THE SIGNIFICANCE OF EXTERNAL AUDITING IN THE BANKING INDUSTRY

(A STUDY OF FIRST BANK OF NIGERIA PLC IN LAGOS)

BY

ADENUGA, AYODELE SOLOMON MATRIC NO: 080201012

A RESEARCH PROJECT SUBMITTED TO UNIVERSITY OF LAGOS, IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF SCIENCE (B.SC) IN ACCOUNTING.

JULY, 2011

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CERTIFICATION I hereby certify that this research work was carried out by ADENUGA, AYODELE SOLOMON, matric no.: 080201012 under my supervision.

---------------------------------O. P. OKPALA

----------------------MR. Date

(Project Supervisor)

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DEDICATION

This research work is dedicated to Almighty God, for His infinite mercy and love throughout my programme.

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ACKNOWLEDGEMENT

First and for most, I give thanks to Almighty God for His guidance throughout the period of this programme. I wish to express my profound and sincere gratitude to my able and dynamic project supervisor, Mr. O. P. Okpala, for finding time out of crowded schedule to supervise this work and whose love of reading encouraged me to write without his motivation and aspiration, this project would not have seen the light of the day. Also recognized here, are the lecturers in the various departments in University of Lagos, for their level of commitment to teaching is highly appreciated. Also to my beloved parents, Chief and Mrs. Adenuga, S. O. who show love and concern toward my education. May the Almighty God continue to bless them. In a very special way, I must not fail to thank my siblings, Kemi Adenuga and Abiola Adenuga for their love and moral support. A host of others I would not like to omit for their contribution which includes: Mr. Chidozie Nnewnihe, Mr. Godwin Mathew and others whose names are not mention for lack of space. Finally, special thank goes to the various authors whose works I was privileged to consult in the course of preparing this project.

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ABSTRACT The aim of the study was to examine the significance of external auditing in the banking industry. External Audit is the process of engaging

a professional expert empowered to examine these financial statements, to determine whether all the accounting principles are followed and if the account shows a true and fair view of state of affairs. Survey research design was
used. The population comprises the entire workers of First Bank of Nigeria Plc in Lagos. The questionnaires were issued to one hundred and twenty (120) respondents which formed the sample size. The samples were drawn using convenience sampling technique. Data collected were analyzed using frequency tables and percentages method. Formulated hypotheses were tested using chi-square ( 2) based on 0.05 probability level of significance. The study shows that external auditing enhances organizational

effectiveness. Organizations engage external auditors in order to ensure credible financial statements. External auditing plays significant role in the detection of fraudulent practices in banking organization. Management encourages proper auditing of financial statement. There is a significant relationship between external auditing and the performance in the Nigerian banking industry. The survival and continuity of the organization depend on effective external auditing. The work of external auditor promotes orderly and efficient conduct of operation. It was recommended management of the organization should encourage credible external auditing of the various books of account to ensure credibility and transparency in operations in the banking indu stry. Management should also encourage periodic review or auditing of account to prevent fraudulent practices in the banking organizations. The organization should endeavour to promote those factors enhance good corporate governance regarding practice of professional auditing in the bank. Employees should show commitment to organizational goals by avoid unprofessional conducts and involvement in fraudulent acts in the banking hall.

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TABLE OF CONTENTS
Page Title page Certification Dedication Acknowledgement Abstract Table of content
Chapter One: Introduction

i ii iii iv v vi
1 4

1.1 1.2

Background to the Study Statement of the Problem

1.3 1.4 1.5

Objectives of the Study Research Questions Research hypotheses

5 6 7

4 1.6 Significance of the Study
6

7

1.7 1.8

Scope of the Study Limitation of the study

8 8

8 References -

Chap ter Two: Literature Review

2.1

History

of

Auditing

1 3
Auditing

2.2

Definition

of

1 4
Objectives Auditing

2.3

of

1 5
Status Auditor

2.4

of

1 6
Significant Roles Auditors

2.5

of

External

1 7
The Changing Roles Audit

2.6

of

the

2 0
Advantages Of Performing An Audit 20

2.7

7

2.8

Role

of

Auditing

in

Public

Finance

Management

2 1
Auditing

2.9

Importance

of

Effective

2 3

2.10 Prerequisites for Effective Auditing 2.11 Fraud 2.12 Managing Risk of Fraud 2.13 Auditors Responsibility to Consider Fraud 2.14 The Cost of Fraud
References
Chapter Three: Research Methodology

24 26 29 30 32

3.1

Research

Design 3

8 3.2 Population of the Study 3 8 3.3 Sampling 9 3.4 Research 9 3.5 Sources 9 3.6
Restatement of Research Questions and Hypotheses 40

and

sampling

technique 3 Instrument 3

of

Data

Collection 3

8

3.7

Method

of

Data

Analysis 4

1
Chapter Four: Presentation and Analysis of Data

4.1

Analysis 3

of

Respondent·s

Responses 4

4.2

Analysis 4

of

Respondents·

Bio-data 4

4.3

Analysis

of

Section

B

part

of

the

questionnaire 4

8 4.4 Test of Hypothesis 6 0
Chapter Five: Summary, Conclusion and Recommendation

5.1

Summary 3

of

Findings 6

5.2

Conclusion 6 4

5 4
9

5.3

Recommendations 6 6

5 6 5.4 Suggestion 6 References 6 8 for further studies 6

5 8

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CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY

Auditing was derived from the Latin word ³audire´ which means ³to hear´. In ancient times, owners of businesses heard the reports made by the auditors. ³Auditing as a branch of accounting is concerned with the efficient use of resources to achieve a previously determined objective or set of objectives contained in a plan´ (Betty 1975). A more enduring definition was given in the report of the committee on basic auditing concepts of the American Accounting Association which defined Auditing as ³a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.´ However, The International Federation of Accountants (IFAC) Handbook 1997 on Technical Pronouncements defines an audit as ³a mechanism that enables the auditor to express an opinion on whether the financial statements are prepared in all material respects in accordance with an identified financial rep orting framework.´ In Nigeria, the NASB has also offered some insights. For

instance, The Statement of Auditing Standards (SAS) No. 1 on Codification sees audit in terms of the objectives of an audit. Thus, the objectives of the ordinary examination of financial statements by the independent auditor is ³the
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expression of an opinion on the fairness with which the financial statements represent the financial position, results of operations and changes in financial position in conformity with the GAAP (Gener al Accepted Accounting Principles). External Audit is the process of engaging a professional expert empowered to examine these financial statements, to determine whether all the accounting principles are followed and if the account shows a true and fair vi ew of state of affairs. A broader definition of a bank is any financial institution that receives, collects, transfers, pays, exchanges, lends, invests, or safeguards money for its customers. This broader definition includes many other financial institutio ns that are not usually thought of as banks but which nevertheless provide one or more of these broadly defined banking services. These institutions include finance companies, investment companies, investment banks, insurance companies, pension funds, security brokers and dealers, mortgage companies, and real estate investment trusts. This research, however, focuses on the narrower definition of a bank and the services provided by banks in Nigeria. Banking is the business of providing financial services to customers and other businesses. The basic services a bank provides are checking accounts, which can be used like money to make payments and purchase goods and services; savings
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accounts and time deposits that can be used to save money for future use; loan s that customers and businesses can use to purchase goods and services; and basic cash management services such as check cashing and foreign currency exchange. Four types of banks specialize in offering these basic banking services: commercial banks, savings and loan associations, savings banks, and credit unions. Based on the CBN report of 2007, the cases of attempted fraud and forgery in banks as at year 2007 have surpassed a total of 141. Fraudulent practices, involving N5.4 billion, $35, 4061,150 were reported in January 2007. In 2006, 1,183 cases were reported involving N4.6 billion, $81.8 million and 14,389 Pound Sterling. The CBN also reported that the backwards development of the banks was attributable to weaknesses in their internal control system. This

clearly painted the picture of how fraud has penetrated the financial strength of Nigerian banks. It is required by the law that every organization must be audited by an external auditor, whose job is to look into the affairs of the organization. In this case, he is to ensure that all the records of the bank are properly kept and all banking rules are followed effectively such that their financial statements will show a true and fair view of their operations. The external auditor needs to know the internal control strength, so as to know the type of audit he will carry out.

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Fraud and corruption in it effects reduces assets and increases the liability of any company. In the case of banks, this may result in the loss of potential customers or a crisis in the confidence of the banking public and in the long run it might result in another failed back situation. In the banking industry some are in the industry because of their love for banking and all it stands for while majorly some are there to enrich themselves by fraudulent means. Due to the upsurge of great activities in the banking sector and its dynamic nature, banks are faced with different kinds of challenges, among which is finding a way to prevent various fraudulent intentions of both staff and customers. This is the role that external auditing is expected to fill.

