Post on 21-Apr-2020
MAKERERE UNIVERSITY
THE RELATIONSHIP BETWEEN AUDITING AND QUALITY OF FINANCIAL
STATEMENTS IN SMALL MEDIUM ORGANISATIONS.
(A CASE STUDY OPPORTUNITY UGANDA (KAWEMPE BRANCH)
BY
OPILA MOSES
07/U/14575/EXT
ARESEARCH REPORT SUBMITTED TO FACULTY OF ECONOMICS AND
MANAGEMENT IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF THE
AWARD OF BACHELOR OF COMMERCE OF
MAKERERE UNIVERSITY.
MAY, 2011
1
Table of contents:
Declaration iv
Approval v
Dedication vi
Acknowledgement vii
List of tables and figures viii
List of abbreviations and acronyms ix
Abstract x
CHAPTER ONE: 1
1.0 Introduction 1
1.1 Statement of the problem 3
1.2 Purpose of the study 4
1.3 Objectives of the study 4
1.4 Research questions 4
1.5 Scope of the study 4
1.6 Significance of the study 5
CHAPTER TWO: 6
2.0 Literature review 6
2.1 introduction 6
2.2 The concept of auditing 6
2.3 Financial statements 7
2.4 Constitutes of quality financial statements 8
2.5 Impact of auditing on financial statements 9
2.6 Impact of audit and quality of financial statements on a business entity’s success. 10
2.7 The relationship between auditing and quality of financial statements. 11
2.8 Conclusion. 13
2
CHAPTER THREE: 14
3.0 RESEARCH METHODOLOGY 14
3.1 Introduction 14
3.2 Research design 14
3.3 research variables 14
3.4 Study population 14
3.5 Sampling procedure 14
3.6 Source of data 15
3.6.1 Secondary data 15
3.6.2 Primary data 15
3.7 Data collection 15
3.8 Research instruments 15
3.9 Data analysis 16
3.9.1 Qualitative data 16
3.9.2 Quantitative data 16
3.10 Limitations of the study/anticipated problems. 16
CHAPTER FOUR: 18
4.0 PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS. 18
4.1 Demographic characteristics of the respondents 18
4.1.1 Sex of the respondents 18
4.1.2 Employee category according to departments 19
4.1.3 Marital status of the respondents 20
4.1.4 Work experience of the respondents 21
4.2 The effectiveness of auditing as a tool for organizational success 22
4.2.1 The control measures in place 22
4.2.2 Presence of audit departments 23
4.2.3 Presence of audit department acting as a relationship between auditing and quality of
financial statements 24
4.3 Quality dimensions used to financial statements. 25
3
4.3.1 The effectiveness of quality dimensions. 27
4.4 The relationship between auditing and quality of financial statements. 28
4.4.1 Auditors help and guidance 28
4.4.2 The independence and objectivity of auditors. 29
CHAPTER FIVE: 31
5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 31
5.1 Summary of the findings 31
5.1.1 Effectiveness of audit as a tool for organizational success 31
5.1.2 Quality dimensions used to financial statements 31
5.1.3 The relationship between auditing and quality of financial statements 32
5.2 conclusions 32
5.3 Recommendations 32
5.3.1 Recommendations in respect of effectiveness of an audit as a tool for organizational success
33
5.3.2 Recommendations in respect to quality dimensions used to financial statements 33
5.3.3 Recommendations in respect to relationship between auditing and quality of financial
statements 33
5.4 Areas suggested for further studies 33
Key text: references. 34
Appendices
Introduction letter
Questionnaire
4
DECLARATION
I, Opila Moses do hereby declare that this is my original work and has not been submitted for
award of a degree in any university/institution before or for publication.
SIGNED................................................Date...........................................
OPILA MOSES
07/U/14575/EXT
CANDIDATE.
5
APPROVAL
This research report has been submitted under my supervision as a university lecturer.
................................................
PASTOR YOEL SHALOM
SUPERVISER.
6
DEDICATION
This work is dedicated to my mother Mrs. AINO NOSIANTA and my brothers; Robert, James,
and Francis. They have been supportive both morally to see me to this level in my academic
struggle. I am very happy and I feel indebted to them.
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ACKNOWLEDGEMENT
The journey has been long I thought I wouldn’t reach, but now I am there. I would like to extend
my sincere gratitude to those who have made my dream come true.
My sincere gratitude in this regard therefore, goes to my supervisor pastor shalom yoel for his
efforts, spiritual guidance, patience, parental love and all the support and advice he gave me
during this exercise.
I would also like to recognize the assistance given to me by various staff at opportunity Uganda
especially Mr. Kachau Richard who was always ready and willing to give me all the information
I needed to make this project a success.
A special acknowledgement goes to my friend Ronah and to all my discussion group members
who encouraged and stood with me in difficult times.
Above all, my praises go to the almighty God who has seen me through. Without his strength and
spiritual direction, this work would be nothing and to him, I give the entire honor.
8
LIST OF TABLES AND FIGURES:
Table I: Gender composition of respondents.
Table ii: Employee category according to departments.
Table iii: Marital status of the respondents.
Table IV: Employees work experience.
Table v: The control measures in place.
Table VI: Presence of audit departments.
Table vii: Presence of audit department acting as a relationship.
Table viii: Quality dimensions used to financial statements.
