those statements are detected.
When the auditor discovers a misstatement material to the financial statements
taken as a whole, including the use of an inappropriate accounting policy or
asset valuation or a failure to disclose essential information, the auditor asks
management to adjust the financial statements to correct the misstatement. If
28
management refuses to make the correction the auditor issues a qualified or an
adverse opinion on the financial statements.
As a supplementary but not necessarily integral part of the audit, the external
auditor ordinarily communicates certain information to management. The
external auditor also communicates matters of governance to those charged with
the governance of the bank (Millichamp, 2002).
2.5.2 The Role of the External Auditor in Banking Regulation and
Supervision
The external auditor has a vital role as a supervisory tool in reporting certain
matters as obliged by the Financial Services and Markets Act 2000 (FSMA) and
also in reporting specific matters through annual reports. As an enforcement
tool, external auditors play a key role in their functions as skilled persons.
Under section 166 of the FSMA, power is conferred on the FSA to mandate a
firm of solicitors or accountants/auditors to report to the FSA matters requiring
provision of information under section 165 of the FSMA.
The reports produced by external auditors as a result of this process are known
as skilled person reports. As well as the FSA's use of external auditors to assist
it in obtaining information, performing risk analysis, sampling and other tasks
during enforcement procedures, the effectiveness of the FSA's use of external
auditors in its off-site and on-site systems of supervision can be efficiently
assessed through a holistic examination of the way in which the audit profession
is regulated.
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Under its role of obtaining information for the FSA, the external auditor's right
and duty to report, statutes and standards governing those rights and duties will
be analyzed. The development of a framework for corporate governance,
developments leading to the establishment of audit committees and the FSA's
enforcement procedures will also be considered. The FSA's enforcement
procedures highlight the immense contribution made by external auditors to the
supervisory process as demonstrated in the Legal and General Case.
2.6 THE CHANGING ROLES OF THE AUDIT
According to accounting literature, the traditional role of the audit was mainly
the detection and prevention of fraud. The move to verification of financial
statements arose from the growing investment in the railway, insurance and
banking industry (Hitchins, Hogg and Mallett, 2001). Suggestions have been
made that this situation occurred because in these particular industries, the
shareholding was more dispersed and more priority given to financial
performance rather than on management's honesty. Bank failures such as those
of BCCI and Johnson Matthey resulted to a re-think of the objective of an audit
to include the detection and prevention of fraud.
2.7 ADVANTAGES OF PERFORMING AN AUDIT
Adeniyi (2004) highlighted the following as benefits derived from having a
company’s account audited: An audited account becomes a relevant document
for the purpose of any claim from the insurance company; auditing serves as a
30
moral deterrents and psychological check against fraudulent practices by staff;
audited account affords the opportunity to gaining assurance as to whether the
state of the business is conducive for investment or not; management attention
is focused on the internal control as a result of audit; audited account is useful
for negotiating bank loans and overdrafts; the Federal Inland Revenue services
will only accept duly certified accounts by the external auditor as a basis of
computing assessable profits; audited accounts form the basis of agreement in
admission of partners or dissolution of partnership; in the ordinary course of
business, audited accounts provides an independent opinion of the business.
2.8 ROLE OF AUDITING IN PUBLIC FINANCE MANAGEMENT
Auditing is an integral part of an institutional framework supporting good
governance and the realization of a country’s welfare measures and poverty
eradication goals (Akinwolemiwa, 2009). Social welfare programs and other
targeted poverty eradication programs in developing countries are characterized
by their access to limited resources. To achieve their goals, therefore, these
programs depend greatly on the efficient and effective utilization of these
limited resources.
Within this framework, the role of the public auditor in monitoring the
utilization of program resources is critical. A vigilant auditor can contribute
greatly to the achievement of social development programs by limiting
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corruption and strengthening the accountability of responsible agencies
(Millichamp, 2002).
i. Facilitating Good Governance
According to the United Nations Development Program (UNDP), good
governance is classified as being participatory, transparent, accountable,
effective, compliant with the rule of law, and responsive to the needs of the
people. An effective Supreme Audit Institution can play an important role in
ensuring that some of these key attributes of good governance are maintained by
the government. By auditing public finances, Supreme Audit Institutions not
only demand accountability of the government but in turn adds credibility to the
government’s public financial policies and practices. By making their audit
findings available to the public, Supreme Audit Institutions provides a critical
window on transparency in public finance management and assess whether
government agencies have complied with national and/or local laws,
regulations, and their annual budgets.
ii. Aiding Financial Management
Modern day public auditors perform a variety of audits aimed at satisfying
different financial management goals. Financial audits assess the accuracy and
fairness of both the accounting procedures utilized by a government agency and
the financial statements reported by the agency (Akinwolemiwa, 2009).
Compliance audits assess whether funds were used for the purposes for which
they were appropriated and in compliance with relevant laws and regulations.
32
Performance audits analyze cost-effectiveness (economy), operational
efficiency, and the general effectiveness of government programs in achieving
their objectives.
There has been a trend in recent years among SAIs toward increasing the
number of performance audits as these audits are seen as revealing more about
the effectiveness of government operations. However, a comprehensive audit
framework requires that all three types of audits (financial, compliance, and
performance) be combined to provide a complete overview of public financial
management.
2.9 IMPORTANCE OF EFFECTIVE AUDITING
Effective auditing can contribute in several important ways to the management
of a government's finances. It can:
i. Detect irregularities involving the misuse of public funds and identify
related weaknesses in management controls that may imperil the integrity
of the organization and the effective implementation of budgetary and
other policy decisions;
ii. Determine the reliability of reports on budget execution and other
financial data;
iii. Identify instances and patterns of waste and inefficiency that, if corrected,
will
iv. permit more economical use of available budget resources;
33
v. Provide reliable data about program results as a basis for future
adjustments in budget allocations (Arens, 2000).
