EFFECT OF INTERNAL AUDIT ON FINANCIAL REPORTING QUALITY OF PRIVATE FIRM IN NIGERIA
ABSTRACT
This study looked at how internal auditing affected the calibre of financial reporting for private companies in Nigeria. The purpose of the study was to determine what influences internal audit standards, internal audit independence, professional competence, top management support, and audit effectiveness in financial reporting quality. This study utilised a survey methodology and used simple random sample procedures. The accounting and finance employees of the chosen Dangote groups in Lagos State made up the population size. The researcher readily chose 57 responders, of whom 50 were validated, to determine the sample size. Data collection involved the use of a self-made and verified questionnaire. Frequency tables were used to analyse the surveys that were gathered and verified. While the theories were investigated, Pearson SPSS v23’s correlation statistical tool. The findings show that internal audit standards have a substantial impact on the efficacy of audits in ensuring the accuracy of financial reporting. The study’s conclusions show that internal audit independence significantly influences the efficiency of audits in ensuring the accuracy of financial reporting. Therefore, it is advised that institutes acknowledge that a professional’s technical proficiency includes a constant awareness of developments occurring in operational activities. This provides professionals with the chance to study, comprehend, and apply new developments on auditing procedures and the dissemination of pertinent financial information, all of which will improve the quality of reporting. to name only a handful.
CHAPTER ONE
INTRODUCTION
1.1 Background Of The Study
The internal control system of both public and private companies heavily relies on the characteristics of internal audit practise. Internal auditors are essential in advancing moral business practises that are founded on effective internal control systems. Most of the time, external auditors rely more on the internal control framework of the companies they are auditing; its absence or weakness calls the auditor into question. In order for an organisation to provide superior financial reporting quality, internal audit must be a well-established internal control system. For instance, Soh and Martinov (2011) proposed that management and the external auditor should evaluate the effectiveness of internal control, which includes the effectiveness of the internal audit function.
In order to ensure the accuracy of financial reporting, internal auditing (IA) is recognised as a useful monitoring and advisory tool (Prawitt, Smith, and Wood 2009; Lin et al. 2014; Johl et al. 2016). IA is tasked with playing a proactive role in ensuring the integrity, quality, and dependability of the financial reporting process through ongoing collaboration with the board of directors, executive directors, and external auditors in the context of testing the effectiveness of internal control over financial reporting (Subramaniam and Stewart 2006; Prawitt et al. 2009; Sarence, De Beelde, and Everaert 2009). Internal audit is anticipated to function as a “constructive critic” who continuously contributes to the improvement of the organisation and “uphold ethics and corporate integrity” (Aghghaleh F. Sh. et al. 2017, 105) through the process of defect discovery, analysis of causes, and proposal of measures for removing the shortcomings. The competencies and duties of IA in putting into place efficient management procedures lend to IA a vital role in guaranteeing the integrity of the financial reporting process, according to Johl et al. (2016).
The primary goal of financial reporting is to deliver dependable financial data on economic entities that can be used to make informed decisions about the economy. High quality financial reporting is essential for investors and other stakeholders when making investment, credit, and similar decisions, according to International Accounting Standard Board (IASB), (2008). Accounting earnings, as reported in the published financial report of firms, is expected to provide a timely and reliable input to potential investors, shareholders, creditors, employees, management, financial analysts, regulators, and other stakeholders for effective economic decisions. It is a key financial reporting variable that is frequently used as a yardstick of financial reporting quality.
The International Federation of Accountants (IFAC) and its audit division, the International Auditing and Assurance Standards Board (IAASB), have stated that audit services are an assurance service that the financial statements prepared by the relevant authority are true and fair, free from intentional and unintentional errors and misstatements, and conform to the relevant rules and regulations guiding the preparation
Additionally, internal auditors are focused on the full spectrum of internal controls inside an organisation, including the operational, financial, and compliance controls (Simmons, 1997). Government offices are vulnerable to waste, corruption, and inefficiencies in the absence of a control system with internal audit as a safeguard for checking the efficiency and effectiveness of that system. Modern internal controls and well-functioning internal audit systems are meant to deliver key assurances to all stakeholders against corruption, waste, and inefficiencies in public services.
An organization’s operations and control framework should be improved as part of the internal audit function’s mission. The correct reporting of an organization’s actions is ensured by an effective and efficient audit of the accounts (Okezie, 2008; Nwaorgu, 2003). Internal auditing makes ensuring that money has been spent in line with the conditions under which it was allotted and that the books have been produced correctly (Johnson, 2004). It offers a potent instrument for determining the degree to which the public institution has provided efficient and on-budget services to both governments and linked parties. As a result, internal audit is “a well-defined activity and a recognised profession” (Manasseh, 2007; IIA, 1994) carried out by experts who assess the validity and efficacy of the organization’s decision-making. Auditor independence, strong working relationships, appropriate personnel and training, exercising due caution, evaluating internal control systems, correct reporting and follow-ups are only a few of the components of an efficient internal audit (IIA, 2004).