Table ix: Effectiveness of quality dimensions used to financial statements.
Table x: Auditors help and guidance.
Table xi: Independence and objectivity of auditors.
Diagram 1: Gender composition of respondents
Diagram 2: Marital status of the respondents
Diagram 3: Employees work experience.
Diagram 4: The effectiveness of control measures in place.
Diagram 5: Presence of audit departments.
Diagram 6: Quality dimensions used to financial statements.
Diagram 7: Effectiveness of quality dimensions used to financial statements.
Diagram 8: Auditors help and guidance.
Diagram 9: Independence and objectivity of auditors.
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LIST OF ABBREVATIONS AND ACRONYMS:
A- Agree.
D- Disagree.
N/S- Not sure.
SA- Strongly agree.
SD- Strongly disagree.
Ltd- Limited.
%- percentage.
10
ABSTRACT:
The study focused on audit and quality of financial statements. The research sought its basis
from the fact that organizational fraud has continued to feature in mass media despite the
presence of checks and balances and that there has been a deliberate tendency by some
auditors to part with their professional ethics and statutory duty in the execution of the
assignments.
The purpose of the study was to determine the need for quality financial statements for
organizational success. The objectives were to evaluate the effectiveness of auditing as a tool
for organizational success, to determine the adherence to quality dimensions used to financial
statements, and to establish the relationship between auditing and quality of financial
statements.
Data was collected using questionnaires. It was then edited, coded, tabulated, transformed
into frequency and percentage and analyzed.
The study revealed from the findings that the effectiveness of control measures in place,
presence of audit departments and presence of audit department acting as a relationship
between auditing and quality of financial statements can enhance the effectiveness of an audit
as a tool for organizational success.
The study also established that timeliness, compliance, objectivity, preparation of reports by
the right persons and accuracy are quality dimensions critical to financial statements.
Lastly the research found out that, auditors help and guidance, presence of audit departments,
and independence and objectivity of auditors are factors responsible for the relationship
between auditing and quality of financial statements.
The research was also able to come up with the view that audit and quality of financial
statements are strongly positively correlated.
The recommendations were made in respect of the findings and research objectives.
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CHAPTER ONE:
INTRODUCTION:
1.1 BACK GROUND:
Auditing has been performed for centuries but it has come to be recognized as modern profession
only during the past approximately 50 years (Ratiff, Wallace, Loebeeke, Mc Farland, 1988).
This has been because of increased complexity in most organizations, companies, and
government, especially in establishing the quality of financial statements.
Auditing, as defined by palm rose 1998, is a systematic process of objectively obtaining
evidence regarding assertions, economic actions and events of an economic entity to ascertain the
degree of assertions and establishes criteria and communicating feedback to users.
The demand for auditors arises from the auditors monitoring role in the principle agent
relationship. According to Zimmerman 1986, financial statements audit is a monitoring
mechanism that helps reduce information a symmetry and protect the interest of the principals,
specifically stakeholders and potential ones by providing reasonable assurance that
management’s financial statements are free from material misstatements. In the case of limited
companies, financial statements are produced annually and take the form of statement of
compressive income, statement of financial position, statement of cash flows, statement of
changes in equity and notes comprising a summary of accounting policies and other explanatory
notes.
The quality of auditing financial statements differs. Audit quality describes how well an audit
detects and reports material misstatements of financial statements while high audit quality is
associated with high information quality of financial statements.
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This is because financial statements audited by high quality auditors are less likely to contain
material misstatements. Angelo 1981 noted that the size of the audit firm is positively associated
with audit quality of financial statements.
He further noted that when accounting firm size is used as the indicator of audit quality, higher
audit quality is associated with less information asymmetry and higher information quality.
However, Murry 2002 argued that the quality of audit and auditor is strengthened by a system of
compulsory rotation of audit firms, especially, after a specific period of time. This is according to
Murry, is essential to maintaining confidence in audit quality and the quality of financial
reporting which is critical in the efficient functioning of the World’s capital markets.
In addition, audit effectiveness i.e. accomplishes what it was designed to do depend upon the
audit firms accumulated knowledge, and long-term experience with the clients operation and
complex reporting issues. Compulsory rotation of auditor acts as a disincentive to the auditor to
make investments that enhance quality, implying that the knowledge of the client relationship
will be fixed and usually of rather short duration thereby his resources, attention and focus on the
new client development.
Management seeks assurance that improves the quality of financial statements. If controls are not
adequate and not operating properly, the organization may be in danger. So, management is
responsible for the organization internal controls and increasingly utilizing auditors to monitor
the performance of the organization control systems in order to produce quality financial
statements.
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1.2 Statement of the problem:
A number of Auditing issues are becoming subjects of anxious debate and controversy. The
accounting press has many articles on these auditing issues which include increased accounting
regulation of enterprise and the effect on auditors, increased regulation of auditors, the extent of
auditors responsibilities for the detection and prevention of fraud, the gap between the public’s
expectations of auditing and the legal position of auditors, audits independence and the whole
future of auditing as professional activity.
The reliability of audited financial statements greatly depends on the auditors opinions, which are
well known to be independent, honest and competent. Recent audit failures such as Enron, waste
management, and WorldCom, have led to a negative perception on the quality of audited
financial statements.