1.2 STATEMENT OF PROBLEM

In the banking industry, fraudulent practices exist and it is the internal auditor ± a worker in the organization ± that is responsible for preventing this practice in his organization. This fraudulent and corrupt practices cannot be fully prevented by such auditor due to the fact that he is accountable to the organization ± which thereby limits his independence ± hence, there is the need for an external audito r to fully prevent and detect such practices in that organization. The Nigerian banking sector is yet to come out of the financial sector crisis facing the entire banks in the country. Banks in the country are faced with poor liquidity management, poor funds management and poor corporate governance in the sector. The present rescue mission carried out by the Central Bank of
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Nigeria on the nine rescued banks in the country shows that the role external audit, and other regulatory bodies as put in place by the Apex bank to monitor the operations of banks in Nigeria is still in doubt. Managements of banks today in the Nigerian banking industry have decided to enrich themselves at the expense of shareholders. This affects the returns on investment, good social responsibility, good working environment, and efficient and effective service delivery of the banks. Finally, the ethics of the banking professions on good management, good audit practice and implementation of banking policies is not yet at its best and th is can be noticed from the high form of mismanagement which the CBN has uncovered in some banks. Fraud and corruption in it effects reduces assets and increases the liability of any company. In the case of bank this may result in the loss of potential customers or crisis of confidence of banking public and in the long run and up in another failed back situation.

1.3 OBJECTIVES OF THE STUDY

The aim of this study is to improve the quality of external auditing in the banking industry in Nigeria. Specifica lly, the study intends to: i. To investigate the effects of poor auditing in the banking industry in Nigeria if any.

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ii.

To examine the various steps taken by the apex bank (Central Bank of Nigeria) in improving the quality of auditing in banks in Nigeria

iii.

To identify how external auditing has been able to expose fraud, financial mismanagement and fraudulent practices banking

organizations in Nigeria iv. To make necessary recommendation that will be beneficial to the banking industry and to the external auditors. v. To proffer solution to the problem of fraudulent act and misappropriation of funds in the banking industry.

1.4

RESEARCH QUESTIONS

The following questions were raised for the study: i. Does external auditing have positive effect on the performance of Nigerian banking industry? ii. Is there significant relationship between effective auditing and bank profitability? iii. What are the various steps taken by the apex bank (Central Bank of Nigeria) in improving the quality of auditing in banks in Nigeria? iv. Do sound audit principles and practices have significant impact on shareholders¶ wealth? v. How has auditing been able to expose financial mismanagement in banking organizations?
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1.5 RESEARCH HYPOTHESES

To achieve the objectives of the study, the following hypotheses were formulated:
Hypothesis 1

Ho: There is no significant relationship between external auditing and the performance in the Nigerian banking industry. H1: There is a significant relationship between external auditing and the performance in the Nigerian banking industry.
Hypothesis 2

Ho: External auditing does not expose financial fraud and mismanagement in banking organizations. H1: External auditing does expose financial fraud and mismanagement in banking organizations.

1.6 SIGNIFICANCE OF THE STUDY

The research study is expected to benefit the Nigerian students, the financial sectors, the Nigerian business environment, the general public and the academics environment. This study will help student to know why poor auditi ng occurs in practice, especially in the banking industry and will improve their knowledge so that they will be able to salvage this problem when they start practicing. The study will help the financial sector to know how fraudulent act are perpetrated in the banking industry and the way to prevent the act.
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The study will also be of benefit to the public as it will enlighten them to know how fraud is carried out in the banking industry and the effect this on the banking industry. This study will improve the body of knowledge with regards to fraudulent practices in banking industry and also how external auditing can serve as a means of checking this.

1.7

SCOPE OF THE STUDY

The study focuses on significance of external auditing in the banking industry in Nigeria. The definition of external auditing, importance of external auditing, and roles of external auditing in the detection of fraud and mismanagement of funds in the banking industry would be reviewed in the study. The study is limited to First Bank of Nigeria Plc in Lagos.

1.8 LIMITATIONS OF THE STUDY

The success of this research study has been threatened by so many set - backs witnessed. First is the problem of finance, this is a problem because the money budgeted for the research is not enough due to constant increase in the price of things. The second set-back is this problem of combining both academic works with research works. The third set-back is on transportation problem, there was insufficient money needed to carry out the resear ch which hinders the collection of more information needed for the study. Time constraint was also encountered. The time available to carry out the research was not enough due to the period given.
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REFERENCES

Abel and Asenne. (2007): Mandatory Rotation of External Auditors, Journal of the Nigerian Accountants P 20-23. Aguolu .O (2002): Fundamentals of Auditing (2nd Ed) Keridian Associates. CBN (2004): Central Bank of Nigeria Annual Report and Statement of
Accounts for theYear Ended 31st December, 2004 . Abuja: Central

Bank of Nigeria. CBN (2005): Central Bank of Nigeria Annual Report and Statement of
Accounts for the Year Ended 31st December, 2005. Abuja: Central

Bank of Nigeria. CBN (2007): Central Bank of Nigeria Annual Report and Statement of Accounts for the Year Ended 31st December, 2006. Abuja: Central Bank of Nigeria. Dike, V.E. (2004): ³Corruption in Nigeria: A New Paradigm for Effective Control´. Africa Economic Analysis. Retrieved on July 7, 2004 . Howard, J., (2002): Principles of Auditing, USA: Donnelly and Son Co. Pound, J (1988): ³Proxy contests and the efficiency of shareholder oversight´ Journal of Financial Economics, 20,(1) 75 -95

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CHAPTER TWO LITERATURE REVIEW 2.0 INTRODUCTION

This chapter of the research work focuses on review of relevant literature bordering on external auditing as a strategic tool for enhancing detection of frauds and financial mismanagement in banking sectors. The etymology dictionary explains that the term audit originates from the Latin word audire, which means ³to hear.´ Audire in ancient Rome referred to the ³hearing of accounts,´ a process in which one official compared his records with those of another official. As many of the parties interested in the audit findings were illiterate, audits were presented orally. In modern times, auditing has evolved into a technical discipline practiced by professional auditors who provide opinions on whether or not the annual financial statements of an entity comply with set accounting standards (Abbott, Parker and Park, 2000). Over the years, auditing has retained its significance in public finance and, as such, Supreme Audit Institutions (SAI) receives constitutional recognition in many countries around the world. As watchdogs of public finances, the public auditors act as critical links in enforcing the accountability of executive agencies to national and state legislatures and through them to the general public (Anderson, Francis and Stokes, 1993). The public sector auditor reviews financial management of public sec tor entities to ensure that transactions have been undertaken with due regard to propriety and regularity.
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Recently, several public auditors have also assumed responsibility for assessing value for money considerations in public projects and programs in re cent years. However, the role of SAIs as public finance watchdogs is still limited in many developing countries around the world. This state of affairs is the result of several factors, including financial and skill constraints, SAIs¶ lack of independence from the executive, and poor communication between the SAI and the legislature and civil society organizations (Carey, Craswell and Simnett, 2000). Although, public budgeting processes have traditionally excluded civil society organizations, in the last 10 years or so, civil society organizations in many developing countries have built effective capacities to analyze and influence public budgets. Generally, however, civil society engagement in public budgeting has focused on examining the executive budget p resented to the legislature and monitoring the subsequent implementation of the budget. There has been much less civil society engagement with the auditing of expenditures after a budget has been implemented and there has thus been limited interaction between civil society organizations and SAIs. In recent years the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entity¶s corporate governance is its external audit function (Nestor, 2004). In association with this, there has also been significant public concern about the level of fraud within organizations.
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Banks play a central role in the economy. They hold the savings of the public provide a means of payment for goods and services and finance the development of business and trade. To perform these functions securely and efficiently, individual banks must command the confidence of the public and those with whom they do business. The stability of the banking system, both nationally and internationally, has therefore come to be recognized as a matter of general public interest. This public interest is reflected in the way banks in almost all countries, unlike most other commercial enterprises, are subject to prudential supervision by centra l banks or specific official agencies. Banks¶ financial statements are also subject to audit by external auditors. The external auditor conducts the audit in accordance with applicable ethical and auditing standards, including those calling for independenc e, objectivity, professional competence and due care, and adequate planning and supervision. The auditor¶s opinion lends credibility to the financial statements and promotes confidence in the banking system. As the business of banking grows in complexity, both nationally and internationally, the tasks of banking supervisors and external auditors are becoming more and more demanding. In many respects, banking supervisors and external auditors face similar challenges and, increasingly, their roles are being perceived as complementary. Not only do banking supervisors benefit from the results of the auditors¶ work, but they may also turn to the external auditor to undertake additional tasks when these tasks contribute to the
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performance of their supervisory roles. At the same time, external auditors, in carrying out their role, also look to banking supervisors for information that can help in discharging their responsibilities more effectively. The International Auditing Practices Committee and the Basel Committe e share the view that greater mutual understanding about the respective roles and responsibilities of banking supervisors and external auditors and, where appropriate, communication between them improves the effectiveness of audits of banks¶ financial statements and supervision to the benefit of both disciplines.