2.10 PREREQUISITES FOR EFFECTIVE AUDITING
The International Organization of Supreme Audit Institutions (INTOSAI) has
promulgated standards for the audit of government organizations and
operations. These standards, or national standards that are equally or more
rigorous, have been adopted by government audit organizations around the
world, including virtually all Supreme Audit Institutions. Anyone who is
interested in the auditing function in government is encouraged to obtain a copy
of the standards from the INTOSAI Secretariat in Vienna. Among the most
important of these standards are those dealing with the following matters:
a. Independence
The independence of the auditing organization is essential to assure that its
work will not be biased by any relationship it might have to the entity being
audited. This is also necessary for internal audit, whereby the entity responsible
must not be part of the finance or treasury function of the ministry concerned,
but report directly to the senior manager overseeing financial transactions. In
the Lima Declaration, INTOSAI made the following statements about the
independence of the Supreme Audit Institution: Section 5. Independence of
Supreme Audit Institutions
34
1. Supreme Audit Institutions can fulfill their tasks objectively and effectively
only if they are independent of the audited entity and are protected against
outside influence.
2. Although state institutions cannot be absolutely independent because they are
part of the state as a whole, the Supreme Audit Institutions shall have the
functional and organizational independence required to fulfill their tasks.
It is essential that the institutional independence of the Supreme Audit
Institution be genuine. The constitutional or statutory basis for the organization
should be clear. The Supreme Audit Institution should have its own budget. It
should have statutory authority to determine the scope of audits, to obtain any
documents and records relevant to the audit, and to exercise its judgment as to
the audit results to be reported.
Not only must the organization be independent, the individual auditors must
also be with respect to the audits on which they are working. This matter is
usually handled through internal regulations promulgated by the Supreme Audit
Institution, but may also be covered in various laws, including those that are
generally applicable to the civil service. For example, it may be appropriate to
have laws and regulations requiring that an individual auditor not be an investor
in an entity that might be affected by the results of the audit.
b. Professional skills
Auditing is a profession that encompasses a wide range of technical skills,
mirroring the types of audits and auditees that the Supreme Audit Institution
35
may be required to face. Few, if any, auditors possess the entire range of skills
that may be needed by an Supreme Audit Institution. For each individual audit,
however, it is essential that the audit team, as a whole, possesses the knowledge
and skills required for that particular audit. If the Supreme Audit Institution is
auditing the financial statements of an entity, the audit team must include (and
preferably be led by) a fully qualified financial auditor.
2.11 FRAUD
According to Apostolou, Hassell, Webber and Sumners (2001), Fraud means an
intentional act by one or more individuals among management, employees, or
third parties that result in a misrepresentation of financial statements. It may
involve:
Manipulation, falsification or alteration of records or documents.
Misappropriation of assets.
Suppression or omission of the effects of transactions from records or
documents.
Recording of transactions without substance.
Due to the number of high profile corporate failures in recent years, corporate
fraud has been of significant public and regulatory interest (Marden and
Edwards, 2005). The penalties for fraudulent financial reporting have
significantly increased to reflect society’s view on this type of behaviour. For
example, Bernard Ebbers the former chairman of WorldCom was recently jailed
36
for 25 years for orchestrating a $US11 billion financial statement fraud (Belson
2005).
This increased importance has affected the work of the external financial
statement auditor. In Australia, the Australian Auditing Standard AUS 210 “The
Auditor’s Responsibility to Consider Fraud and Error in an Audit of a Financial
Report” has been amended a number of times in recent years to increase the
external auditor’s responsibility in this area (AARF 2004). It defines fraud as
“…an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage.” (AUS 2010)
AUS 2010 continues by stating that there are two types of intentional
misstatements relevant to the auditor. Firstly, there are misstatements that result
from fraudulent financial reporting and secondly, there are misstatements that
result from misappropriation of assets. Much of the research to date has
examined associations between corporate governance structures and financial
statement fraud, some of which is discussed below.
While, inconsistent results have been found in relation to audit committee
existence and the likelihood of financial statement fraud (Beasley 1996;
McMullen 1996; Dechow, Sloan and Sweeney 1996), audit committee
effectiveness has been found to reduce the likelihood that companies are
sanctioned for fraudulent financial reporting (Abbott, Parker and Park, 2000).
37
A positive relation was found between concentration of power in the hands of
insiders and the likelihood of issuing fraudulent financial statements (Dunn,
2004). In Australia, a negative relation has been found between the proportion
of independent directors and institutional investors and the likelihood of fraud,
while a positive relation was found between duality (chair of board and also the
chief executive officer) and the likelihood of fraud (Sharma, 2004). One
difference from this study to others was that in his measure of fraud Sharma
(2004) used both financial statement fraud and misappropriation of assets.
Although external auditors are not, by definition, part of a banking organization
and therefore, are not part of its internal control system, they have an important
impact on the quality of internal controls through their audit activities, including
discussions with management and recommendations for improvement to
internal controls. The external auditors provide important feedback on the
effectiveness of the internal control system.
While the primary purpose of the external audit function is to give an opinion
on the annual accounts of a bank, the external auditor must choose whether to
rely on the effectiveness of the bank’s internal control system. For this reason,
the external auditors have to obtain an understanding of the internal control
system in order to assess the extent to which they can rely on the system in
determining the nature, timing and scope of their own audit procedures.