The companies Act requires that the audited financial statements must give a true and fair view of
statement of affairs of the company which is based on auditor’s personal opinion. The users of
these statements will know from his knowledge of the auditor whether or not to rely on the
auditor’s opinion basing on so many factors.
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1.3 Purpose of the study.
The study was intended to expand on the quality of financial statements and find out whether
there was a relationship between auditing and quality of financial statements for the success of
the firm.
1.4 Objectives of the study:
To evaluate the effectiveness of auditing as a tool for organization success.
To determine the adherence to quality dimensions which are critical to financial
statements?
To establish the relationship between auditing and quality of financial statements.
1.5 Research questions:
How effective is auditing as a tool for organization success?
What quality dimensions are used to financial statements?
What is the relationship between auditing and quality of financial statements?
1.6 Scope of the study.
1.6.1 Geographical scope.
The geographical scope was opportunity Uganda Kawempe branch plus other
Departments and stakeholders.
1.6.2 Subject scope
This was based on auditing and quality of financial statements. It was an attempt to define what
auditing is, what financial statements are and constitutes of quality and financial statements. The
study also endeavored to find out the impact of auditing on financial statements and the impact of
audited quality financial statements on company’s entity’s success.
1.6.3 Time scope.
The study covered time from financial year 2007/08 up to 2009/10.
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1.7 Significance of the study.
This research can supplement numerous efforts readily put on ground by other
Researchers in availing proper information to guide on effective auditing and financial
statements. The findings of the study may provide salient information to planners, relevant
Ministries like ministry of finance and Economic Planning, to design appropriate policies
concerning auditing and preparation of financial statements in organizations.
The results of the study will have implications for both researchers and accounting information
users in that assessment of auditing through actual and perceived audit quality and observation
will provide evidence in the quality of financial statements.
The academicians interested in auditing will learn from and expand upon the research.
REVIEW:
Future researchers are encouraged to research on internal audit and organisational
performance, with the following research objectives.
To examine the internal audit effectiveness.
To examine the organisation performance.
To determine the relationship between internal auditing and organisational performance.
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2.0 CHAPTER TWO:
LITERATURE REVIEW:
2.1 Introduction: This chapter basically involves analyzing, examining, evaluating and assessing
the existing body of knowledge about the topic. The researcher also tried to focus on the
weakness while consolidating on the strength of the existing literature by various scholars.
The literature was reviewed on the concept of auditing as a variable to enhance the preparation of
quality financial statements. The main issues discuss include auditing, financial statements,
constitutes of quality of financial statements and impact of auditing and financial statements on a
business entity success.
2.2 The concept of Auditing.
In ordinary sense, Auditing means official examination of accounts. ‘Audit’, is derived from
the Greek word “Audire” meaning hear. This was so because in the ancient times the accountants
of an estate, domain or manor were checked by having them called out by those who had
compelled them to that authority (Woolf, 1994).
Spicer and pegler (1969), according to them, audit is such examination of the books of accounts
and vouchers of business as will enable auditors to report whether he is satisfied that the
statement of financial position is properly drawn up so as to give a true and fair view of the
statement of affairs of the business and statement of comprehensive income gives a true and fair
view of profit for the financial period, according to the best of information and explanations
given.
Auditing in another sense is also said to be the systematic and independent examination of data,
statements, records, operations and performance for a stated purpose
(Ramaswaamyi, 1981).
According to Woolf 1994, Auditing is a process carried out by qualified auditors whereby the
accounts of business entities including limited companies, charities, trusts and professional firms,
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are subjected to scrutiny in such detail as will enable the auditors to form an opinion as to their
accuracy, truth and fairness. This opinion is then embodied in an audit report, addressed to those
interested parties who commissioned the audit, or to whom the auditors are responsible.
Auditing started in early days of man as people were employed to review the work tax collectors
and estate managers. For example, landlords employed independent auditors to check returns
from tenant farmers to ensure they accurately reflected revenue received from their estates.
Modern auditing started with the formation of limited companies where the business is separate
from owners and the liability of owners is limited to the capital invested in the company. An
audit of companies is therefore required to protect the:
Business owners from unscrupulous managers.
Business world and the public from owners taking advantage of the limited liability
status.
Auditing is broadly divided into external Audit and internal audit. An external audit is an audit of
financial statements by external auditors from outside the entity and its objective is to enable
auditors to express an opinion whether the financial statements give true and fair view and are
prepared in all material respects, in accordance with an applicable financial reporting framework
and relevant laws applicable in a particular country.
According to (chamber, 1988) defines internal auditing as an independent appraisal activity,
within an organization for the reviewing of operations as a service to management.
2.3 Financial statements.
These are Summaries of an organization’s day-to-day underlying transactions put in report form.
They are basically developed from the basic records of an organization for example, Ledgers,
receipts and vouchers. The financial statement usually take the form of statement of
comprehensive income, statement of financial position, statement of changes in equity and
statement of accounting policies and notes.
Audit work on financial statements is aimed at getting sufficient appropriate audit evidence to
support the financial statement assertions. Financial statements assertions are the representation
of the management, explicit or implicit, that are embodied in the financial statements.
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The financial statements represent fair measurements of the economic events and business
transactions that affect the organization during a certain period of time (Taylor, 1988).