1.2 Statement Of The Problem
Internal controls are the measures taken by a company to guarantee that its objectives, aims, and missions are carried out. In order to guarantee that an organization’s transactions are handled appropriately to prevent waste, theft, and misuse of resources, they are a collection of rules and procedures employed by an agency. In order to fairly ensure that an entity’s objectives in terms of accurate financial reporting, operational effectiveness and performance, and compliance with applicable laws and regulations are being met, internal controls are tools developed and put into place by those in charge of governance, management, and other staff (Mwindi, 2008). Internal audit is a control that management instituted to examine and report on the sufficiency, effectiveness, and adherence of the internal control structure that management had built. The additional duties carried out by internal auditors to guarantee accurate financial reporting include conducting value for money inspections and fraud investigations, reviewing financial and operational records, assessing compliance with pertinent legislation, management practises, and reporting requirements. Due to their failure to adopt and put into practise effective financial management practises when investors and other users of financial data were not present, several enterprises and huge corporations have collapsed. Until they fell as a result of the publication of attractive and healthy financial accounts, the majority of company failures throughout the years remained unreported by their shareholders and other financial information consumers. In recent years, numerous public sector organisations in Nigeria have been noted for having high rates of fraud, embezzlement, misuse of money, and ineffective operating practises (Jenfa, 2003). In Nigeria, public sector organisations have internal audit units, although numerous financial crimes still happen. For instance, fraud, irregularities, and even violations of other regulations have been reported (Okoya, 2002). Consequently, two natural results have resulted from corporate accounting crises paired with a need for honesty and integrity in financial reporting. In order to resolve the intricate accounting manoeuvres that have clouded financial statements, internal auditing abilities are now essential. Additionally, the public’s need for reform and governmental intervention has changed how corporate governance is seen. As a result, agents of organisations working for the principals now face greater ethical and legal scrutiny. Together, these results are accountable for allaying public concerns over the financial reporting system. Implementing these internal audit findings and recommendations, however, continues to be lackadaisical. (2018) Kinyua et al. In light of the aforementioned, this study aims to evaluate the efficiency of internal audits and the calibre of private business financial reporting.
1.3 Objectives Of The Study
The main aim of this study is to examine the Effect of internal audit on financial reporting Quality of private firm in Nigeria. Other aims of this study are:
- Examine the effect of Internal Audit Standards on audit effectiveness of financial reporting quality.
- Examine the effect of internal audit independence on audit effectiveness of financial reporting quality
- Examine the impact of Professional Competence on financial reporting quality in private firm.
- Examine the effect of top management support on audit effectiveness in financial reporting quality.
- Find out the factors affecting internal audit effectiveness in the private firm.
1.4 Research Questions
The study will be guided by the following questions.
- Does internal audit standards have a significant effect on audit effectiveness of financial reporting quality?
- Does internal audit independence have a significant effect on audit effectiveness of financial reporting quality?
- Does professional competence of auditors have a significant effect on internal audit effectiveness in financial reporting quality?
- Does top management support have a significant effect on internal audit effectiveness in private firm financial reporting quality?
- What are the factors affecting internal audit effectiveness in a private firm?
1.5 Research Hypotheses
Ho: There is no significant positive relationship between internal audit and private firm financial reporting quality.
Ha: There is a significant positive relationship between internal audit and firm financial reporting quality.
1.6 Significance Of The Study
The project intended to bring to light the issues of internal auditing effectiveness in public sector with a view of coming up with possible ways to improve it.
The research work will be of vital importance to the private firms, bringing to light the challenges hampering the efficiency of the internal auditing and how these challenges can be tackled.
The research work will also be of significance to the management or head of department of various private corporations so as to see the importance of effective internal control system and the discharge of their responsibilities to the auditors as a yardstick to improve organizational performance. It is also necessary for the auditors to understand their loopholes so that necessary adjustments could be made to enhance their efficiency.
1.7 Scope of the Study
This study focuses on the internal audit and private firm financial reporting quality of firms in Lagos State. The study will further ascertain the factors affecting internal audit effectiveness in the firm. Hence, accounting/financial staff of the firm will serve as respondents.
1.8 Limitations of the Study
In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.
Moreover, the case study method utilized in the study posed some challenges to the investigator including the possibility of biases and poor judgment of issues. However, the investigator relied on respect for the general principles of procedures, justice, fairness, objectivity in observation and recording, and weighing of evidence to overcome the challenges.
1.9 Definition of Terms
Auditing: This is the process by which a competent independent person accumulates and evaluates evidence about quantifiable information and established criteria.
Internal Control: Internal control is the whole system of control, financial and otherwise, established by management in order to carry on with the business to an enterprise in an orderly manner, ensure adherence to management policies, safeguard its asset and secure as far as possible the completeness, accuracy and reliability of books and other records.
1.10 Organization of the Studies
The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter (chapter five) contains the summary, conclusion and recommendation.
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