38
2.12 MANAGING RISK OF FRAUD
Any company is at risk of fraud and it is the directors’ task to manage such risk
in a professional manner. They must apply to it the same techniques, which are
applied to all business problems i.e. analyzing the scope and scale of the risk,
developing a strategy to minimize the risk and carefully implementing the
strategy. However, managing the fraud risk is difficult because it is plausible.
Fraudsters are experts at manipulating people, documents, situations and the
slightest opportunity. They are equally good at covering their tracks. The
appearance may therefore be normal but the reality quite different; deception is
the key to any fraud. Many companies tend to narrow their field of vision by
looking only at accounting procedures and controls rather than the specific risks
of frauds that the business faces. They do not take account of the whole
spectrum of risk. The fraudster is not only interested in the straight forward and
often highly visible cash but also the
• Ability of the business to generate credit e.g. through loans
• Power to commit the business to contract to accept liability and to approve
invoices
• Contingent assets and rights to commercial secrets
• Ability to control resources and accounting records under separate legal
ownership e.g. relating to pension or trust funds and client account.
Accounting procedures and controls may give a false sense of security. They
may operate quite differently in theory than in practice. Fraudsters are
39
opportunists who take advantage of temporary weaknesses or unnoticed gaps
between the apparent strength and the real effectiveness of controls.
It is important to appreciate the nature of the risk and to remember that it is
people, not the business, system or ghost who commit fraud. Some companies
have taken special measures to counter fraud, for example by appointing
security officers or setting up dedicated fraud investigation units. Sometimes
these units deal only with fraud which is reported to them and do not play a
proactive role in helping directors and managers to manage the risk of fraud in
the business. The focus may also be only on external threats (e.g. in banks,
cheque and credit cards fraud), overlooking what may be the greater threat, the
enemy within. It is a known fact that a very high proportion of corporate fraud
is committed by, or in collusion with management and employees.
2.13 AUDITORS RESPONSIBILITY TO CONSIDER FRAUD
The auditor has a responsibility to plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud. Due to the nature of audit
evidence and the characteristic of fraud, the auditor is able to obtain reasonable,
but not absolute, assurance that material misstatements are detected.
In an attempt to stifle the criticism and appropriately respond to the public
demand for improved auditors performances NSA5 in substantial compliance
with ISA 240 ushers auditors into a much wider arena of procedures aimed at
40
detecting frauds. The auditor is now required to consider fraud at every stage of
the audit process; this consideration must be seamlessly blended into the audit
process and be continually updated until the audit completion.
Although the public constantly expect auditors to uncovered fraud, they are not
charged specifically with the duties of fraud detection since reliance is heavily
placed on the management to provide information and documentation; small
scale fraud is extremely difficult for auditors to detect, particularly if it is being
perpetrated by more than one key staff within organization. SAS NO.82 issued
by American institute of certified public accountant detailed the auditor
responsibility to detect and report material misstatement in financial statement
due to fraud. He is required to consider forty-one risk factors relating to
fraudulent financial reporting and misappropriation of assets when designing an
audit plan.
Furthermore, the plan needs to be continuously modified during the audit on the
basis of information gathered concerning these factors. However, auditors must
still use subjective judgment in analyzing the many risk factors e.g. one risk
factor to be assessed by the auditors is management display a significant
disregard to regulatory authorities.
International Auditing standard maintain that an auditor’s mandate may require
him to take cognizance and report matters that come to his knowledge in
performing his duties, which relate to compliance with legislative or regulatory
41
requirement, adequacy of accounting and control system, viability of economic
activities, programmes and projects.
Lately, a view has emerged that auditors should play a more vital and direct role
in establishing good governance, if this means to expect them to cross the
established borders of genuine audit functions , it would be stretching the string
too far, without gaining anything positive and substantial. The only alternative
then is to make the auditors feel more conscientious, more dutiful and therefore,
be more effective, while restricting themselves to their term of references.
2.14 THE COST OF FRAUD
The ways in which companies may suffer loss due to fraud include:
2.14.1 The Cost of Fraud to Business
i. Removal of funds or assets from the business. This include theft of cash
from bank account, removal of other asset such as stock, manipulation of
companies relationship with suppliers or customers, overstatement of
claims, undisclosed creation of credits and assumption of liabilities.
ii. Misrepresentation of the financial position of the business, which include
false accounting such as omissions, mis-recording and manipulation of
the company’s accounting records. It must be stressed again that when all
these nefarious acts are committed with a view to obtain undue advantage
or benefit, a fraud has occurred. The cost of fraud to business is difficult
to estimate because not all fraud and abuse are discovered, not all
42
uncovered fraud is reported, and civil and criminal actions are not always
pursued. A conservative estimate of the cost to organizations is
approximately 6% of annual revenue (Association of fraud
examiners1999). To quantify other indirect costs like legal costs,
accounting costs, insurance costs and loss of productivity associated with
hiring and firing employees to the business is outside the scope of this
paper. Experts agree that companies usually suffer similar losses and
organizations are paying for them through their normal operating
expenses. Data show that the overall cost of fraud is over double the
amount of missing money or assets. As computerized systems become
more complex, so is the expected cost of fraud.
2.14.2 The Cost of Frauds to the Offenders
It is the trusted and valued employee who generally commits business fraud.
When fraud are uncovered, there is often shock and disbelief that they have
committed such acts, the perpetrator of business fraud could be ‘the person next
door’ this person is likely to be a married male with a family, a religious
affiliate, and above average education.