The preparation of final accounts is the statutory responsibility of the directors who also prepare
support schedules, which summarize the contents of accounts, and to relate the summaries to the
detailed records from which the information has been drawn (Woolf, 1994).
2.4 Constitutes of quality of financial statements.
Quality of financial statements is embedded in accuracy, relevancy and reliability, timely
submission, objectivity, comparability, verifiability, neutrality and compliance.
Timely submission refers to beating the deadline or agreed upon for the final report to be
handed over to the interested parties. Timeliness requires that accounting information be provided
at a time when it may be considered in making a decision (Herman son, 1987).
Accuracy here means arithmetical accuracy of source documents and accounting records, which
can be checked by performing independent calculations (Woolf, 1994).
The recording of the business transactions should be accurate and arithmetically correct for this
purpose, controls such as checking of totals, reconciliation, control accounts and trial balance
should be upheld (Saleemi, 1997).
Financial information has verifiability when it can be substantially duplicated by independent
measures using the same measuring methods. Verifiability is directed towards eliminating
measures bias, rather than measurement bias (Herman son, 1987).
Relevancy and reliability here mean enquiries as to whether the source data is sufficient, relevant
and reliable which can also be crosschecked through receiving and testing the data (Woolf,
1994.). Reliability of internally created documents is increased if two parties with opposing
interests participate in the preparation of the documents (Melgs, 1988). For information to have
relevance, it should be pertinent to or bear upon a decision. The information must make a
difference to someone who does not already have the information (Herman son, 1987).
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Objectivity means that the financial statement must be free from any manipulation or
subjectivity. This means appropriate amendments must be adhered to.
Compliance requires that the financial statements are in compliance with the international
accounting standards in all material aspects as to the basic principles and essential procedures
identified in the international standards.
Financial statements are normally required to contain particulars of any material departure from
an accounting standard which applies to the reporting entity together with the financial effects of
the departure (Woolf, 1994).
The financial statement of the previous periods or years should be comparable to the current year.
For example in the statement of financial position, there should be a schedule for each item it
contains. The schedule will invariably commence with the figure, which appeared for the item in
question in the audited statement of financial position. The two amounts are reconciled by means
of detailed cross reference back to the underlying ledger accounts (Woolf, 1994). The companies
Act schedule 4(4) states that corresponding amounts are required to be disclosed in respect of
every item in a company’s statement of financial position and statement of comprehensive
income relates (milli champ, 1996).
Neutrality in accounting information should be free of measurement method bias. Non-neutral
accounting information is designed to favor one set of interested parties over others, for example,
a particular form of measurement might favor owners over creditors or vice versa ( Herman son,
1987).
2.5 Impact of auditing on financial statements.
The impact of auditing on financial statements is of much significance. Internal auditors are
answerable to management while external auditors are answerable to shareholders. The quality
and truthfulness of the final accounts will to a greater extent depend on the degree of internal
controls employed in an organization. It will also depend on the objectivity and personal
judgment of the auditor in question whether internal or external especially where the auditor will
be required to use his sixth sense to come to an opinion and not just carry out compliance tests.
Therefore different parties interested in the final accounts of an organization will to greater
degree rely on the auditor’s opinion as to the state of affairs of the organization (Woolf, 1994).
20
However, it’s worth noting that, no matter how meticulously financial accounts are prepared and
audited, no matter how many accounting standards, are enforced, total objectivity in accounting
is probably on idealist dream. Even if it were practicable for the auditor to examine in detail
every single shred of documentary evidence relating to the transactions of a large company
through out its financial year, It would still not be possible to certify More than the arithmetical
and book keeping accuracy. Accounting as opposed to book keeping involves the exercise of
judgment and there is thus every chance that two auditors, of equal skill and experience will view
a particular circumstance differently, even at fundamental level managements facing financial
difficulties may be tempted to present their accounts in ways that seek to hide the problems they
face.
In times of service business stress, it is all too easy to succumb to the temptation of what may be
called “expediency accounting” (Woolf. 1994).
2.6 Impact of Audit and quality of financial statements on a business entity’s success.
It’s often mistakenly believed that a genuine need for an external audit arises only in the case of
large and complex organizations, or where the interests of outside non-executive shareholders
and investors must be protected, quite a part from situations, there are many inherent advantage
in having accounts audited.
With audited final accounts, disputes between partners may largely be avoided, especially where
complicated profit sharing arrangements subsist.
The admission of a new partner is facilitated if sets of past audited accounts are available for
examination. Any partnership change (e.g. death or retirement or alteration of profit sharing
ratios) will have to be reflected in the accounts and it’s usual for the partnership assets, including
goodwill to be revalued at such a time. Since such revaluations directly affect the respective
shares of each partner, it is advisable to have the post –change-accounts independently audited.
Applications to banks and other outside parties for the purpose of raising finance are greatly
enhanced if supported by audited accounts.
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Audited accounts submitted to tax authorities carry greater authority than accounts, which have
not been audited (Woolf, 1994).
In case of fire, insurance company may settle the claim on the basis of audited accounts of the
previous years (Saleemi, 1997). Private trustees recognize the advantages of an audit in their own
interest, since any erroneous treatment in the accounts for which they might be, personally liable
will be pointed out by the auditors and can be rectified. Further, they are able to consult the
auditor on points of difficulty before action is taken
(Bigg, 1972).
