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Effect of Audit on Financial Performance of Listed Manufacturing Company in Nigeria

Chapter one – Objectives of the Study/Research Questions.

Objective of the study

The objectives of the study are;

  1. To examine the effect of Auditor’s Independence on Return on Assets (ROA) of listed manufacturing company in Nigeria
  2. To evaluate the effect of Audit Committee on Return on Assets (ROA) of listed manufacturing company in Nigeria
  3. To determine the effect of Audit Fee on Return on Assets (ROA) of listed manufacturing company in Nigeria.

Research question

The following research question will be formulated;

  1. What is the extent of effect of Auditor’s Independence on Return on Assets (ROA) of listed manufacturing company in Nigeria?
  2. To what extent does the Audit Committee affect the Return on Assets (ROA) of listed manufacturing company in Nigeria?
  3. What effect does audit fee have on Return on Assets (ROA) of listed manufacturing company in Nigeria?

Chapter Two – Literature Review

2.1 Conceptual Review

Audit quality

De Angelo (1981) defined audit quality as the market-assessed joint probability that a given auditor will both detect material misstatements in the client’s financial statements and report the material misstatements. Therefore, according to De Angelo’s (1981) definition, audit quality is a function of the auditor’s ability to detect material misstatements (technical capabilities) and reporting the errors (auditor independence). Palmrose (1988) defined audit quality in terms of level of assurance. Since the purpose of an audit is to provide assurance on financial statements, audit quality is the probability that financial statements contain no material misstatements. Audit quality is not primarily about auditing standards but about the quality of people, their training and ethical standards (Geiger & Rama, 2006). The Financial Reporting Council argues that the skills, personal qualities of audit partners and staff, and the training given to audit personnel are important factors that determine auditor quality (Francis & Wang, 2014).

Auditor’s Independence

Enofe, Mgbame, Okunrobo and Izon (2012) describe auditor’s independence as a metal state of objectivity and lack of bias. The researchers also state that public faith in the reliability of a corporation’s financial statements is dependent on the public perception of the outside auditor as an independent professional. Thus, the level of auditor’s independence is joint outcome of the policies and procedures implemented by the audit firm and the state of mind of the individuals involved in the particular audit assignment (Tepalagul & Lin, 2014). Harrison (2015) defines audit independence as the independence of the auditor in executing his duties. It is characterized by integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner. Okolie and Izedonmi (2014) see audit Independence as an auditor’s unbiased mental attitude in making decisions throughout the audit and financial reporting. They describe independence as the quality of being free from influence, persuasion or bias because in the absence of independence, the value of the audit service will be greatly impaired. If an auditor lacks independence, it will increase the possibility of being perceived as not being objective in his opinion or report. This means that the auditor will not likely report a discovered breach.

Audit Committee

Smii (2016) describes audit committee as one of the controllable mechanisms put in place to ensure the relevance and consistency of the accounting policies adopted for the preparation of the financial statements for the organizations. The researcher adds that the presence of audit committee within the firm will help improve the transparency of the information disclosure and limit the degree of the manager’s involvement in the process of the management result. Ancella (2011) sees audit committee as a committee established by the board of commissioners in order to assist the board of commissioners in carrying out their duties and functions. The researcher adds that the objective of the audit committee formation in the corporate governance structure is to increase the company’s accountability and transparency to its stakeholders by providing a more relevant and reliable financial information. Ilaboya (2012) defines audit committee as the governance body that is charge with oversight of the organization’s audit and control function. The researcher adds that it is a committee of the board of directors whose sole aim typically focuses on aspects of financial reporting on the entity’s processes to manage business and financial risk, and for compliance with significant applicable legal, ethical and regulatory requirements