In most cases offenders do not view stealing from companies as harmful, they
may think that the crime was victimless; and that they do not view their theft as
being devastating or costly to the business. Many frauds occur because the
opportunity exists and the perpetrator does not believe he/she will be caught. In
many cases, the offender has little or no criminal self concept and offenders
43
view violations as part of their work. They usually minimize their crime since it
results in minor losses for a large volume of clients. No one client is usually
targeted for the crime.
44
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activity and independence on corporate fraud. Managerial Finance 26:
55-67.
Accounting Standard Board (1988): The auditor responsibility to detect and
reports errors and irregularities
Adeniyi A A. (2004): Auditing and investigation, first edition, Lagos: Value
Analyst Consult.
Akinwolemiwa, C.F.G (2009): The auditors’ responsibility to consider fraud
in an audit of financial statement, The Nigerian accountant- Institute
of chartered Accountant of Nigeria Journal. Vol.2, No1 Pp. 57-64.
Anderson, D., Francis, J. R. and Stokes, D. J. (1993): Auditing, directorships
and the demand for monitoring. Journal of Accounting and Public
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Anderson, D., J. Francis, R. and Stokes, D. J. (1993): Auditing, directorships
and the demand for monitoring. Journal of Accounting and Public
Policy 12 (4): 353-375.
Apostolou, B. A., Hassell, J. M. Webber S. A.and Sumners, G. E. (2001): The
relative importance of management fraud risk factors. Behavioral
Research in Accounting 13: 1-24.
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Arens L. (1980). Auditing an integrated approach, 7th Edition, Upper Saddle
River, New Jersey: Prentice-Hall, Inc.
Auditing and Assurance Standards Board (AUASB) (2006): ASA 240: The
Auditor's Responsibility to Consider Fraud in an Audit of a Financial
Report. Melbourne: AUASB.
Australian Accounting Research Foundation. (2004): AUS 210: The Auditor's
Responsibility to Consider Fraud in an Audit of a Financial Report.
Melbourne: AARF.
Borge, M. (1999): “The role of Supreme Audit Institutions (SAIs) in
Combating Corruption.” Transparency International. Updated October
1999. Retrieved 8 February 2005.
Carey, P. Craswell A. and Simnett, R. (2000): Voluntary demand for internal
and external auditing by family businesses. Auditing: A Journal of
Practice & Theory 19 (supplement): 37-51.
Dewing P and Russell PO (2005): The Role of Auditors, Reporting Accountants
and Skilled Persons in UK.
Dunn, P. (2004): The impact of insider power on fraudulent financial
reporting. Journal of Management 30 (3): 397-412.
Farrell, B. R. and Joseph R. F. (1999): The role of the auditors in the
prevention and detection of business fraud, Retrieved November 16,
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Hitchins J, Hogg m and Mallett D (2001): Banking: A Regulatory Accounting
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outsourcing on perceived external auditor independence. Journal of
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Marden, R. and Edwards, R. (2005): Employee fraud in the casino and gaming
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McMullen, D. A. (1996): Audit committee performance: An investigation of
the consequences associated with audit committees. Auditing: A Journal
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47
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
This chapter is designed specifically to present the procedures and methods
adopted in the conduct of this study to achieve the desired objectives of the
study. To this end, this chapter consists of the following sub-headings: Research
design, Population of the study, Sampling techniques and size, Administration
of the instrument, Sources of data collection, Method of data analysis, and
Limitation of the methods.
3.1 RESEARCH DESIGN
The research design is based on descriptive survey research techniques. This
type of research design describes the variables i.e dependent and independent
under study. The sample used for the research was survey through a
representative sample of the population.
3.2 POPULATION OF THE STUDY
The population for the research study consisted of the entire workers of First
bank of Nigeria Plc in Lagos State. The population size of the organization is
seven hundred and fourteen (714) employees.
48
3.3 SAMPLING TECHNIQUE AND SIZE
The sample for the research study comprised of One Hundred and twenty (120)
employees ranging from top to lower level workers. The sampling technique
used was convenience random sampling technique
3.4 ADMINISTRATION OF THE INSTRUMENT
The instrument used for the collection of data was constructed questionnaires
using 5-point likert scale i.e strongly agree, agree, uncertain, disagree, strongly
disagree. The questionnaire consists of twenty {20} items.
The research instrument used for the study was administered to one hundred and
twenty {120} respondents ranging from top to lower level workers.
Descriptions on how to complete the questionnaire were given and responses
were collected from the respondents.
3.5 SOURCES OF DATA COLLECTION
The data used for the study were collected from two sources, namely primary
and secondary sources. Primary sources of data collection: these include the use
of questionnaire to obtain first hand information. Secondary sources of data
collection: these include textbook, publication, journals and articles written by
various authors and academician relating to the topic under study.
49
3.6RESTATEMENT OF RESEARCH QUESTIONS AND HYPOTHESES
The following questions were raised for the study:
i. Does external auditing have positive effect on the performance of
Nigerian banking industry?
ii. Is there significant relationship between effective auditing and bank
profitability?
iii. What are the various steps taken by the apex bank (Central Bank of
Nigeria) in improving the quality of auditing in banks in Nigeria?
iv. Do sound audit principles and practices have significant impact on
shareholders’ wealth?
v. How has auditing been able to expose financial mismanagement in
banking organizations?
To achieve the objectives of the study, the following hypotheses were
formulated:
Hypothesis 1
Ho: There is no significant relationship between external auditing and the
performance in the Nigerian banking industry.
H1: There is a significant relationship between external auditing and the
performance in the Nigerian banking industry.