With audited accounts, management will know the true and fair state of affairs of the
organization. Confidence is also created on the reliability of accounts of the organization. The
errors and fraud can be detected during an audit. The weakness in the internal control system can
also be identified by auditors (Ramaswamy, 1981).
2.7 The relationship between auditing and quality of financial statements.
Audit quality is of significant value to investors in capital markets because investors often use
audited financial statements by auditors as a basis for investment decisions. Because auditors are
both insurance provider and information intermediary that provide independent verification of
manager prepared financial statements, audit quality contributes to credibility of financial
statements.
Based on De Angelo (1981), audit quality refers to the probability that will both discover and
truthfully report material errors, misrepresentations, or omissions in accounting system of clients.
In addition, Watkins, et al (2004) discuss that the components of audit quality consist of
“Monitoring strength” and “Reputation”. The monitoring strength gives the auditors ability to
increase the quality of financial statements information which reflects true economic
circumstances of clients. Also, reputation represents auditor’s ability to enhance the credibility of
financial information.
Based on an extensive review of the literatures involving the relationship between the length of
auditor client relationship and audit quality, numerous studies suggest that new auditors may lack
client specific knowledge and lack audit independence due to increasing incentives to reserve
new client relationships thus they reduce audit quality.
22
Recently, the proponents of mandatory auditor rotation have long been an issue of debate. They
argue that the length of auditor client relationship may lead to damage of auditor independence
and audit quality. The extended auditor client relationship could have harmful impact on auditor
independence because an auditor’s objectivity may be reduced (Mautz and Sharaf, 1961).
Furthermore, the auditors are more likely to agree with managers on important reporting
decisions (Ryan, et al (2001).
Consequently imposing mandatory that requires auditor’s rotation would improve audit quality
by reducing client’s ability to influence auditors. Quality is defined as a level of quality of
relationship between auditor and client and it comprises of the level of trust, compatibility,
competence, and length of relationship that an auditor engages with a client and they may reflect
the length of audit engagement or length of time an auditor maintains with a client (Beattie,
Fearnley and Brandt, 2004).
Therefore, according to the literature reviewed, a link between the length of auditor-client
relationship and audit quality, the relationship quality (trust, compatibility, competence, and
length of relationship) is likely to have a positive relation with audit quality.
Thus, auditors with higher degree of trust, compatibility, competence, and length of relationship
will efficiently obtain greater audit quality.
With regards to competitive environment literatures, Deis and Giroux (1992) suggest that
auditors performance and behavior are influenced by the environment. Yardley Kauffman,
Cairney and Albrecht (1992) found that increased competition lead to reduce audit quality. As a
result, competitive environment is postulated to reduce the relationship between auditing and
quality of financial statements.
Thus, the main objective of this study is to investigate the relationship between auditing and
quality of financial statements by using competitive environment and regulation flexibility as
moderators.
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2.8 Conclusion.
The Constitutes of quality financial statement are majorly accuracy, relevancy and reliability,
timely submission of reports, objectivity, comparability, verifiability, neutrality and
compliance.The impact of auditing on financial statements can not be underestimated and is
therefore of much importance to a business concern like opportunity Uganda (Kawempe branch).
In the same way, the quality of financial reports is very crucial for the success of any business
entity.
REVIEW:
Future researchers are therefore encouraged to research on the following;
Duties of an internal auditor.
Internal audit and internal control.
Factors affecting the effectiveness of internal audit.
Performance of an organisation.
The relationship between internal audit and organisation performance.
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CHAPTER THREE:
3.0 RESEARCH METHODOLOGY
3.1 Introduction
This chapter presents ways, methods, and process through which the study was conducted. It
consists of different aspects like research design, research variables, area and population of study
and sample selection and size. It’s also concerned with sources of data, data collection and
analysis.
3.2 Research Design:
The researcher used both descriptive and analytical research design. The descriptive design was
aimed at establishing the relationship between audit and quality of financial statements.
Analytical design was used to evaluate facts gathered. Method triangulation was used for data
collection and analysis i.e. Quantitative and qualitative methods.
3.3 Research variables:
The independent variable used was Auditing while the dependent variable was quality of
financial statements. The indicators of quality financial statements include accuracy, relevance
and reliability, comparability, timeliness, objectivity and compliance.
3.4 Study population.
A few employees of opportunity Uganda constituted the population of the study i.e. at least 30
people. The sample of employees constituted contact staff, and managers directly involved in the
preparation of final accounts and those monitoring internal controls or audit.
3.5 Sampling Design and procedure.
Purposive method was used in sample selection. The reason for this was to have a fair
representation of the respondents from the study organization, opportunity Uganda. These are
mainly the directors; audit department, loans department, and the accounts and finance
25
department because these are people who are involved in the preparation and writing of financial
statements. A survey of at least 6 respondents from each department was conducted so as to get
an assessment of audit practice and the preparation of financial statements.
3.6 Sources of data.
3.6.1 Secondary data:
Secondary information on final accounts of small medium companies in general and opportunity
Uganda reports in particular was obtained to get the background to the study. This was collected
from both internal and external sources. Internal sources included the opportunity Uganda reports
and audit undertaken by the company concerned. External sources were journals, newspapers
article, text books, the internet, previous research reports.