Audit Fees

Smii (2016) says an audit fee is audit remuneration received by the auditors in discharge of their duties for the company or client. The researcher continues that the audit remuneration received by the auditor will determine the quality of service that will be provided by auditors in the discharging their duties in the company. Enofe, et al (2012) argue that audit fee is the amount of money received by an audit firm in carry out audit assignment. The normal or expected rate of change in the audit fee reflects objective factors such as firm size, the complexity of the audit issues affecting the items appearing on the firm’s profit and loss account and its balance sheet as well as the changes that have occurred in the institutional and accounting frame work since the audit was last conducted. Yuniarti (2011) says that the amount of audit fee depends on the risk of assignment, the complexity of services provided, expertise, and other professional considerations. It shows that the higher audit fee will provide a higher quality audit as well. The researcher also adds that the amount of audit fee can affect the independence of public accountants’ appearance because the big fee can make accounting firms become reluctant to oppose the will of the client, while small fee can limit the time and cost to perform complete audit procedures. Members must be able to show the work done professionally and meet the specified quality requirements and meet the needs of the client.

Financial Performance

Financial performance is a measure of how well an organization can use assets from its primary mode of business to generate revenues (Grimsley, 2018).). Financial performance is also used as general measure of a firm’s overall financial health over a given period of time. Empirical analysis of performance is an important requirement for further policy changes. Financial performance means whether a firm has done well within a certain period to realize its set goals. Some firms in Nigeria has remained stable and resilient despite the challenges caused by the global financial crisis and the failure of some domestic unauthorized institutions. Financial statements provide information on the performance. Measurement of firms’ performance should start by evaluating whether it has been able to achieve the objectives set by stakeholders (Hofstrand, 2018).

Return on Assets (ROA)

Return on Assets (ROA) is a major ratio that indicates the profitability of a firm. It is an indicator of how profitable a company is relative to its total asset. It is a ratio of income to its total asset. It measures the ability of the firm’s management to generate income by utilizing company assets at their disposal. In other words, it shows how efficiently the resources of the company are used to generate the income (Amahalu, Egolum & Obi, 2019). This profitability ratio shows management efficiency, and rate of returns. It further indicates the efficiency of the management of a company in generating net income from all the resources of the organisation. A higher ROA shows that the company is more efficient in using its resources (Horton, 2018). Return on Assets is displayed as a percentage and it calculated as: Return on Assets (ROA) = Net Income / Total Assets

Audit Committee Size and Financial Performance

Most of the regulations including that of Nigeria require the provision of equal number of shareholders and directors to run the audit committee. As highlighted earlier, section 359(6) of the Companies and Allied Matters Act (CAMA) requires every public company to have an audit committee which shall have a maximum of six members of equal representation by three shareholders and three directors. However, previous studies provide mixed findings on the impact of audit committee size on financial performance. Xie, Davidson and DaDalt (2013); Davidson, Goodwin-Stewart and Kent (2015) found no association between size of audit committee and financial performance. On the other hand, Yang and Krishnan (2015) found that there is a significant negative relationship between audit committee size and financial performance. Furthermore, Amahalu and Ezechukwu (2017) documented that audit committee size was positively associated with financial performance.

Chapter Three – The Methodology (Population of the Study)

The study adopted ex-post facto research design. The study was carried out in Nigeria, with particular reference to selected manufacturing firms that are listed  on  the  Nigerian  Stock Exchange (NSE). Secondary data were sourced from the annual reports and accounts of listed manufacturing firms in Nigeria from 2012 to 2021. The population of the study comprised all the listed manufacturing firms on Nigerian Stock Exchange (NSE). In Nigerian Stock  Exchange  (NSE),  the  total  sectors  of manufacturing firms is eight (8) namely Automobile & Tyre Sector, Breweries Sector, Building Materials Sector, Chemical & Paints Sector, Food, Beverages &Tobacco Sector, Health Care Sector, Oil & Gas Sector and Textiles Sector. These eight (8) sectors of listed manufacturing firms in Nigeria have a total of eighty (80) manufacturing firms. Of these eight (8) sectors and eighty (80) manufacturing firms, only six (6) sectors and twenty- four (24) manufacturing firms that is, four (4) firms each from each sector were selected for the study through purposive sampling technique.


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