Hypothesis 2
50
Ho: External auditing does not expose financial fraud and mismanagement in
banking organizations.
H1: External auditing does expose financial fraud and mismanagement in
banking organizations.
3.6 METHOD OF DATA ANALYSIS
The data collected for the study were analyzed using descriptive statistics such
as frequency table and percentages method. With respect to the test of
hypotheses Chi-square ( χ 2) inferential statistics was deployed based on 0.05
probability level of significance.
Cal ( χ 2) = ∑ (O−E
E )2
Where:
O= Observed Frequency
E= Expected Frequency
∑= Summation
α= Apha = 0.05
DF = N-1)
Where:
DF= Degree of freedom
N= Number of row
51
Decision: reject H0 and accept H1 if calculated chi – square ( χ 2) value is greater
than tabulated chi-square ( χ 2) value, otherwise accept H0 if cal ( χ 2) < tab ( χ 2).
52
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.0 INTRODUCTION
This chapter of the research study focuses on the method used in analyzing data
collected through the use of structured questionnaire. Data collected would be
analyzed using descriptive statistics such as frequency table and percentage
method. The formulated hypothesis would be tested using inferential statistics
such as chi-square ( χ 2) based on 0.05 probability level of significance.
4.1 ANALYSIS OF RESPONDENTS
Table 4.1: Distribution of Respondents by Response Response Frequency Percentage (%)
Returned 120 96
Unreturned 5 4
Total 125 100
Source: Field Survey, 2011.
Table 4.1 shows that out of 125 copies of questionnaires distributed to
respondents, 120 were fully completed and returned representing 96% while 5
copies of questionnaires were unreturned representing 4%. Thus, majority of the
respondents (96%) completed and returned their questionnaire.
53
ANALYSIS OF RESPONDENTS’ BIO-DATA
Table 4.2: Distribution of Respondents by SexResponse Frequency Percentage (%)
Male 46 38
Female 74 62
Total 120 100
Source: Field Survey, 2011.
Table 4.2 shows that 46 respondents were male representing 38% while 74
respondents were female representing 62%.Thus, most of the respondents
(62%) were female.
Table 4.3: Distribution of Respondents by Marital StatusResponse Frequency Percentage (%)
Single 70 58
Married 50 42
Total 120 100
Source: Field Survey, 2011.
Table 4.3 shows that 70 respondents were single representing 58% and 50
respondents were married representing 42%. Thus, majority of the respondents
(58%) were single.
Table 4.4: Distribution of Respondents by Age
54
Response Frequency Percentage (%)
18 – 30 33 28
31 – 40 58 48
41 – 50 17 14
51 and above 12 10
Total 120 100
Source: Field Survey, 2011.
Table 4.4 shows that 33 respondents were between 18-30 years representing
28%; 58 respondents were between 31-40 years representing 48%; 17
respondents were between 41-50 years representing 14%; 12 respondents were
between 51 years and above representing 10%. Thus, majority of the
respondents (48%) were between the ages of 31-40 years.
Table 4.5: Distribution of Respondents by Length of service Year Frequency Percentage (%)
1 – 5 years 40 33
6 -10 years 56 47
11-15 years 10 8
16 years and above 14 12
Total 120 100
Source: Field Survey, 2011.
Table 4.5 shows that 40 respondents have worked for 1-5 years representing
33%; 56 respondents have worked for 6-10 years representing 47%; 10
respondents have worked for 11-15 years representing 8% while 14 respondents
55
have worked for 16 years and above) representing 12%. Thus, majority of the
respondents (47%) have worked for 6-10 years.
Table 4.6: Distribution of Respondents by Job statusLevel Frequency Percentage (%)
Top Manager 20 17
Middle Manager 58 48
Lower Manager 42 35
Total 120 100
Source: Field Survey, 2011.
Table 4.6 shows that 20 respondents were top level management representing
17%; 58 respondents were middle level management representing 48%; 42
respondents were lower managers representing 35%; while 30 respondents were
junior staff representing 25%. Thus, majority of the respondents (48%) were in
Middle Manager level.
Table 4.7: Distribution of Respondents by QualificationQualification Frequency Percentage (%)
SSCE/WASC 25 21
NCE/OND 50 42
HND/BSC 40 33
MBA / M.Sc 5 4
Total 120 100
Source: Field Survey, 2011.
Table 4.7 shows that 25 respondents were SSCE/WASC holders representing
21%; 50 respondents were NEC/OND holders representing 42%; 40
56
respondents were HND/B.Sc holders representing 33% while 5 respondents are
holders of MBA/MSC representing 4%. Thus, most of the respondents (42%)
were holders of NCE/OND.
Table 4.8: Distribution of Respondents by Department Department Frequency Percentage (%)
Marketing 40 33
Finance 25 21
Personnel /Admin. 18 15
Operation 25 21
Research and Dev. 12 10
Total 120 100
Source: Field Survey, 2011.
Table 4.8 shows that 40 respondents were in marketing department representing
33%; 25 respondents were in finance department representing 21%; 18
respondents were in Personnel/Admin department representing 15%; 25 and 12
respondents were in Operation and Research and Development department
representing 21% and 10% respectively. Thus, the respondents were in different
department of the organization.
4.2 ANALYSIS OF RESPONSES TO RESEARCH QUESTIONS
Table 4.9: External auditing enhances organizational effectiveness. Responses Frequency Percentage (%)
57
Strongly agree 70 58
Agree 20 17
Undecided 0 0
Disagree 12 10
Strongly disagree 18 15
Total 120 100
Source: Field Survey, 2011.