2.1 HISTORY OF AUDITING

The introduction of Joint Stock Companies increased the supply of capital to industry and commerce. The small privately owned business financed by sole trader and partnership gave way to the forms of organization now referred to as limited companies. The body of shareholders delegated some of their members to act as a ³board of directors´ to manage the business and then periodically submit accounts of their stewardship to the shareholders so that they could be aware of the state of affairs of the enterprise. It was therefore necessary for the shareholders to be satisfied that the accounts presented by the directors did provide an objective view of the state of affairs of the company.

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The Joint Stock Act 1844 was the first legislation in Britain to require all incorporated businesses to have their annual financial statements examined by an auditor. Early auditors were in most cases non-accountants who were required to show whether the accounts show ³true and correct´ views of the state of affairs of the company. It was the Companies Act of 1900 that require the auditors to be independent and it was not until 1948 Companies Act that he was required to be professionally qualified. Business and not-for-profit organizations in Nigeria engage chartered accountants to perform audit examinations. Large private and public enterprise sometimes also maintain internal audit staff to conduct audit -like examinations, including some that is more concerned with operating efficiency and managerial effectiveness than with the accuracy of the accounting data.

2.2 DEFINITION OF AUDITING

Auditing is the examination, by an independent accountant, of the financial data, accounting records, business do cuments, and other pertinent financial statement. It is a systematic examination of financial statements records and related operations to determine adherence to generally accepted accounting principles, management policies of stated requirements (Dunn, 2004). The auditing standard defined audit as ³the independent examination of, and expression of opinion on, the financial statements of an enterprise by an
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appointed auditor in accordance with the terms of his engagement and in compliance with any relevant requirements. Lowe, Geiger and Pany (2001) defined auditing is an independent function with the main objective of ascertaining the truth and fairness with which financial statements have been presented with a view of enabling the auditor to issue a report. statutory obligations and professional

2.3 OBJECTIVES OF AUDITING

The primary objective of an auditor under CAMA 1990, is for an appointed auditor to express a professional opinion on the financial statement of an enterprise prepared by the management so that any person reading and using them may have faith in them. The appointed auditor is to express an opinion: i. Whether or not the financial statements show a true and fair view of the enterprise¶s financial positions; and ii. Whether the accounts have been properly prepared in accordance with the company and allied matter act (CAMA) 1990 and other statutory regulations. Other secondary objectives include: a. To prevent errors and fraud by the deterrent and moral effect of the audit; b. To detect any form of irregularities;

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c. To evaluate the effectiveness or otherwise, of the internal control system within the enterprise; d. To provide spin-off effects. The auditor will be able to assist his clients with accounting systems, taxation, receivership, and other problems. e. To advice on financial matters for efficient decision making by the management. f. To ascertain and ensure that an enterprise conform to statutory and professional requirements.

2.4 STATUS OFAUDITOR

According to McMullen (1996) there are two types of audit:
i. External Audit: This is independent examination of the financial

statements of an organization by an auditor who is appointed by the shareholders. The report goes to the shareholders.
ii. Internal Audit: This is the review of the transactions of a business which

may be in many respects, similar to the statutory audit, but which is carried out by employees of the business who are responsible to the management.

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2.5 SIGNIFICANT ROLES OF EXTERNAL AUDITORS

Anderson, Francis and Stokes (1993) stated that the external auditors perform the following roles: i. Examines the financial records (i.e. books of accounts prepared by the directors of the company). It is not the duty of auditor to prepare financial statements. ii. iii. He serves as the watchdog on behalf of the share holders of the enterprise. The auditor ensures uprightness on the part of the management of the enterprise.
2.5.1 The Role of the Bank ¶s External Auditor

The objective of an audit of a bank¶s financial statements by an external auditor is to enable an inde pendent auditor to express an opinion as to whether the bank¶s financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework (Huepkes, 2005). The auditor assesses control risk as being high unl ess the auditor is able to identify controls that are likely to prevent or detect and correct a material misstatement and conducts tests of the controls that support a lower assessment of control risk (Dewing and Russell, 2005). A detailed audit of all transactions of a bank would be not only time -consuming and expensive but also impracticable. The external auditor therefore bases the audit on the assessment of the inherent risk of material misstatement, the assessment of control risk and testing of the internal controls designed to
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prevent or detect and correct material misstatements, and on substantive procedures performed on a test basis. While the external auditor has the sole responsibility for the audit report and for determining the nature, timing and extent of audit procedures, much of the work of internal auditing can be useful to the external auditor in the audit of the financial statements. Judgment permeates the auditor¶s work. The auditor uses professional judgment in areas such as: i. Assessing inherent and control risk and the risk of material misstatement due to fraud and error; ii. iii. iv. Deciding upon the nature, timing and extent of the audit procedures; Evaluating the results of those procedures; and Assessing the reasonableness of the judgments and estimates made by management in preparing the financial statements. An external auditor plans and conducts the audit to obtain reasonable assurance that misstatements in the bank¶s financial statements which, individually or in aggregate, are material in relation to the financial information presented by those statements are detected. When the auditor discovers a misstatement material to the financial statements taken as a whole, including the use of an inappropriate accounting polic y or asset valuation or a failure to disclose essential information, the auditor asks management to adjust the financial statements to correct the misstatement. If
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management refuses to make the correction the auditor issues a qualified or an adverse opinion on the financial statements. As a supplementary but not necessarily integral part of the audit, the external auditor ordinarily communicates certain information to management. The external auditor also communicates matters of governance to those charged with the governance of the bank (Millichamp, 2002).
2.5.2 The Role of the External Auditor in Banking Regulation and Supervision

The external auditor has a vital role as a supervisory tool in reporting certain matters as obliged by the Financial Services and Markets Act 2000 (FSMA) and also in reporting specific matters through annual reports. As an enforcement tool, external auditors play a key role in their functions as skilled persons. Under section 166 of the FSMA, power is conferred on the FSA to mandate a firm of solicitors or accountants/auditors to report to the FSA matters requiring provision of information under section 165 of the FSMA. The reports produced by external auditors as a result of this process are known as skilled person reports. As well as the FSA's use of external auditors to assist it in obtaining information, performing risk analysis, sampling and other tasks during enforcement procedures, the effectiveness of the FSA's use of external auditors in its off-site and on-site systems of supervision can be efficiently assessed through a holistic examination of the way in which the audit profession is regulated.
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Under its role of obtaining information for the FSA, the external auditor's right and duty to report, statutes and standards governing those rights and duties will be analyzed. The development of a framework for corporate governance, developments leading to the establishment of audit committees and the FSA's enforcement procedures will also be considered. The FSA's enforcement procedures highlight the immense contribution made by external auditors to the supervisory process as demonstrated in the Legal and General Case.

2.6 THE CHANGING ROLES OF THE AUDIT

According to accounting literature, the traditional role of the audit was mainly the detection and prevention of fraud. The move to verification of financial statements arose from the growing investment in the railway, insurance and banking industry (Hitchins, Hogg and Mallett, 2001). Suggestions have been made that this situation occurred because in these particular industries, the shareholding was more dispersed and more priority given to financial performance rather than on management's honesty. Bank failures such as those of BCCI and Johnson Matthey resulted to a re-think of the objective of an audit to include the detection and prevention of fraud.

2.7

ADVANTAGES OF PERFORMING AN AUDIT

Adeniyi (2004) highlighted the following as benefits derived from having a company¶s account audited: An audited account becomes a relevant docum ent for the purpose of any claim from the insurance company ; auditing serves as a
30

moral deterrents and psychological check against fraudulent practices by staff ; audited account affords the opportunity to gaining assurance as to whether the state of the business is conducive for investment or not; management attention is focused on the internal control as a result of audit; audited account is useful for negotiating bank loans and overdrafts ; the Federal Inland Revenue services will only accept duly certified accounts by the external auditor as a basis of computing assessable profits; audited accounts form the basis of agreement in admission of partners or dissolution of partnership; in the ordinary course of business, audited accounts provides an independent opinion of the business.

