CHAPTER ONE

INTRODUCTION

1.1 background of the study

The word audit is derived from a Latin word known as “audile’’ which means To hearer” thus, in the beginning acts as an essential element in maintaining the financial performance of companies; an objective quality audit forms the basis for confidence on the integrity and credibility of financial reports which is extremely important for efficient functioning market and also improve the financial performance. However, external audit is carried out in compliance with the superiority auditing principles can strengthen the application o accounting principles by relevant entities and assist in ensuring that their financial reports are useful transparent and reliable. External auditors are authorised by law to examine and publicly issue an opinion the status and reliability of the company’s financial report.

 The main objective of the financial statement audit is to add credibility to Managements financial statement hence, allowing owners, investors, bankers and other users of the financial statement to use them with greater confidence. However, an auditor is not a guarantor; it provides the user with a reasonable assurance that the financial statement is free from all material misstatement.

One of the cores of auditing to obtain and evaluate evidence. Public auditors should reduce agency problems and improve transparency in all operations in the organization. Auditing is a regulated function, but it is also base on professional judgement of the auditor (Eklov 2001). Auditors are expected to rely on their experience and bring many aspects into consideration before issuing their reports.

An independent audit would assist in reinforcing a strong internal control mechanism, risk management and corporate governance codes in companies, thereby contributing to the financial performance (Hassan & Farouk2014) .Furthermore, auditors assists in minimizing the chances of engaging in material misstatements by guaranteeing that financial reports are developed in compliance with the stipulated principles. Lesser risks of engaging in this statements build up trust in the capital markets, which as a result reduces the cost of capital for companies (Hoti, Ismaji, Ahmeti & Dermaku, 2012).

The audit market identifies independent auditors and size to be of high quality that the reward as paid to the auditors by the firm with greater enhancement or decreases in the share prices accordingly. Taking into account the independent audit as well las the quality is plays a significant role in preserving a well-functioning market environment, that install confidence in the veracity and reliability of financial reports required for an efficient market (ugwunts, ugwanyi, & Ngwa,2018)

The direct effect of audit attributes on the financial performance of firms has been a measure consent by researchers. In this Present day, audit attributes are measured by 3 major components audit fee, audit size and audit independence and return of assets (ROA) which is the measurement for financial performance.

It is within the background that the present study tends to explore the impacts of auditing on the financial performance of listed companies Cameroon. The main study is to examine the extent of association between the determinants of auditing with the financial performance.

The management team implements strategies and plan approved by the board of directors on their first ordinary meeting and carries out daily operation of the business, management also set and maintain a good internal control system. Since management are working on behave of shareholders as agent they are accountable to the shareholders and are required by law to prepare statement that is shows the financial position of the business. This statement shows the financial performance of the business in a particular period, the result the business present financial position.

Audit is a systematic process of objectively obtaining and evaluating adequate evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between assertions and established criteria and communicating the results to interested users or expected users. The financial statement makes assertions, which are the Balance sheet, Income statement, Casflow statement, to name a few. The books of accounts of the company are mostly audited once in a year after completion of the financial year. Their role is to give an opinion on the financial statements of their client. Base on their findings during the audit exercise, they also produce a management letter, which acts as an advice to the management of the company. This helps the management on how to improve their organization and working methods to enhance achievement of the organizational goal and objectives.

The auditor is supposed to review and evaluate internal control system maintained by the organization, which if strong will helps to prevent material is statement of the financial statements. Professional auditors are willing to accept questionable financial documents and are more likely to report error and irregularities revealed during the audit exercise. Gray & Manson (2008) asserts that, an audit is an investigation or search for evidence to enable an opinion to formed on truth and fairness of financial and other information by a person or persons likely to gain directly from the information, and the issue of a report on that information with the intention of increasing its credibility and therefore its usefulness.

The audit is conducted in accordance with the “Generally Accepted Auditing standard” (GAAS). These standards require compliance with ethical requirement and that the audit be planned to obtain reasonable assurance but not absolute assurance because auditor are guarantor not assurer, about the financial statement whether there are free from materials. The external auditor is required to obtain all information and explanations that to the best of how knowledge and belief are necessary for the purpose audit. The company has also established the internal auditing departments, which implements and ensure the internal control system are strong and maintain within the organization operations. The audit exercise also includes evaluate the appropriateness of accounting policies used reasonableness of accounting estimate made by the management, as well as evaluating the overall presentation of financial statement

1.1 Problem statement

Owners who appoint managers to look after the owner’s properties will be concerned to know what has happened to their property. This is how those who control report to the owners. This function required accountability of the directors to the shareholders of the directors to the shareholders.

Since management objective sometimes conflict with the shareholders, for example shareholders want to maximized profit earn a high dividend, management on the other hand want a higher wage. Because of this conflict in objectives management performance may be impair thereby making them motto action shareholders interest. This reduces the confidence that shareholders have on the financial statement prepared and presented to them by management.

Audit is a key contributor to financial stability and re-establishment of trust and market confidence. Auditors are entrusted by law with conducting statutory audits and fulfill important of offering an opinion whether the financial statement are stated to be true or fair in all material respect (Quick2012).This assurance should therefore reduce the risk of misstatement hence subsequently reduction of cost of business failure.

The need for auditing of financial statement evolved because of the growing complexity in business. The separation of ownership from management particularly created a need for verification and authentication of result of operations presented in financial statements produced management who were entrusted with resources by third party independent of management itself to express an opinion on their truth and fair state.

The objective of audit has been identified to be two folds namely primary and secondary objective. The primary objective is for the appointed auditor to write a report expressing his professional opinion on the truth and fairness of the financial statement examine so as to give confidence to those parties who may want to make a decision based on them. The secondary objectives include to detect and prevent errors and fraud and to provide other service to client in areas such as accounting work, financial analysis, and tax matters among others.

1.3 Research Question

This study therefore, intends to address the research question: What are the effects of external auditing on the financial performance of companies in Buea municipality?

However, there are some specific questions which help us answer this general question which include;

• To what extend does external auditing affect Return on Equity?
• What are the effects of external audit on the Debt to Equity Ratio?
• How does external audit affect operating Cash flows?

1.4 Objectives of the study

The general objective of the study is examine the effects of external audit on financial performance of banks in Cameroon.    

The specific objectives include;

• To evaluate or analyze the extent to which auditing affects Return on equity.
• To determine the effect of external audit on the Debt to Equity Ratio.
• To examine how external audit affects operating cash flows.

 To give recommendations.

1.5 Hypothesis

Based on the statement of problem and objectives of this research work, the following these are formulated:

H₀: External Audit does not significantly affects Return on Equity.

H₁: External Audit have a significant affects Return on Equity.

H₀: External Audit does not significantly affects Debt to Equity Ratio.

H_1: External Audit significantly affects Debt to Equity Ratio

H_0: External Audit does not significantly affects operating cash flow.

H_1: External Audit significantly affects operating cash flow.