ayo project

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

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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

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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

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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

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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

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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


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


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.


Accounts for the Year Ended 31st December, 2005. Abuja: Central

Bank of Nigeria.


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.

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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

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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

REFERENCES

Abbott, L. J. Parker S. and Park, Y. (2000): The effects of audit committee

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

Policy 12 (4): 353-375.

Anderson, D., J. Francis, R. and Stokes, D. J. (1993): Auditing, directorships


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.

45

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,

2010.

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Hitchins J, Hogg m and Mallett D (2001): Banking: A Regulatory Accounting

and Auditing Guide, Institute of Chartered Accountants

Huepkes E (2005): ‘The External Auditor and the Bank Supervisor: Sherlock

Holmes and Doctor Watson?’ Journal of Banking Regulation Volume 7

No1/2

Lowe, D. J. Geiger M. A. and Pany, K. (2001): The effects of internal audit

outsourcing on perceived external auditor independence. Journal of

Accountancy 191 (1): 90.

Marden, R. and Edwards, R. (2005): Employee fraud in the casino and gaming

industry. Internal Auditing 20 (3): 21-30.

McMullen, D. A. (1996): Audit committee performance: An investigation of

the consequences associated with audit committees. Auditing: A Journal

of Practice & Theory 15 (1): 87-103.

Millichamp A. H, (2002): Auditing, Eight Edition, United Kingdom:

Bookpower

Nestor, S. (2004): The impact of changing corporate governance norms on

economic crime. Journal of Financial Crime 11 (4): 347-352.

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





Hypothesis 2

50





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


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


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


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


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


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


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


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


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 (%)


Agree 78 65

58

Undecided 0 0

Disagree 4 3


Total 120 100



respondents agreed representing 65%; no respondents was undecided


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.



Agree 36 30

Undecided 10 8

59

Disagree 14 12


Total 120 100



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.



Agree 54 45

Undecided 0 0

Disagree 0 0

60


Total 120 100



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.



Agree 26 22

Undecided 0 0

Disagree 10 8


61

Total 120 100






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.



Agree 18 15

Undecided 12 10

Disagree 6 5


Total 120 100

62




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.



Agree 32 27

Undecided 5 4

Disagree 18 15


Total 120 100


63


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.



Agree 40 33

Undecided 0 0

Disagree 0 0


Total 120 100


64


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.



Agree 8 7

Undecided 0 0

Disagree 40 33


Total 120 100


65


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 (%)


Agree 60 50

Undecided 14 12

Disagree 4 3


Total 120 100


66

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.



Agree 62 52

Undecided 10 8

Disagree 16 13


Total 120 100


67



representing 8%; 16 and 6 respondents disagreed and strongly disagree


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.



Agree 20 17

Undecided 0 0

Disagree 6 5


Total 120 100


68





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.



Agree 0 0

Undecided 0 0

Disagree 0 0


Total 120 100


69

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





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





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.

83

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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ayo project

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