3.6.2 Primary data.
As shown in 3.5 above, Data was collected mainly from the Auditing department staff, staff from
other departments and as well as the directors. Personal interviews with the personnel involved in
final accounts preparation and internal auditing were undertaken.
Data collection.
Data was collected mainly through questionnaires and qualitative data through in-depth interview
guides.
Research instruments.
Two categories were used the questionnaires and the interviews for the structured and
unstructured instruments respectively. The main instrument was a questionnaire, which consisted
of both open and closed questions. This was considered as the most appropriate by the researcher.
The research instrument was developed in consultation with the accounts and audit department.
This was to make sure the objectives for the research are achieved.
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3.9 Data analysis and processing:
3.9.1 Qualitative data:
Data was summarized using statistical means like tables, graphs, percentages and
interpreted.
3.9.2 Quantitative:
Quantitative data method of data analysis and summary statistics with some inferences
was used.
Editing:
Each questionnaire was ranked for consistency, accuracy and completeness. Editing was
carried out after interview to correct any inconsistencies.
3.9.4 Coding:
Coding was of great importance as it provides a means of tracking data from the point of
entry into information system therefore the researcher used it to put data in its right
distribution.
Data analysis:
Under this, data was tabulated using frequency distribution tables and where possible
percentages were calculated which could be transferred and shown in pie charts with the
aid of Ms Excel. Electronic data calculation was used.
Limitations of the study/anticipated problems:
1 The time frame for carrying and writing the research was limited since the researchers had
to attend lectures, discuss for class presentations, write and present other essays, sit for tests
and had to prepare for exams at the same time.
2. Response errors were encountered as some respondents were not adequately providing
right answer to the questionnaires and/or left other blank/unfilled.
3. Unavailability of the respondents. Members of staff were always busy with routine work.
However, amidst all the problems/ challenges noted above, the researcher tried as much as
possible to minimize them, so that the results/findings of the study are not affected. For
27
example the researcher had to stand firm and solve all the financial constraints of the study
including stationery, photocopying, printing, transport, phone calls, typing and entry fees to
some public libraries. The constraints worry thus, was about “where’s the money going to
come from”. This diluted all the pride and the pleasure I had.
REVIEW:
I would do chapter three differently in the following ways;
I would use descriptive and analytical research designs.
I would use pueposive method of sampling.
The study focus will be on employees and particularly internal audit staff.
I would use questionaires for data collection;
And hereby encourage future researchers to undertake the same.
28
CHAPTER FOUR
4.0 PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS.
This chapter is concerned with presentation, analysis and discussion of the findings in line with
the research objectives and questions which were;
-To evaluate the effectiveness of auditing as a tool for organization success.
-To determine the adherence to quality dimensions which are critical to financial statements?
-To establish the relationship between auditing and quality of financial statements.
The analysis also focuses on the demographic characteristics of the respondents.
4.1 Demographic Characterizes of the Respondents.
The findings presented in this section were collected using the questionnaire. Sex of respondents,
employee category according to departments, and marital status were the factors considered
among others.
4.1.1 Sex of respondents.
The researcher tried very much to collect data using well-balanced composition of respondents.
The chart below shows the composition of respondents according to gender.
Chart 1.
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Table1: Gender Composition of the Respondents
Sex Frequency Percentage
Female 17 53
Male 15 47
Total 32 100
Source: Primary Data
From the table above, 53% and 47% of the respondents were female and male respectively.
4.1.2 Employee category according to departments.
The employees were staffed to 3 departments in opportunity Uganda. The departments were,
auditing, loans, and finance/accounting. The chart below shows their composition.
Chart 2.
30
Table 11: Employee Category according to Departments.
Department Frequency Percentage
Auditing 7 22
loans 17 53
Finance and Accounting 8 25
Total 32 100
Source: Primary Data.
The table above shows that 22% of the respondents belong to the auditing department, 53% are
from the loans department and 25% finance and accounting department.
4.1.3 Marital status of respondents.
The chart shows the distribution of the respondents by marital status
Chart 3.
Table III: Marital Status of the Respondents.
Status Frequency Percentage
Married 13 41
Single 19 59
Total 32 100
Source; primary data.
31
The above table shows that 41% of respondents are married while 59% are single as shown in the
following pie chart.
4.1.4 Work experience of respondents:
Chart 4 and table IV below shows the distribution of respondents according to work experience
or seniority. This was grouped into years that is, whether an employee has worked for less than or
equal to 5 years, above 5 years but below 7 years, and above 7 years.
Chart 4
Table IV: Employees’ Work Experience
Work experience No of employees
Less than or equal to 5 years. 22
Above 5 years but below 7 years. 6
Above 7 years. 4
Source: Primary Data
32
Table above shows that 22 of the respondents had experience of less than or equal to 5 years, 6
had experience of above but below 7 years and 4 had experience of more than 7 years.
4.2 The effectiveness of auditing as a tool for organizational success:
The researcher considered several factors that enhance the effectiveness of an audit as a tool for
organizational success. These included whether there were effective control measures, presence
of audit department and whether presence of audit department can act as a relationship between
auditing and quality of financial statements.
4.2.1 The control measures in place:
Respondents were required to evaluate whether they strongly agree, agree, not sure disagree, and
strongly disagree with the control measures in place as enhancing the effectiveness of an audit as
a tool for organizational success. The results were presented as shown in the graph and table
below.