2.8 ROLE OF AUDITING IN PUBLIC FINANCE MANAGEMENT

Auditing is an integral part of an institutional framework supporting good governance and the realization of a country¶s welfare measures and poverty eradication goals (Akinwolemiwa, 2009). Social welfare programs and other targeted poverty eradication programs in developing countries are characterized by their access to limited resources. To achieve their goals, therefore, these programs depend greatly on the efficient a nd effective utilization of these limited resources. Within this framework, the role of the public auditor in monitoring the utilization of program resources is critical. A vigilant auditor can contribute greatly to the achievement of social development programs by limiting

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corruption and strengthening the accountability of responsible agencies (Millichamp, 2002).
i. Facilitating Good Governance

According to the United Nations Development Program (UNDP), good governance is classified as being participatory, transparent, accountable, effective, compliant with the rule of law, and responsive to the needs of the people. An effective Supreme Audit Institution can play an important role in ensuring that some of these key attributes of good governance are maintained by the government. By auditing public finances, Supreme Audit Institutions not only demand accountability of the government but in turn add s credibility to the government¶s public financial policies and practices. By making their audit findings available to the public, Supreme Audit Institutions provides a critical window on transparency in public finance management and assess whether government agencies have complied with national and/or local regulations, and their annual budgets. ii.
Aiding Financial Management

laws,

Modern day public auditors perform a variety of audits aimed at satisfying different financial management goals. Financial audits assess the accuracy and fairness of both the accounting procedures utilized by a government agency and the financial statements reported by the agency (Akinwolemiwa, 2009). Compliance audits assess whether funds were used for the purposes for which they were appropriated and in compliance with relevant laws and regulations.
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Performance

audits

analyze

cost-effectiveness

(economy),

operational

efficiency, and the general effectiveness of government programs in achieving their objectives. There has been a trend in recent years among SAIs toward increasing the number of performance audits as these audits are seen as revealing more about the effectiveness of government operations. However, a comprehensive audit framework requires that all three types of audits (financial, compliance, and performance) be combined to provide a complete overview of public financial management.

2.9 IMPORTANCE OF EFFECTIVE AUDITING

Effective auditing can contribute in several important ways to the management of a government's finances. It can: i. Detect irregularities involving the misuse of public funds and identify related weaknesses in management controls that may imperil the integrity of the organization and the effective implementation of budgetary and other policy decisions; ii. Determine the reliability of reports on budget execution and other financial data; iii. Identify instances and patterns of waste and inefficiency that, if corrected, will iv. permit more economical use of available budget resources;
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v.

Provide reliable data about program results as a basis for future adjustments in budget allocations (Arens, 2000).

2.10 PREREQUISITES FOR EFFECTIVE AUDITING

The International Organization of Supreme Audit Institutions (INTOSAI) has promulgated standards for the audit of government organizations and operations. These standards, or national standards that are equally or more rigorous, have been adopted by government audit organizations around the world, including virtually all Supreme Audit Institutions. Anyone who is interested in the auditing function in government is encouraged to obtain a copy of the standards from the INTOSAI Secretariat in Vienna. Among the most important of these standards are those dealing with the following matters: a. Independence The independence of the auditing organization is essential to assure that its work will not be biased by any relationship it might have to the entity being audited. This is also necessary for internal audit, whereby the entity responsible must not be part of the finance or treasury function of the ministry concerned, but report directly to the senior manager overseeing financial transactions. In the Lima Declaration, INTOSAI made the following statements about the independence of the Supreme Audit Institution: Section 5. Independence of Supreme Audit Institutions

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1. Supreme Audit Institutions can fulfill their tasks objectively and effectively only if they are independent of the audited entity and are protected against outside influence. 2. Although state institutions cannot be absolutely independent because they are part of the state as a whole, the Supreme Audit Institutions shall have the functional and organizational independence required to fulfill their tasks. It is essential that the institutional independence of the Supreme Audit Institution be genuine. The constitutional or statutory basis for the organization should be clear. The Supreme Audit Institution should have its own budget. It should have statutory authority to determine the scope of audits, to obtain any documents and records relevant to the audit, and to exercise its judgment as to the audit results to be reported. Not only must the organization be independent, the individual auditors must also be with respect to the audits on which they are working. This matter is usually handled through internal regulations promulgated by the Supreme Audit Institution, but may also be covered in various laws, including those that are generally applicable to the civil service. For example, it may be appropriate to have laws and regulations requiring that an individual auditor not be an investor in an entity that might be affected by the results of the audit. b. Professional skills Auditing is a profession that encompasses a wide range of technical skills, mirroring the types of audits and auditees that the Supreme Audit Institution
35

may be required to face. Few, if any, auditors possess the entire range of skills that may be needed by an Supreme Audit Institution. For each individual audit, however, it is essential that the audit team, as a whole, possesses the knowledge and skills required for that particular audit. If the Supreme Audit Institution is auditing the financial statements of an entity, the audit team must include (and preferably be led by) a fully qualified financial auditor.

2.11 FRAUD

According to Apostolou, Hassell, Webber and Sumners (2001), Fraud means an intentional act by one or more individuals among management, employees, or third parties that result in a misrepresentation of financial statements. It may involve:
y Manipulation, falsification or alteration of records or documents. y Misappropriation of assets. y Suppression or omission of the effects of transactions from records or

documents.
y Recording of transactions without substance.

Due to the number of high profile corporate failures in recent years, corporate fraud has been of significant public and regulatory interest (Marden and Edwards, 2005). The penalties for fraudulent financial reporting have significantly increased to reflect society¶s view on this type of behaviour. For example, Bernard Ebbers the former chairman of WorldCom was recently jailed
36

for 25 years for orchestrating a $US11 billion financial statement fraud (Belson 2005). This increased importance has affected the work of the external financial statement auditor. In Australia, the Australian Auditing Standard AUS 210 ³The Auditor¶s Responsibility to Consider Fraud and Error in an Audit of a Financial Report´ has been amended a number of times in recent years to increase the external auditor¶s responsibility in this area (AARF 2004). It defines fraud as ³«an intentional act by one or more individuals among m anagement, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.´ (AUS 2 010) AUS 2010 continues by stating that there are two types of intentional misstatements relevant to the auditor. Firstly, there are misstatements that result from fraudulent financial reporting and secondly, there are misstatements that result from misappropriation of assets. Much of the research to date has examined associations between corporate governanc e structures and financial statement fraud, some of which is discussed below. While, inconsistent results have been found in relation to audit committee existence and the likelihood of financial statement fraud (Beasley 1996; McMullen 1996; Dechow, Sloan and Sweeney 1996), audit committee effectiveness has been found to reduce the likelihood that companies are sanctioned for fraudulent financial reporting (Abbott, Parker and Park , 2000).

37

A positive relation was found between concentration of power in the hands of insiders and the likelihood of issuing fraudulent financial statements (Dunn , 2004). In Australia, a negative relation has been found between the proportion of independent directors and institutional investors and the likelihood of fraud, while a positive relation was found between duality (chair of board and also the chief executive officer) and the likelihood of fraud (Sharma , 2004). One difference from this study to others was that in his measure of fraud Sharma (2004) used both financial stateme nt fraud and misappropriation of assets. Although external auditors are not, by definition, part of a banking organization and therefore, are not part of its internal control system, they have an important impact on the quality of internal controls throug h their audit activities, including discussions with management and recommendations for improvement to internal controls. The external auditors provide important feedback on the effectiveness of the internal control system. While the primary purpose of the external audit function is to give an opinion on the annual accounts of a bank, the external auditor must choose whether to rely on the effectiveness of the bank¶s internal control system. For this reason, the external auditors have to obtain an understan ding of the internal control system in order to assess the extent to which they can rely on the system in determining the nature, timing and scope of their own audit procedures.

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2.12 MANAGING RISK OF FRAUD

Any company is at risk of fraud and it is the directors¶ task to manage such risk in a professional manner. They must apply to it the same techniques, which are applied to all business problems i.e. analyzing the scope and scale of the risk, developing a strategy to minimize the risk and carefully imp lementing the strategy. However, managing the fraud risk is difficult because it is plausible. Fraudsters are experts at manipulating people, documents, situations and the slightest opportunity. They are equally good at covering their tracks. The appearance may therefore be normal but the reality quite different; deception is the key to any fraud. Many companies tend to narrow their field of vision by looking only at accounting procedures and controls rather than the specific risks of frauds that the business faces. They do not take account of the whole spectrum of risk. The fraudster is not only interested in the straight forward and often highly visible cash but also the ‡ Ability of the business to generate credit e.g. through loans ‡ Power to commit the business to contract to accept liability and to approve invoices ‡ Contingent assets and rights to commercial secrets ‡ Ability to control resources and accounting records under separate legal ownership e.g. relating to pension or trust funds and client ac count. Accounting procedures and controls may give a false sense of security. They may operate quite differently in theory than in practice. Fraudsters are
39

opportunists who take advantage of temporary weaknesses or unnoticed gaps between the apparent strength and the real effectiveness of controls. It is important to appreciate the nature of the risk and to remember that it is people, not the business, system or ghost who commit fraud. Some companies have taken special measures to counter fraud, for example by appointing security officers or setting up dedicated fraud investigation units. Sometimes these units deal only with fraud which is reported to them and do not play a proactive role in helping directors and managers to manage the risk of fraud in the business. The focus may also be only on external threats (e.g. in banks, cheque and credit cards fraud), overlooking what may be the greater threat, the enemy within. It is a known fact that a very high proportion of corporate fraud is committed by, or in collusion with management and employees.

