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.

7

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.

9

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.

14

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.

15

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,

17

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.

18

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).

19

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.

21

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.

23

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.

24

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.

26

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.

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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.

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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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