Chart 5
SA-Strongly agree, A- Agree, N/S- Not sure, D- Disagree, SD- Strongly disagree.
33
Table V: The control measures in place.
Response Frequency Percentage
SA 10 32
A 18 56
N/S 2 6
D 2 6
SD 0 0
Total 32 100
Source: Primary Data
It was deduced from table V above that 32% of the respondents strongly agree that the control
measures in place can enhance the effectiveness of an audit as a tool for organizational success,
56% of the respondents agree, 6% are not sure and 6% disagree.
4.2.2 Presence of audit department.
Respondents were to state whether opportunity Uganda had audit department.
Chart 6
34
Table VI: presence of audit department
Response Frequency Percentage
Yes 26 81
No 0 0
Not sure 6 19
Total 32 100
Source: Primary Data.
As seen from the above table and pie chart, the results showed that 81% of respondents say that
there is audit department while 19% are not sure.
4.2.3 Presence of audit department acting as a relationship.
Respondents were required to state whether the presence of audit department can act as a
relationship between auditing and quality of financial statements
Chart 7
SA-Strongly agree, A- Agree, N/S- Not sure, D- Disagree, SD- Strongly disagree.
35
Table VII; presence of audit department;
Response Frequency Percentage
SA 10 31
A 17 53
N/S 3 10
D 1 3
SD 1 3
Total 32 100
Source; primary data.
Table VII shows that 31% of the respondents strongly agree that having auditing department can
enhance the effectiveness of an audit as a tool for organizational success. While 53% agree, 10%
are not sure, 3% disagree and 3% strongly disagree.
4.3.1 Quality dimensions used to financial reports:
The researcher considered several elements that are critical to quality financial statements.
The elements considered were timeliness, compliance, objectivity, preparation of reports by the
right persons and accuracy. Results from the respondents were by the chart and table below.
Chart 8
36
Table VIII; Quality dimensions used to financial reports.
Quality
dimensions/Measures
Yes No Not sure
Frequency % Frequency % Frequency %
Timeliness 24 75 2 6 6 19
Compliance 13 41 3 9 16 50
Objectivity 15 47 3 9 14 44
Prepared by right
persons
27 84 0 0 5 16
Accuracy 22 69 2 6 8 25
Source: Primary Data
The finding showed that in relation to timeliness, 75% of the respondents think that the financial
reports in opportunity Uganda can have quality when prepared in time, 6% think they may not
necessarily have quality if prepared in time, 19% are not sure. As far as compliance is concerned,
41% of the respondents think that compliance is a dimension critical to financial statements, 9%
say no, while 50% are not sure.
As far as objectivity is concerned, 47% of the respondents think that objectivity is a quality
measure in the preparation of financial reports while 9% think they may not be objectivity in
preparing statements and 19% are not sure.
In relation to the reports being prepared by the right personnel, 84% of the respondents think the
preparation of reports by the right persons can enhance the quality of reports while 16% of the
respondents are not sure.
As for accuracy, 69% of the respondents think that accuracy is a quality dimension critical to
financial statements while 6% say no and 25% are not sure. The highest percentage of
respondents agrees that accuracy is one quality measure critical to financial reports and this
confirms similar findings by Saleemi 1997 as seen in graph below.
37
4.3.2 The effectiveness of quality dimensions’.
Respondents were asked whether the above quality dimensions critical for the preparation of
financial statements can enhance the effectiveness of auditing as a tool for organizational success
and they were required to state whether they strongly agree, agree, not sure, disagree and strongly
disagree.
Chart 9
SA- Srongly agree, A- Agree, N/S- Not sure, D- Disagree, SD- Strongly disagree.
Table IX; Effectiveness of quality dimensions critical to financial statements.
Response Frequency Percentage
SA 3 9
A 24 75
N/S 4 13
D 1 3
SD 0 0
TOTAL 32 100
Source; primary data.
38
The above table shows that 9% of the respondents strongly agree that effective quality
dimensions in place can enhance the effectiveness of auditing as a tool for organizational success,
while the biggest number of respondents i.e. 75% agrees, 13% not sure and 3% disagree.
4.4 The relationship between auditing and quality of financial statements:
The auditors help and guidance, and the independence and objectivity of external auditors as far
as the quality of financial reports are discussed here.
4.4.1 Auditors help and guidance:
Respondents were required to state whether they strongly agree, agree, not sure, disagree, or
strongly disagree that auditors’ help and guidance can influence the relationship between auditing
and quality of financial reports. The results were presented as shown in the chart and table below.
Chart 10
SA- Strongly agree, A- Agree, N/S- Not sure, D- Disagree, SD- Strongly disagree
39
Table X: Auditors help and guidance.
Response Frequency Percentage
SA 7 22
A 22 69
N/S 0 0
D 3 9
SD 0 0
Total 32 100
Source: Primary Data.
From the table X above the researcher found out that 22% of the respondents strongly agree that
auditors’ help and guidance is a determinant for the relationship between auditing and quality of
financial reports. 69% agree, and 9% disagree. As shown by the table above, the highest
percentage of respondents of 69% agree that auditors’ help and guidance acts as a determination
for the relationship between auditing and quality of financial statements. This is almost in
conformity with findings by Weirich 1983.