Table 4.9 shows that 70 respondents strongly agreed representing 58%; 20
respondents agreed representing 17%; no respondent was undecided
representing 0%; 12 and 18 respondents disagreed and strongly disagreed
representing 10% and 15% respectively. Thus, majority of respondents (75%)
agreed that external auditing enhances organizational effectiveness.
Table 4.10: Organizations engage external auditors in order to ensure credible financial statements.
Responses Frequency Percentage (%)
Strongly agree 32 27
Agree 78 65
58
Undecided 0 0
Disagree 4 3
Strongly disagree 6 5
Total 120 100
Source: Field Survey, 2011.
Table 4.10 shows that 32 respondents strongly agreed representing 27%; 78
respondents agreed representing 65%; no respondents was undecided
representing 0%; 4 and 6 respondents disagreed and strongly disagreed
representing 3% and 5% respectively. Thus, majority of the respondents (92%)
agreed that organizations engage external auditors in order to ensure credible
financial statements.
Table 4.11: External auditing ensures the detection of fraudulent practices in banking organization.
Responses Frequency Percentage (%)
Strongly agree 60 50
Agree 36 30
Undecided 10 8
59
Disagree 14 12
Strongly disagree 0 0
Total 120 100
Source: Field Survey, 2011.
Table 4.11 shows that 60 respondents strongly agreed representing 50%; 36
respondents agreed representing 30%; 10 respondents were undecided
representing 8%; 14 respondents disagreed representing 12% while no
respondent strongly disagree representing 0%. Thus, majority of the
respondents (80%) that external auditing ensures the detection of fraudulent
practices in banking organization.
Table 4.12: management encourages proper auditing of financial statement.
Responses Frequency Percentage (%)
Strongly agree 66 55
Agree 54 45
Undecided 0 0
Disagree 0 0
60
Strongly disagree 0 0
Total 120 100
Source: Field Survey, 2011.
Table 4.12 shows that 66 respondents strongly agreed representing 55%; 54
respondents agreed representing 45%; no respondents was undecided, disagree
and strongly disagree representing 0%. Thus, majority of the respondents
(100%) agreed that management encourages proper auditing of financial
statement.
Table 4.13: External auditing helps organizations manage their financial resources effectively.
Responses Frequency Percentage (%)
Strongly agree 78 65
Agree 26 22
Undecided 0 0
Disagree 10 8
Strongly disagree 6 5
61
Total 120 100
Source: Field Survey, 2011.
Table 4.13 shows that 78 respondents strongly agreed representing 65%; 26
respondents agreed representing 22%; no respondents was undecided
representing 0%; 10 and 6 respondents disagreed and strongly disagreed
representing 8% and 5% respectively. Thus, majority of the respondents (87%)
agreed that external auditing helps organizations manage their financial
resources effectively.
Table 4.14: The work of external auditor promotes orderly and efficient conduct of operation.
Responses Frequency Percentage (%)
Strongly agree 84 70
Agree 18 15
Undecided 12 10
Disagree 6 5
Strongly disagree 0 0
Total 120 100
62
Source: Field Survey, 2011.
Table 4.14 shows that 84 respondents strongly agreed representing 70%; 18
respondents agreed representing 15%; 12 respondents were undecided
representing 10%; 6 respondents disagreed representing 5%; no respondent
strongly agreed representing 0%. Thus, majority of respondents (85%) agreed
that the work of external auditor promotes orderly and efficient conduct of
operation.
Table 4.15: There is significant relationship between effective auditing and organizational profitability.
Responses Frequency Percentage (%)
Strongly agree 50 42
Agree 32 27
Undecided 5 4
Disagree 18 15
Strongly disagree 15 12
Total 120 100
Source: Field Survey, 2011.
63
Table 4.15 shows that 50 respondents strongly agreed representing 42%; 32
respondents agreed representing 27%; 5 respondents was undecided
representing 4%; 18 respondents disagreed representing 15% while 15
respondents strongly disagreed representing 12%. Thus, majority of the
respondent (69%) agreed that there is significant relationship between effective
auditing and organizational profitability.
Table 4.16: The Central Bank of Nigeria has promulgated some measures to prevent fraudulent acts in the banking sectors.
Responses Frequency Percentage (%)
Strongly agree 80 67
Agree 40 33
Undecided 0 0
Disagree 0 0
Strongly disagree 0 0
Total 120 100
Source: Field Survey, 2011.
64
Table 4.16 shows that 80 respondents strongly agreed representing 67%; 40
respondents agreed representing 33%; no respondents were undecided,
disagreed and strongly disagreed representing 0%. Thus, majority of the
respondents (100%) agreed that the Central Bank of Nigeria has promulgated
some measures to prevent fraudulent acts in the banking sectors.
Table 4.17: My Company experiences liquidity problem resulting from mismanagement of funds.
Responses Frequency Percentage (%)
Strongly agree 12 10
Agree 8 7
Undecided 0 0
Disagree 40 33
Strongly disagree 60 50
Total 120 100
Source: Field Survey, 2011.
65
Table 4.17 shows that 12 respondents strongly agreed representing 10%; 8
respondents agreed representing 7%; no respondent were undecided
representing 0%; 40 respondents disagreed representing 33% while 60
respondents strongly disagreed representing 50%. Thus, majority of the
respondents (83%) disagreed that their Company experiences liquidity problem
resulting from mismanagement of funds.
Table 4.18: My Company always performed periodic audit of its resources.Responses Frequency Percentage (%)
Strongly agree 42 35
Agree 60 50
Undecided 14 12
Disagree 4 3
Strongly disagree 0 0
Total 120 100
Source: Field Survey, 2011.
