CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION                           

This will be the first chapter of the research report which includes aspects such as background of the study, statement of the problem, main and specific research questions, main and specific research objectives, hypothesis, the significance of the study, the scope of the study, and the organization of work.

1.1 BACKGROUND OF STUDY

Internal audit has traditionally been focused on identifying policy violations and encouraging compliance with regulators. It has been a control mechanism to provide assurance that the government officials or its ministries (internal audit) and the establishment legislature (external audit), that public funds are received and used in accordance with the required appropriate and established laws and regulations (compliance audit) and that the government financial performance reports are true and fair and they are prepared from the underlying financial records and presents its financial position (financial audit). The role of internal audit function has changed due to shifts in international corporate Practices. It improves the organization’s operations as it is an independent activity helping a firm achieve its goals by using a well-organized approach to manage their risk, internal Control and governance efficiency and effectiveness (Stewart and Subramaniam,2010), as the ultimate goal of internal audit is to achieve better returns for the organization in shape of Improved firm performance (Saud, 2012). In recent times, a combination of different forces has led to a quiet revolution of the profession. Organizations have to now demonstrate accountability in the use of shareholders money and efficiency in the delivery of services. Organizations now demand great competency and professionalism from internal audit, and limited resources must be used efficiently and effectively to minimize and manage risks.

Financial reporting is one of the primary responsibilities of management which enables them give account of their stewardship. Managers of public companies are expected to prepare and present annual financial reports to shareholders, who are owners of the firm and other interested users such as creditors, analysts, government, and the general public to enable them assess the performance and financial position of the reporting entity. The main objective of financial reporting therefore is the provision of information on the financial performance and position of the reporting entity that is useful to different users, to enable them assess the stewardship of management and make informed economic decisions (Amahalu, Okoye & Obi, 2019). This means that published financial reports that fail to meet the information needs of its users do not achieve their intended purpose.

(Eighme & Cashell, 2002) states that the internal audit department is charged with providing information that enhances the system support, the responsibility of the management of the institution and employees as well as stakeholders of the institution in operation and financial performance of the institution. Audit quality is important for every organization to achieve efficient and effective management of resources. It leads to the improvement of financial performance as a key implementation strategy of the accounting system and helps management check the work of each department within the firm as a whole. Around the world, audit quality assures the achievement of quality financial statements or reports for commercial banks of any country. According to ( De Angelo, 1981) audit quality is the market-assessed joint probability that a given auditor will both discover a material misstatement in the client’s accounting system and subsequently report it. This implies that audit quality depends on both the auditor’s ability and willingness to detect and disclose errors or frauds in the financial statements. Higher audit quality reduces the information asymmetry and agency costs between managers and share holders, and enhances the credibility and reliability of the financial reporting process. (DeFond and Zhang, 2014) states that higher audit quality is greater assurance of high financial reporting quality. This definition implies that audit quality is not only about the auditor’s ability and willingness to detect and report errors or frauds, but also about the quality of the financial information that the auditor verifies. Higher audit quality reduces the information asymmetry and agency costs between managers and shareholders, and enhances the credibility and reliability of the financial reporting process. (The Institute of Internal Auditor, 2023) defines audit quality as the degree to which an audit activity provides assurance that risks are appropriately identified and managed, internal controls are effective and reliable and governance processes are sound and ethical. This definition reflects that audit quality encompasses the key elements that create an environment that maximizes the likelihood that quality audits are performed on a consistent basis. These elements include leadership, fact-based decision making, people, suppliers and partners, and quality assurance and improvement programmes internal audit performs an essential part in enhancing the achievement of company goals. Additionally, it also influences the implementation of strategies that are aimed at ensuring their success (Ljubisavljević & Jovanovi, 2011). Internal audit is charged with the responsibility for improving management and audit committees (Hutchinson & Zain, 2009). Therefore, the internal audit report is prepared as a form of communication between internal audit and the management. Additionally, it is established as a crucial guideline to enhance the management of the company and ensure its success (Ljubisavljević & Jovanovi, 2011).

(Okaro et al, 2015) as (Adeyemi&Fagbemi,2010) , argue that internal audit quality is the joint probability, as assessed by the market, that a given auditor will simultaneously discover a deficiency in the client’s accounting system and report that deficiency, meaning that the auditor has both the technical competence to detect any material errors during the audit process and the independence to ensure that material errors and omissions are corrected or disclosed in the auditor’s report. However, it would appear that the quality of internal auditing is enhanced when internal auditors are competent and independent. It is also the ability on an internal audit function to provide useful findings and recommendations that would help increase senior management interaction with these recommendations (Ed-Douadi & Bakour, 2020). (DeFond and Zhang, 2014) states that higher audit quality is greater assurance of high financial reporting quality. This definition implies that audit quality is not only about the auditor’s ability and willingness to detect and report errors or frauds, but also about the quality of the financial information that the auditor verifies. Higher audit quality reduces the information asymmetry and agency costs between managers and shareholders, and enhances the credibility and reliability of the financial reporting process.

1.2PROBLEM STATEMENT

In recent years, corporate accounting scandals coupled by an outcry for transparency and integrity in financial reporting have given rise to internal audit skills in resolving this corporate accounting scandals and failures.

KlynveldPeat Marwick Goerdeler (KPMG) has identified a series of business failures and corporate scandals to be as a result of weak internal control and audit systems. The famous failure of Enron in 2001 was as a result of weak internal control and internal audit systems. In respond to this, the Sarbanes Oxley Act(SOX) was created in 2002 to restore public thrust in corporations. The intention of SOX was to protect investors by improving the accuracy and reliability of corporate disclosures in financial statements and other documents, as well as strengthen internal control and audit committees. In order to ensure a strong auditing system, Statements Of Auditing Standards (SAS) 70, prepared by the American Institute Of Certified Public Accountants (AICPA) have provided guidance to auditors when evaluating internal control of service organizations.

However, despite all these control and standards set by international and national body, there is still continuing scandals and failures in many companies around the globe for examples; WorldCom, Volkswagen, Afribank Nigeria Plc in 2009; Intercontinental Bank Plc in 2009 and Skye Bank Plc in 2018. Low-quality financial reporting has also been a contributing factor in many high-profile corporate scandals, leading stakeholders in many countries to demand higher quality corporate governance (Amahalu, Egolum & Obi, 2019). Continuing corporate scandals and failures have show that the issue of risk and how to mitigate it through internal control and auditing efforts is far from resolved. It is against this study that the researcher will seeks to examine the effect of internal audit quality on financial performance.

1.3 RESEARCH QUESTIONS

1.3.1 Main Research Question:

What is the effect of internal audit quality on financial performance of Cogeni Buea?

1.3.2 Specific Research Questions

• What is the effect of audit committee size on the financial performance of Cogeni Buea?
• What is the effect of audit committee independence on the financial performance of Cogeni Buea?
• What is the effect of audit committee competency on the financial performance of Cogeni Buea?

1.4 RESEARCH OBJECTIVES

1.4.1 Main Objective

To examine the effect of internal audit quality on financial performance of Cogeni Buea.

1.4.2 Specific Objectives

• To determine the effect of audit committee size on the financial performance of Cogeni Buea.
• To ascertain the effect of audit committee independence on the financial performance of Cogeni Buea.
• To assess the effect of audit committee competency on the financial performance of Cogeni Buea.