4.4.2 The independence and objectivity of auditors.
Respondents were required to state whether the independence and objectivity of external auditors
can act as a relationship between auditing and quality of financial reports. The results were
presented as shown in the chart and table below.
Table XI: Independence and objectivity of auditors.
Response Frequency Percentage
Yes 23 72
No 0 0
Not sure 9 28
Total 32 100
Source: Primary Data
From the table XI above the researcher found out that 72% of the respondents agree that auditor’s
independence and objectivity can act as a relationship between auditing and quality of financial
statements while 28% are not sure.
40
Chambers and Atwont (1987) do observe that for an internal audit function to be effective, it
must have some degree of independence. Although an internal auditor is an employee of the
organization, and can not therefore be independent, the standard should be that he/she is
independent in terms of organizational status and personal objectivity, which permits proper
performance of their duties (The Ugandan Accounts News letter, June 2002).
Conclusion;
In examining the existing literature on audit, (Ratift et al, 1998) says, ‘management seeks
assurance that internal control systems are functioning satisfactory’. If controls are inadequate
and not operating properly, then regardless of how well management has planed, the organization
may be in dangers so management should increase the utilization of internal auditors to monitor
the performance of the organization control system. This is one observation that any staff of any
organization need to grasp and acknowledge if there is any need to have a successful
organization.
REVIEW:
Future researchers are encouraged to undertake the following tasks.
Evaluate the internal audit.
Establish factors affecting internal audit effectiveness.
Evaluate organisation performance.
Relationship between internal audit and organisational performance.
41
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.
In this chapter the researcher summarizes the main findings, in relation to research objectives,
makes conclusions and recommendations basing on the objectives of the research which were:
To evaluate the effectiveness of auditing as a tool for organizational success.
To determine the quality dimensions used to financial statements?
To establish the relationship between auditing and quality of financial statements.
5.1 summaries of the findings:
5.1.1 Effectiveness of auditing as a tool for organizational success.
The researcher found out that there are several factors that can enhance the effectiveness of
audits. Among those tested were the effectiveness of control measures in place, presence of audit
department and whether the presence of audit department can act as a relationship between
auditing and quality of financial statements. Most of the respondents agree that these factors can
enhance the effectiveness of auditing as a tool for organizational success.
For example 56% of the respondents, the highest recorded, agree that the control measures in
place at opportunity Uganda can enhance the effectiveness of audit as a tool for organizational
success.
It was also observed from the findings that a sizeable percentage i.e. 53% of the respondents
agree that the presence of audit department can act as a relationship between auditing and quality
of financial statements.
5.1.2 Quality dimensions critical to financial statements:
Using questionnaire method of data collection, the researcher observed that timeliness,
compliance, objectivity, preparation of reports by the right persons and accuracy are quality
dimensions critical to financial statements and the majority of the respondents (75%) agree that
42
effective quality dimensions in place can enhance the effectiveness of auditing as a tool for
organizational success.
The relationship between auditing and quality of financial statements.
The study indicates that there is a direct relationship between auditing and quality of financial
statements. Factors like auditors help and guidance, presence of audit departments, and the
independence and objectivity of external auditors were observed as determinants for the
relationship between auditing and quality of financial statements.
The majority of the respondents (72%) accept that independence and objectivity of external
auditors is a determinant for the relationship between auditing and quality of financial statements.
CONCLUSION.
From the findings of the study, the researcher was able to achieve the purpose of the study. The
study was thus able to establish that audit can be an effective tool for organizational success. The
study was also able to establish that timeliness, objectivity, compliance, preparation of reports by
right persons and accuracy are quality dimensions critical to financial statements.
Lastly the researcher was able to establish that audit and quality of financial statements are
strongly positively correlated. Audit plays a big role in enhancing the quality of financial reports
especially where the control measures in place are efficiently and effectively implemented and
where right personnel are deployed in the right places.
5.3 Recommendations.
The recommendations are in lieu of the findings and research objectives. The researcher
recommended the following course of action to management of opportunity Uganda.
43
5.3.1 Recommendations in respect of effectiveness of an audit as a tool for organizational
success.
Opportunity Uganda must not stop from seeing into it that the control measures in
place and supervision of various jobs is undertaken and made routine to ensure
efficiency and effectiveness.
The element of delays in vital information like bank statements and attendant bills, as
the researcher found out should be addressed by communicating earlier to the
concerned parties so as to serve as a reminder to submit them in time.
5.3.2 Recommendations in respect of quality dimensions used to financial statements.
The opportunity Uganda must continue to embrace the quality dimensions critical to
financial statements in as far as the preparation of financial statements is concerned.
5.3.3 Recommendations in respect of the relationship between auditing and quality of
financial statements.
Auditors must have fixed, limited contract periods during which their services can not
be terminated, in order to remove the threat of being fired for delivering an
unfavorable audit.
There is dire need to rotate clients by accounting firms.
Continuous education of auditors must also be adopted so that they come to appreciate
the profound impact of self-serving biases on judgment.
To respect the Sarbanes “Oxley Act” which prohibits accounting firms from providing
certain consultancy services to the companies they audit.
Areas suggested for future research.
internal audit and organisational performance.
Audit and computer fraud.
The role of auditing in minimizing fraud.
44
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