2.13 AUDITORS RESPONSIBILITY TO CONSIDER FRAUD

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Due to the nature of audit evidence and the characteristic of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. In an attempt to stifle the criticism and appropriately respond to the public demand for improved auditors performances NSA5 in substantial compliance with ISA 240 ushers auditors into a much wider arena of procedures aimed at
40

detecting frauds. The auditor is now required to consider fraud at eve ry stage of the audit process; this consideration must be seamlessly blended into the audit process and be continually updated until the audit completion. Although the public constantly expect auditors to uncovered fraud, they are not charged specifically with the duties of fraud detection since reliance is heavily placed on the management to provide information and documentation; small scale fraud is extremely difficult for auditors to detect, particularly if it is being perpetrated by more than one key st aff within organization. SAS NO.82 issued by American institute of certified public accountant detailed the auditor responsibility to detect and report material misstatement in financial statement due to fraud. He is required to consider forty-one risk factors relating to fraudulent financial reporting and misappropriation of assets when designing an audit plan. Furthermore, the plan needs to be continuously modified during the audit on the basis of information gathered concerning these factors. However, a uditors must still use subjective judgment in analyzing the many risk factors e.g. one risk factor to be assessed by the auditors is management display a significant disregard to regulatory authorities. International Auditing standard maintain that an audi tor¶s mandate may require him to take cognizance and report matters that come to his knowledge in performing his duties, which relate to compliance with legislative or regulatory

41

requirement, adequacy of accounting and control system, viability of economic activities, programmes and projects. Lately, a view has emerged that auditors should play a more vital and direct role in establishing good governance, if this means to expect them to cross the established borders of genuine audit functions , it would be stretching the string too far, without gaining anything positive and substantial. The only alternative then is to make the auditors feel more conscientious, more dutiful and therefore, be more effective, while restricting themselves to their term of refere nces.

2.14 THE COST OF FRAUD

The ways in which companies may suffer loss due to fraud include:
2.14.1 The Cost of Fraud to Business

i.

Removal of funds or assets from the business. This include theft of cash from bank account, removal of other asset such as stock, manipulation of companies relationship with suppliers or customers, overstatement of claims, undisclosed creation of credits and assumption of liabilities.

ii.

Misrepresentation of the financial position of the business, which include false accounting such as omissions, mis-recording and manipulation of the company¶s accounting records. It must be stressed again that when all these nefarious acts are committed with a view to obtain undue advantage or benefit, a fraud has occurred. The cost of fraud to b usiness is difficult to estimate because not all fraud and abuse are discovered, not all
42

uncovered fraud is reported, and civil and criminal actions are not always pursued. A conservative estimate of the cost to organizations is approximately 6% of annual revenue (Association of fraud

examiners1999). To quantify other indirect costs like legal costs, accounting costs, insurance costs and loss of productivity associated with hiring and firing employees to the business is outside the scope of this paper. Experts agree that companies usually suffer similar losses and organizations are paying for them through their normal operating expenses. Data show that the overall cost of fraud is over double the amount of missing money or assets. As computerized systems bec ome more complex, so is the expected cost of fraud.
2.14.2 The Cost of Frauds to the Offenders

It is the trusted and valued employee who generally commits business fraud. When fraud are uncovered, there is often shock and disbelief that they have committed such acts, the perpetrator of business fraud could be µthe person next door¶ this person is likely to be a married male with a family, a religious affiliate, and above average education. In most cases offenders do not view stealing from companies as harmful, they may think that the crime was victimless; and that they do not view their theft as being devastating or costly to the business. Many frauds occur because the opportunity exists and the perpetrator does not believe he/she will be caught. In many cases, the offender has little or no criminal self concept and offenders
43

view violations as part of their work. They usually minimize their crime since it results in minor losses for a large volume of clients. No one client is usually targeted for the crime.

44

REFERENCES

Abbott, L. J. Parker S. and Park, Y. (2000): The effects of audit committee activity and independence on corporate fraud. Managerial Finance 26: 55-67. Accounting Standard Board (1988): The auditor responsibility to detect and reports errors and irregularities Adeniyi A A. (2004): Auditing and investigation, first edition, Lagos: Value Analyst Consult. Akinwolemiwa, C.F.G (2009): The auditors¶ responsibility to consider fraud in an audit of financial statement, The Nigerian accountant- Institute of chartered Accountant of Nigeria Journal. Vol.2, No1 Pp. 57-64. Anderson, D., Francis, J. R. and Stokes, D. J. (1993): Auditing, directorships and the demand for monitoring. Journal of Accounting and Public Policy 12 (4): 353-375. Anderson, D., J. Francis, R. and Stokes, D. J. (1993): Auditing, directorships and the demand for monitoring. Journal of Accounting and Public Policy 12 (4): 353-375. Apostolou, B. A., Hassell, J. M. Webber S. A.and Sumners, G. E. (2001): The relative importance of management fraud risk factors. Behavioral Research in Accounting 13: 1-24.

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Arens L. (1980). Auditing an integrated approach, 7th Edition, Upper Saddle River, New Jersey: Prentice-Hall, Inc. Auditing and Assurance Standards Board (AUASB) (2006): ASA 240: The Auditor's Responsibility to Consider Fraud in an Audit of a Financial Report. Melbourne: AUASB. Australian Accounting Research Foundation. (2004): AUS 210: The Auditor's Responsibility to Consider Fraud in an Audit of a Financial Report. Melbourne: AARF. Borge, M. (1999): ³The role of Supreme Audit Institutions (SAIs) in Combating Corruption.´ Transparency International. Updated October 1999. Retrieved 8 February 2005. Carey, P. Craswell A. and Simnett, R. (2000): Voluntary demand for internal and external auditing by family businesses. Auditing: A Journal of Practice & Theory 19 (supplement): 37-51. Dewing P and Russell PO (2005): The Role of Auditors, Reporting Accountants and Skilled Persons in UK. Dunn, P. (2004): The impact of insider power on fraudulent financial reporting. Journal of Management 30 (3): 397-412. Farrell, B. R. and Joseph R. F. (1999): The role of the auditors in the prevention and detection of business fraud, Retrieved November 16, 2010.
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Hitchins J, Hogg m and Mallett D (2001): Banking: A Regulatory Accounting and Auditing Guide, Institute of Chartered Accountants Huepkes E (2005): µThe External Auditor and the Bank Supervisor: Sherlock Holmes and Doctor Watson?¶ Journal of Banking Regulation Volume 7 No1/2 Lowe, D. J. Geiger M. A. and Pany, K. (2001): The effects of internal audit outsourcing on perceived external auditor independence. Journal of Accountancy 191 (1): 90. Marden, R. and Edwards, R. (2005): Employee fraud in the casino and gaming industry. Internal Auditing 20 (3): 21-30. McMullen, D. A. (1996): Audit committee performance: An investigation of the consequences associated with audit committees. Auditing: A Journal of Practice & Theory 15 (1): 87-103. Millichamp A. H, (2002): Auditing, Eight Edition, United Kingdom: Bookpower Nestor, S. (2004): The impact of changing corporate governance norms on economic crime. Journal of Financial Crime 11 (4): 347-352.

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CHAPTER THREE RESEARCH METHODOLOGY 3.0 INTRODUCTION

This chapter is designed specifically to present the procedures and methods adopted in the conduct of this study to achieve the desired objectives of the study. To this end, this chapter consists of the following sub -headings: Research design, Population of the study, Sampling tec hniques and size, Administration of the instrument, Sources of data collection, Method of data analysis, and Limitation of the methods.

3.1 RESEARCH DESIGN

The research design is based on descriptive survey research techniques. This type of research design describes the variables i.e dependent and independent under study. The sample used for the research was survey through a representative sample of the population.

3.2 POPULATION OF THE STUDY

The population for the research study consisted of the entire workers of First bank of Nigeria Plc in Lagos State. The population size of the organization is seven hundred and fourteen (714) employees.