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Table 4.18 shows that 42 respondents agreed representing 35%; 60 respondents
agreed representing 50%; 14 respondents were undecided representing 12%; 4
respondents were undecided representing 12%; 4 respondents disagreed
representing 3%; no respondent strongly agreed representing 0%. Thus,
majority of the respondents (85%) agreed that their company always performed
periodic audit of its resources.
Table 4.19: External auditing in the banking sector prevents the occurrence of frauds.
Responses Frequency Percentage (%)
Strongly agree 26 22
Agree 62 52
Undecided 10 8
Disagree 16 13
Strongly disagree 6 5
Total 120 100
Source: Field Survey, 2011.
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Table 4.19 shows that 26 respondents strongly agreed representing 22%; 62
respondents agreed representing 52%; 10 respondents were undecided
representing 8%; 16 and 6 respondents disagreed and strongly disagree
representing 13% and 5% respectively. Thus, majority of the respondents (74%)
agreed that external auditing in the banking sector prevents the occurrence of
frauds.
Table 4.20: Stakeholders are satisfied with the ways the company accounts are being audited by external auditors.
Responses Frequency Percentage (%)
Strongly agree 90 75
Agree 20 17
Undecided 0 0
Disagree 6 5
Strongly disagree 4 3
Total 120 100
Source: Field Survey, 2011.
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Table 4.20 shows that 90 respondents strongly agreed representing 75%; 20
respondents agreed representing 17%; no respondents was undecided
representing 0%; 6 and 4 respondents disagreed and strongly disagreed
representing 5% and 3% respectively. Thus, majority of the respondents (92%)
agreed that stakeholders are satisfied with the ways the company accounts are
being audited by external auditors.
Table 4.21: The survival and continuity of the organization depend on effective external auditing.
Responses Frequency Percentage (%)
Strongly agree 120 100
Agree 0 0
Undecided 0 0
Disagree 0 0
Strongly disagree 0 0
Total 120 100
Source: Field Survey, 2011.
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Table 4.21shows that 120 respondents strongly agreed representing 100%; no
respondents agreed, undecided, disagreed and strongly disagree representing
0%. Thus, majority of the respondents (100%) agreed that the survival and
continuity of the organization depend on effective external auditing.
4.3 TEST OF HYPOTHESES
Hypothesis 1
Ho: There is no significant relationship between external auditing and the
performance in the Nigerian banking industry.
H1: There is a significant relationship between external auditing and the
performance in the Nigerian banking industry.
Table 4.15 was be used in analyzing hypothesis 1
Computation of calculated chi-square valueResponses O E O-E (O-E)2 (O-E)2
ESA 50 24 26 676 28.17
A 32 24 8 64 2.67
U 5 24 -19 361 15.04
D 18 24 -6 36 1.5
SD 15 24 -9 81 3.38
120 50.76
Expected value= 120 = 24 5
70
Cal ( χ 2) = 50.76
D.F = N -1
= 5 – 1
= 4
α = 0.05
Tab ( χ 2) = 9.48773
Decision: Since the calculated chi-square ( χ 2) value (50.76) is greater than
tabulated chi-square value (9.48773) at 4 degrees of freedom under 0.05
probability level. We reject H0 and accept H1. We, therefore, conclude that
there is a significant relationship between external auditing and the performance
in the Nigerian banking industry.
Hypothesis 2
Ho: External auditing does not expose financial fraud and mismanagement in
banking organizations.
H1: External auditing does expose financial fraud and mismanagement in
banking organizations.
Table 4.11 was be used in analyzing hypothesis 2
Computation of calculated chi-square valueResponses O E O-E (O-E)2 (O-E)2
E SA 60 24 36 1296 54
A 36 24 12 144 6.0
U 10 24 -14 196 8.17
D 14 24 -10 100 4.17
SD 0 24 -24 576 24.0
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120 96.34
Expected value= 120 = 24 5
Cal χ 2=∑ (O−E )2
E = 96.34
DF = N -1
= 5 – 1
= 4
α = 0.05
Tab ( χ 2) = 9.48773
Decision: Since the calculated chi-square ( χ 2) value (96.34) is greater than
tabulated chi-square ( χ 2) value (9.48773). We reject H0 and accept H1. We
therefore conclude that external auditing does expose financial fraud and
mismanagement in banking organizations.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 INTRODUCTION
This chapter of the research work summarizes the major findings of the study,
make recommendations and conclude the study. Suggestions for further studies
are also considered.
5.1 SUMMARY OF FINDINGS
The following findings were made:-
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i. The study shows that external auditing enhances organizational
effectiveness.
ii. It was also shows that organizations engage external auditors in order to
ensure credible financial statements.
iii. It was inferred that external auditing play significant role in the detection
of fraudulent practices in banking organization.
iv. The study also shows that management encourages proper auditing of
financial statement.
v. The study discovers that there is a significant relationship between
external auditing and the performance in the Nigerian banking industry.
vi. The study reveals that the survival and continuity of the organization
depend on effective external auditing.
vii. The study shows that stakeholders are satisfied with the ways the
company accounts are being audited by external auditors.
viii. It was discovered that the management of First Bank of Nigerian Plc
carried out periodic audit of its various books of account in order to
prevent fraud from occurring.
ix. The study shows that the work of external auditor promotes orderly and
efficient conduct of operation.