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3.3 SAMPLING TECHNIQUE AND SIZE

The sample for the research study compris ed of One Hundred and twenty (120) employees ranging from top to lower level workers. The sampling technique used was convenience random sampling technique

3.4

ADMINISTRATION OF THE INSTRUMENT

The instrument used for the collection of data was constructed questionnaires using 5-point likert scale i.e strongly agree, agree, uncertain, disagree, strongly disagree. The questionnaire consists of twenty {20} items. The research instrument used for the study was administered to one hundred and twenty {120} respondents ranging from top to lower level workers. Descriptions on how to complete the questionnaire were given and responses were collected from the respondents.

3.5

SOURCES OF DATA COLLECTION

The data used for the study were collected from two sources, namely primary and secondary sources. Primary sources of data collection: these include the use of questionnaire to obtain first hand information. Secondary sources of data collection: these include textbook, publication, journals and articles written by various authors and academician relating to the topic under study.

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3.6 RESTATEMENT OF RESEARCH QUESTIONS AND HYPOTHESES

The following questions were raised for the study: i. Does external auditing have positive effect on the performance of Nigerian banking industry? ii. Is there significant relationship between effective auditing and bank profitability? iii. What are the various steps taken by the apex bank (Central Bank of Nigeria) in improving the quality of auditing in banks in Nigeria? iv. Do sound audit principles and practices have significant impact on shareholders¶ wealth? v. How has auditing been able to expose financial mismanagement in banking organizations? To achieve the objectives of the study, the following hypotheses were formulated:
Hypothesis 1

Ho: There is no significant relationship between external auditing and the performance in the Nigerian banking industry. H1: There is a significant relationship between external au diting and the performance in the Nigerian banking industry.
Hypothesis 2

50

Ho: External auditing does not expose financial fraud and mismanagement in banking organizations. H1: External auditing does expose financial fraud and mismanagement in banking organizations.

3.6

METHOD OF DATA ANALYSIS

The data collected for the study were analyzed using descriptive statistics such as frequency table and percentages method. With respect to the test of hypotheses Chi-square ( G 2) inferential statistics was deployed based on 0.05 probability level of significance. ¨O  E¸ Cal ( G ) = § © ¹ ª E º
2
2

Where: O= E= ™= = Observed Frequency Expected Frequency Summation Apha = 0.05

DF = N-1) Where: DF= Degree of freedom N= Number of row

51

Decision: reject H0 and accept H1 if calculated chi ± square ( G 2) value is greater

than tabulated chi-square ( G 2) value, otherwise accept H 0 if cal ( G 2) < tab ( G 2).

52

CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA 4.0 INTRODUCTION

This chapter of the research study focuses on the method used in analyzing data collected through the use of structured questionnaire. Data collected would be analyzed using descriptive statistics such as frequency table and percentage method. The formulated hypothesis would be tested using inferential statistics such as chi-square ( G 2) based on 0.05 probability level of significance. 4.1
ANALYSIS OF RESPONDENTS

Table 4.1: Distribution of Respondents by Response Response Frequency Percentage (%)

Returned Unreturned
Total

120 5
125

96 4
100

Source: Field Survey, 2011. Table 4.1 shows that out of 125 copies of questionnaires distributed to respondents, 120 were fully completed and returned representing 96% while 5 copies of questionnaires were unreturned representing 4%. Thus, majority of the respondents (96%) completed and returned their questionnaire.

53

ANALYSIS OF RESPONDENTS¶ BIO-DATA Table 4.2: Distribution of Respondents by Sex Response Frequency

Percentage (%)

Male Female
Total

46 74
120

38 62
100

Source: Field Survey, 2011. Table 4.2 shows that 46 respondents were male representing 38% while 74 respondents were female representing 62%.Thus, most of the respondents (62%) were female.
Table 4.3: Distribution of Respondents by Marital Status Response Frequency Percentage (%)

Single Married
Total

70 50
120

58 42
100

Source: Field Survey, 2011. Table 4.3 shows that 70 responden ts were single representing 58% and 50 respondents were married representing 42%. Thus, majority of the respondents (58%) were single.

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Table 4.4: Distribution of Respondents by Age Response Frequency

Percentage (%)

18 ± 30 31 ± 40 41 ± 50 51 and above
Total

33 58 17 12
120

28 48 14 10
100

Source: Field Survey, 2011. Table 4.4 shows that 33 respondents were between 18 -30 years representing 28%; 58 respondents were between 31 -40 years representing 48%; 17 respondents were between 41-50 years representing 14%; 12 respondents were between 51 years and above representing 1 0%. Thus, majority of the respondents (48%) were between the ages of 31 -40 years.
Table 4.5: Distribution of Respondents by Length of service Year Frequency Percentage (%)

1 ± 5 years 6 -10 years 11-15 years 16 years and above
Total

40 56 10 14
120

33 47 8 12
100

Source: Field Survey, 2011. Table 4.5 shows that 40 respondents have worked for 1-5 years representing 33%; 56 respondents have worked for 6-10 years representing 47%; 10
55

respondents have worked for 11-15 years representing 8% while 14 respondents have worked for 16 years and above) representing 12%. Thus, majority of the respondents (47%) have worked for 6-10 years.
Table 4.6: Distribution of Respondents by Job status Level Frequency Percentage (%)

Top Manager Middle Manager Lower Manager
Total

20 58 42
120

17 48 35
100

Source: Field Survey, 2011. Table 4.6 shows that 20 respondents were top level management re presenting 17%; 58 respondents were middle level management representing 48%; 42 respondents were lower managers representing 35%; while 30 respondents were junior staff representing 25%. Thus, majority of the respondents (48%) were in Middle Manager level.
Table 4.7: Distribution of Respondents by Qualification Qualification Frequency Percentage (%)

SSCE/WASC NCE/OND HND/BSC MBA / M.Sc
Total

25 50 40 5
120

21 42 33 4
100

Source: Field Survey, 2011.
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Table 4.7 shows that 25 respondents were SSCE/WASC holders representing 21%; 50 respondents were NEC/OND holders representing 42%; 40 respondents were HND/B.Sc holders representing 33% while 5 respondents are holders of MBA/MSC representing 4%. Thus, most of the respondents (42%) were holders of NCE/OND.
Table 4.8: Distribution of Respondents by Department Department Frequency Percentage (%)

Marketing Finance Personnel /Admin. Operation Research and Dev.
Total

40 25 18 25 12
120

33 21 15 21 10
100

Source: Field Survey, 2011. Table 4.8 shows that 40 respondents were in marketing department representing 33%; 25 respondents were in finance department representing 21%; 18 respondents were in Personnel/Admin department representing 15%; 25 and 12 respondents were in Operation and Research and Development department representing 21% and 10% respectively. Thus, the respondents were in different department of the organization.

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4.2

ANALYSIS OF RESPONSES TO RESEARCH QUESTIONS

Table 4.9: External auditing enhances organizational effectiven ess. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

70 20 0 12 18
120

58 17 0 10 15
100

Source: Field Survey, 2011. Table 4.9 shows that 70 respondents strongly agreed representing 58%; 20 respondents agreed representing 17%; no respondent was undecided representing 0%; 12 and 18 respondents disagreed and strongly disagreed representing 10% and 15% respectively. Thus, majority of respondents (75%) agreed that external auditing enhances organ izational effectiveness.

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Table 4.10: Organizations engage external auditors in order to ensure credible financial statements. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

32 78 0 4 6
120

27 65 0 3 5
100

Source: Field Survey, 2011. Table 4.10 shows that 32 respondents strongly agreed representing 27%; 78 respondents agreed representing 65%; no respondents was undecided representing 0%; 4 and 6 respondents disagreed and strongly disagreed representing 3% and 5% respectively. Thus, majority of the respondents (92%) agreed that organizations engage external auditors in order to ensure credible financial statements.

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Table 4.11: External auditing ensures the detection of fraudulent practices in banking organization. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

60 36 10 14 0
120

50 30 8 12 0
100

Source: Field Survey, 2011. Table 4.11 shows that 60 respondents strongly agreed representing 50%; 36 respondents agreed representing 30%; 10 respondents were undecided representing 8%; 14 respondents disagreed representing 12% while no respondent strongly disagree representing 0%. Thus, majority of the

respondents (80%) that external auditing ensures the detection of fraudulent practices in banking organization .

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Table 4.12: management encourages proper auditing of financial statement. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

66 54 0 0 0
120

55 45 0 0 0
100

Source: Field Survey, 2011. Table 4.12 shows that 66 respondents strongly agreed representing 55%; 54 respondents agreed representing 45%; no respondents was undecided, disagree and strongly disagree representing 0%. Thus, majority of the respondents (100%) agreed that management enc ourages proper auditing of financial statement.

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Table 4.13: External auditing helps organizations manage their financial resources effectively. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

78 26 0 10 6
120

65 22 0 8 5
100

Source: Field Survey, 2011. Table 4.13 shows that 78 respondents strongly agreed representing 65%; 26 respondents agreed representing 22%; no respondents was undecided representing 0%; 10 and 6 respondents disagreed and strongly disagreed representing 8% and 5% respectively. Thus, majority of the respondents (87%) agreed that external auditing helps organizations manage their financial resources effectively.

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Table 4.14: The work of external auditor promotes orderly and efficient conduct of operation. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

84 18 12 6 0
120

70 15 10 5 0
100

Source: Field Survey, 2011. Table 4.14 shows that 84 respondents strongly agreed representing 70%; 18 respondents agreed representing 15%; 12 respondents were undecided representing 10%; 6 respondents disagreed representing 5%; no respondent strongly agreed representing 0%. Thus, majority of respondents (85%) agreed that the work of external auditor promotes orderly and efficient conduct of operation.

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Table 4.15: There is significant relationship between effective auditing and organizational profitability. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

50 32 5 18 15
120

42 27 4 15 12
100

Source: Field Survey, 2011. Table 4.15 shows that 50 respondents strongly agreed representing 42 %; 32 respondents agreed representing 27%; 5 respondents was undecided

representing 4%; 18 respondents disagreed representing 15% while 15 respondents strongly disagreed representing 12%. Thus, majority of the respondent (69%) agreed that there is significant relationship between effective auditing and organizational profitability .

64

Table 4.16: The Central Bank of Nigeria has promulgated some measures to prevent fraudulent acts in the banking sectors . Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

80 40 0 0 0
120

67 33 0 0 0
100

Source: Field Survey, 2011. Table 4.16 shows that 80 respondents strongly agreed representing 67%; 4 0 respondents agreed representing 33%; no respondents were undecided, disagreed and strongly disagreed representing 0%. Thus, majority of the

respondents (100%) agreed that the Central Bank of Nigeria has promulgated some measures to prevent fraudulent acts in the banking sectors .

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Table 4.17: My Company experiences liquidity probl em resulting from mismanagement of funds. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

12 8 0 40 60
120

10 7 0 33 50
100

Source: Field Survey, 2011. Table 4.17 shows that 12 respondents strongly agreed representing 10%; 8 respondents agreed representing 7%; no respondent were undecided

representing 0%; 40 respondents disagreed representing 33% while 60 respondents strongly disagreed representing 50%. Thus, majority of the respondents (83%) disagreed that their Company experiences liquidity problem resulting from mismanagement of funds.

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Table 4.18: My Company always performed periodic audit of its resources . Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

42 60 14 4 0
120

35 50 12 3 0
100

Source: Field Survey, 2011. Table 4.18 shows that 42 respondents agreed representing 35%; 60 respondents agreed representing 50%; 14 respondents were undecided representing 12%; 4 respondents were undecided representing 12%; 4 respondents disagreed representing 3%; no respondent strongly agreed representing 0%. Thus, majority of the respondents (85%) agreed that their company always performed periodic audit of its resources.

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Table 4.19: External auditing in the banking sector prevents the occurrence of frauds . Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

26 62 10 16 6
120

22 52 8 13 5
100

Source: Field Survey, 2011. Table 4.19 shows that 26 respondents strongly agreed representing 22%; 62 respondents agreed representing 52%; 10 respondents were undecided representing 8%; 16 and 6 respondents disagreed and strongly disagree representing 13% and 5% respectively. Thus, majority of the respondents (74%) agreed that external auditing in the banking sector prevents the occurrence of frauds.

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Table 4.20: Stakeholders are satisfied with the ways the company accounts are being audited by external auditors . Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

90 20 0 6 4
120

75 17 0 5 3
100

Source: Field Survey, 2011. Table 4.20 shows that 90 respondents strongly agreed representing 75%; 20 respondents agreed representing 17%; no respondents was undecided representing 0%; 6 and 4 respondents disagreed and strongly disagreed representing 5% and 3% respectively. Thus, majority of the respondents (92%) agreed that stakeholders are satisfied with the ways the company accounts are being audited by external auditors .

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Table 4.21: The survival and continuity of the organization depend on effective external auditing. Responses Frequency Percentage (%)

Strongly agree Agree Undecided Disagree Strongly disagree
Total

120 0 0 0 0
120

100 0 0 0 0
100

Source: Field Survey, 2011. Table 4.21shows that 120 respondents strongly agreed representing 100%; no respondents agreed, undecided, disagreed and strongly disagree representing 0%. Thus, majority of the respondents (100%) agreed that the survival and continuity of the organization depend on effective external auditing .

4.3

TEST OF HYPOTHESES Hypothesis 1

Ho: There is no significant relationship between external auditing and the performance in the Nigerian banking industry. H1: There is a significant relationship between external auditing and the

performance in the Nigerian banking industry. Table 4.15 was be used in analyzing hypothesis 1

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Computation of calculated chi-square value Responses O E O-E

(O-E)2

SA A U D SD

50 32 5 18 15
120

24 24 24 24 24

26 8 -19 -6 -9

676 64 361 36 81

(O-E)2 E 28.17

2.67 15.04 1.5 3.38
50.76

Expected value= 120 5 Cal ( G 2) = 50.76 D.F = N -1 = 5±1 =4
E = 0.05

= 24

Tab ( G 2) = 9.48773
Decision: Since the calculated chi-square ( G 2) value (50.76) is greater than

tabulated chi-square value (9.48773) at 4 degrees of freedom under 0.05 probability level. We reject H0 and accept H1. We, therefore, conclude that there is a significant relationship between external auditing and the pe rformance in the Nigerian banking industry.
Hypothesis 2

Ho: External auditing does not expose financial fraud and mismanagement in banking organizations.
71

H1:

External auditing does expose financial fraud and mismanagement in

banking organizations. Table 4.11 was be used in analyzing hypothesis 2
Computation of calculated chi-square value Responses O E O-E (O-E)2 (O-E)2 E 54

SA A U D SD

60 36 10 14 0
120

24 24 24 24 24

36 12 -14 -10 -24

1296 144 196 100 576

6.0 8.17 4.17 24.0
96.34

Expected value= 120 5 Cal G
2

= 24

O  E 2 = 96.34 !§
E

DF = N -1 = 5±1 =4
E = 0.05

Tab ( G 2) = 9.48773
Decision: Since the calculated chi-square ( G 2) value (96.34) is greater than

tabulated chi-square ( G 2) value (9.48773). We reject H0 and accept H1. We therefore conclude that external auditing does expose financial fraud and mismanagement in banking organizations .
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CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.0 INTRODUCTION

This chapter of the research work summarizes the major findings of the study, make recommendations and conclude the study. Suggestions for further studies are also considered.

5.1 SUMMARY OF FINDINGS

The following findings were made:i. The study shows that external auditing enhances organizational effectiveness. ii. It was also shows that organizations engage external auditors in order to ensure credible financial statements. iii. It was inferred that external auditing play significant role in the detection of fraudulent practices in banking organization . iv. The study also shows that management encourages proper auditing of financial statement. v. The study discovers that there is a significant relationship between external auditing and the performance in the Nigerian banking industry . vi. The study reveals that the survival and continuity of the organization depend on effective external auditing .

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vii.

The study shows that stakeholders are satisfied with the ways the company accounts are being audited by external auditors .

viii.

It was discovered that the management of First Bank of Nigerian Plc carried out periodic audit of its various books of account in order to prevent fraud from occurring.

ix.

The study shows that the work of external auditor promotes orderly and efficient conduct of operation .

5.2 CONCLUSION

Banks play a central role in the economy. They hold the savings of the public, provide means of payment for goods and services, and finance the development of business and trade. To perform these functions securely and efficiently, individual banks must command the confidence of the public and those with whom they do business. The stability of the banking system, both nationally and internationally, has therefore come to be recognized as a matter of general public interest. This public interest is reflected in the way banks in almost all countries, unlike most other commercial enterprises, a re subject to prudential supervision by Central Banks or specific official agencies. Banks¶ financial statements are also subject to audit by external auditors. The external auditor conducts the audit in accordance with applicable ethical and auditing standards, including those calling for independence, objectivity, professional competence and due care, and adequate planning and supervision.
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The auditor¶s opinion lends credibility to the financial statements and promotes confidence in the banking system. The role of the external auditor in the supervisory process requires standards such as independence, objectivity and integrity to be achieved. Even though the regulator and external auditor perform similar functions, namely the verification of financial statements, they serve particular interests. The regulator works towards safeguarding financial stability and investor interests. On the other hand, the external auditor serves the private interests of the shareholders of a company. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. As the business of banking grows in complexity, both nationally and internationally, the tasks of banking supervisors and exte rnal auditors are becoming more and more demanding. In many respects, banking supervisors and external auditors face similar challenges and, increasingly, their roles are being perceived as complementary. Not only do banking supervisors benefit from the results of the auditors¶ work, but they may also turn to the external auditor to undertake additional tasks when these tasks contribute to the performance of their supervisory roles. At the same time, external auditors, in carrying out their role, also look to banking supervisors for information that can help in discharging their responsibilities more effectively.