5.2 CONCLUSION
73
Banks play a central role in the economy. They hold the savings of the public,
provide means of payment for goods and services, and finance the development
of business and trade. To perform these functions securely and efficiently,
individual banks must command the confidence of the public and those with
whom they do business. The stability of the banking system, both nationally and
internationally, has therefore come to be recognized as a matter of general
public interest. This public interest is reflected in the way banks in almost all
countries, unlike most other commercial enterprises, are subject to prudential
supervision by Central Banks or specific official agencies.
Banks’ financial statements are also subject to audit by external auditors. The
external auditor conducts the audit in accordance with applicable ethical and
auditing standards, including those calling for independence, objectivity,
professional competence and due care, and adequate planning and supervision.
The auditor’s opinion lends credibility to the financial statements and promotes
confidence in the banking system.
The role of the external auditor in the supervisory process requires standards
such as independence, objectivity and integrity to be achieved. Even though the
regulator and external auditor perform similar functions, namely the verification
of financial statements, they serve particular interests. The regulator works
towards safeguarding financial stability and investor interests. On the other
hand, the external auditor serves the private interests of the shareholders of a
company. The financial audit remains an important aspect of corporate
74
governance that makes management accountable to shareholders for its
stewardship of a company.
As the business of banking grows in complexity, both nationally and
internationally, the tasks of banking supervisors and external auditors are
becoming more and more demanding. In many respects, banking supervisors
and external auditors face similar challenges and, increasingly, their roles are
being perceived as complementary. Not only do banking supervisors benefit
from the results of the auditors’ work, but they may also turn to the external
auditor to undertake additional tasks when these tasks contribute to the
performance of their supervisory roles. At the same time, external auditors, in
carrying out their role, also look to banking supervisors for information that can
help in discharging their responsibilities more effectively.
5.3 RECOMMENDATIONS
The following were recommended:
i. Management of the organization should encourage credible external
auditing of the various books of account to ensure credibility and
transparency in operations in the banking industry.
ii. Management should also encourage periodic review or auditing of
account to prevent fraudulent practices in the banking organizations.
75
iii. The organization should endeavour to promote those factors enhance
good corporate governance regarding practice of professional auditing in
the bank.
iv. Employees should show commitment to organizational goals by avoid
unprofessional conducts and involvement in fraudulent acts in the
banking hall.
v. Finally, management of the organization should always introduced
fairness in the treatment of workers at workplace. This will enhance
employees’ commitment to work.
5.4 SUGGESTIONS FOR FURTHER STUDIES
The following suggestions were made for the study:-
i. Researchers should try as much as possible to look into those factors
that encourage credible external auditing in banking organizations.
ii. Future studies should be carried out to find out the causes of
fraudulent acts and unprofessional practices in banking sectors.
iii. An investigation should also be carried out in the foreseeable future to
assess the relationship between effective external auditing and
organizational effectiveness.
iv. Finally, in order to improve further studies, it is suggested that more
related textbooks and journals should be reviewed.
76
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APPENDIX 1
Department of Accounting, University of Lagos, Akoka, Lagos State.
Dear Sir/Madam,
REQUEST FOR THE COMPLETION OF QUESTIONNAIRE
I am a final year student of the above mentioned institution. I am conducting a
research on “The Significance of External Auditing in the Banking Industry
in Nigeria”, and I am using your establishment as my study area.
81
I humbly request your co-operation and assistance in completing this
questionnaire. The exercise is purely for academic purpose and all information
supplied shall be treated with strict and absolute confidentiality.
Thanks for your anticipated co-operation and assistance.
Yours faithfully,
ADENUGA, AYODELE SOLOMON
Researcher
Questionnaire
Section A: Personal Information
Please tick (√) against the appropriate items or responses to indicate your
answers to the items.
1. Sex: (a) Male ( ) (b) Female ( )
2. Age (years) :( a) 18 – 30 ( ) (b) 31 – 40 ( )( c) 41 – 50 ( ) (d) 51 and above ( )
3. Marital Status: (a) Single ( ) (b) Married ( )
4. Working Experience: (a) 1 – 5yrs ( ) (b) 6 – 10yrs ( )( c) 11 - 15yrs ( ) (d) Above 15 years ( )
82
5. Position at work: (a) Top manager ( ) (b) Middle manager ( )(c ) Lower manager ( )
6. Highest Qualification :(a) SSCE ( ) (b) NCE/OND( )(c ) HND/B.Sc ( ) (d)Master Degree( )
7. Department: (a) Operation ( ) (b) Personnel ( )(c ) Finance ( ) (d) Marketing ( ) (e) Research & development ( )
Section BInstruction: Kindly tick the appropriate answer in the boxes attached to the statements below:SA = strongly agree A = agree U = UndecidedD = disagree SD = strongly disagree
S/N Statements SA A U D SD
8. External auditing enhances organizational
effectiveness.
9. Organizations engage external auditors in
order to ensure sound financial statements.
10. External auditing ensures the detection of
fraudulent practices in banking
organization.
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11. Management encourages proper auditing
of financial statement.
12. External auditing helps organization
manage their financial resources
effectively.
13 The work of external auditors promotes
orderly and efficient conduct of
operations.
14. There is significant relationship between
effective auditing and organizational
profitability.
15. Central bank of Nigeria has promulgated
some measures to prevent fraudulent act in
the banking sectors.
16. My Company experiences liquidity
problem resulting from mismanagement of
funds.
17. My Company always performed periodic
audit of its accounts.
18. External auditing in the banking sector
prevents the occurrence of frauds.
19. Stakeholders are satisfied with the ways
the company accounts are being audited
by external auditors.
20. The survival and continuity of the
organisation depend on effective external
auditing.
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