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5.3 RECOMMENDATIONS

The following were recommended: i. Management of the organization should encourage credible external auditing of the various books of account to ensure credibility and transparency in operations in the banking industry . ii. Management should also encourage periodic review or auditing of account to prevent fraudulent practices in the banking organizations . iii. The organization should endeav our to promote those factors enhance good corporate governance regarding practice of professional auditing in the bank. iv. Employees should show commitment to organizational goals by avoid unprofessional conducts and involvement in fraudulent acts in the banking hall. v. Finally, management of the organization should always introduced fairness in the treatment of workers at workplace. This will enhance employees¶ commitment to work.

5.4 SUGGESTIONS FOR FURTHER STUDIES

The following suggestions were made for the study:i. Researchers should try as much as possible to look into those factors that encourage credible exte rnal auditing in banking organiz ations.

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ii.

Future studies should be carried out to find out the causes of fraudulent acts and unprofessional practices i n banking sectors.

iii.

An investigation should also be carried out in the foreseeable future to assess the relationship between effective external auditing and organizational effectiveness.

iv.

Finally, in order to improve further studies, it is suggested that more related textbooks and journals should be reviewed.

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REFERENCES

Abbott, L. J. Parker S. and Park, Y. (2000): The effects of audit committee activity and independence on corporate fraud. Managerial Finance 26: 55-67. Abel, J. and Asenne, A. (2007): Mandatory Rotation of External Auditors, Journal of the Nigerian Accountants P 20 -23. Accounting Standard Board (1988): The auditor responsibility to detect and reports errors and irregularities Adeniyi A A. (2004): Auditing and investigation, first edition, Lagos: Value Analyst Consult. Aguolu .O (2002): Fundamentals of Auditing (2nd Ed) Keridian Associates. Akinwolemiwa, C.F.G (2009): The auditors¶ responsibility to consider fraud in an audit of financial statement, The Nigerian accountant- Institute of chartered Accountant of Nigeria Journal. Vol.2, No1 Pp. 57 -64. Anderson, D., Francis, J. R. and Stokes, D. J. (1993): Auditing, directorships and the demand for monitoring. Journal of Accounting and Public Policy 12 (4): 353-375. Apostolou, B. A., Hassell, J. M. Webber S. A.and Sumners, G. E. (2001): The relative importance of management fraud risk factors. Behavioral Research in Accounting 13: 1-24.

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Arens L. (1980). Auditing an integrated approach, 7th Edition, Upper Saddle River, New Jersey: Prentice-Hall, Inc. Auditing and Assurance Standards Board (AUASB) (2006): ASA 240: The Auditor's Responsibility to Consider Fraud in an Audit of a Financial Report. Melbourne: AUASB. Australian Accounting Research Foundation. (2004): AUS 210: The Auditor's Responsibility to Consider Fraud in an Audit of a Financial Report . Melbourne: AARF. Borge, M. (1999): ³The role of Supreme Audit Institutions (SAIs) in Combating Corruption.´ Transparency International. Updated October 1999. Retrieved 8 February 2005. Carey, P. Craswell A. and Simnett, R. (2000): Voluntary demand for internal and external auditing by family businesses. Auditing: A Journal of Practice & Theory 19 (supplement): 37-51. CBN (2004): Central Bank of Nigeria Annual Report and Statement of
Accounts for theYear Ended 31st December, 2004 . Abuja: Central

Bank of Nigeria. CBN (2005): Central Bank of Nigeria Annual Report and Statement of
Accounts for the Year Ended 31st December, 2005. Abuja: Central

Bank of Nigeria.

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CBN (2007): Central Bank of Nigeria Annual Report and Statement of Accounts for the Year Ended 31st December, 2006. Abuja: Central Bank of Nigeria. Dewing P and Russell PO (2005): The Role of Auditors, Reporting Accountants and Skilled Persons in UK. Dike, V.E. (2004): ³Corruption in Nigeria: A New Paradigm for Effective Control´. Africa Economic Analysis. Retrieved on July 7, 2004 . Dunn, P. (2004): The impact of insider power on fraudulent financial reporting. Journal of Management 30 (3): 397-412. Farrell, B. R. and Joseph R. F. (1999): The role of the auditors in the prevention and detection of business fraud, Retrieved November 16, 2010. Hitchins J, Hogg m and Mallett D (2001): Banking: A Regulatory Accounting and Auditing Guide, Institute of Chartered Accountants Howard, J., (2002): Principles of Auditing, USA: Donnelly and Son Co. Huepkes E (2005): µThe External Auditor and the Bank Supervisor: Sherlock Holmes and Doctor Watson?¶ Journal of Banking Regulation Volume 7 No1/2 Lowe, D. J. Geiger M. A. and Pany, K. (2001): The effects of internal audit outsourcing on perceived external auditor independence. Journal of Accountancy 191 (1): 90.
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Marden, R. and Edwards, R. (2005): Employee fraud in the casino and gaming industry. Internal Auditing 20 (3): 21-30. McMullen, D. A. (1996): Audit committee performance: An investigation of the consequences associated with audit committees. Auditing: A Journal of Practice & Theory 15 (1): 87-103. Millichamp A. H, (2002): Auditing, Eight Edition, United Kingdom: Bookpower Nestor, S. (2004): The impact of changing corporate governance norms on economic crime. Journal of Financial Crime 11 (4): 347-352. Pound, J (1988): ³Proxy contests and the efficiency of shareholder oversight´ Journal of Financial Economics, 20,(1) 75 -95

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APPENDIX 1

Department of Accounting, University of Lagos, Akoka, Lagos State.

Dear Sir/Madam,
REQUEST FOR THE COMPLETION OF QUESTIONNAIRE

I am a final year student of the above mentioned institution. I am conducting a research on ³The Significance of External Auditing in the Banking Industry
in Nigeria ´, and I am using your establishment as my study area.

I humbly request your co-operation and assistance in completing this questionnaire. The exercise is purely for academic purpose and all information supplied shall be treated with strict and absolute confidentiality . Thanks for your anticipated co-operation and assistance. Yours faithfully,

ADENUGA, AYODELE SOLOMON Researcher

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Questionnaire Section A: Personal Information

Please tick (¥) against the appropriate items or responses to indicate your answers to the items. 1. 2. 3. 4. 5. Sex: (a) Male ( ) (b) Female ( ) ( )

Age (years) :( a) 18 ± 30 ( ( c) 41 ± 50 ( Marital Status: (a) Single

) (b) 31 ± 40 ( ) (d) 51 and above ( ) ) (b) Married ( ) ) )

Working Experience: (a) 1 ± 5yrs ( ) (b) 6 ± 10yrs ( ( c) 11 - 15yrs ( ) (d) Above 15 years ( Position at work: (a) Top manager ( (b) Middle manager ( (c ) Lower manager ( Highest Qualification :(a) SSCE (c ) HND/B.Sc ( Department: ) ) )

6. 7.

( ) (b) NCE/OND( ) (d)Master Degree( ) ) )

)

(a) Operation ( ) (b) Personnel ( (c ) Finance ( ) (d) Marketing ( (e) Research & development ( )

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Section B Instruction: Kindly tick the appropriate answer in the boxes attached to the statements below: SA = strongly agree A = agree U = Undecided D = disagree SD = strongly disagree S/N Statements SA A U D SD

8. 9. 10.

External auditing enhances organizational effectiveness. Organizations engage external auditors in order to ensure sound financial statements. External auditing ensures the detection of fraudulent organization. practices in banking

11.

Management encourages proper auditing of financial statement.

12.

External manage effectively.

auditing their

helps financial

organization resources

13

The work of external auditors promotes orderly and efficient conduct of

operations. 14. There is significant relationship between effective 15. auditing and organizational profitability. Central bank of Nigeria has promulgated some measures to prevent fraudulent act in the banking sectors. 16. My Company experiences liquidity problem resulting from mismanagement of
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funds. 17. 18. 19. My Company always performed periodic audit of its accounts. External auditing in the banking sector prevents the occurrence of frauds. Stakeholders are satisfied with the ways the company accounts are being audited by external auditors. 20. The survival and continuity of the organisation depend on effec tive external auditing.

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