The Impact and Challenges of Internal and External Auditors in Manufacturing Companies

1.1 Introduction

Auditing is defined as the systematic examination and evaluation of an organization’s financial records, operations, and internal controls to ensure accuracy, compliance, and accountability (Arens, Elder, & Beasley, 2017). Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations (Institute of Internal Auditors [IIA], 2020). Internal auditors assess the effectiveness of risk management, control systems, and governance processes, ensuring that the organization operates efficiently and effectively. On the other hand, external auditing involves the independent examination of financial statements by certified professionals who express an opinion on whether the financial statements present a true and fair view of the organization’s financial position (Messier, Glover, & Prawitt, 2018).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.

1.2 Background of the Study

Historically, auditing dates back several centuries, evolving alongside the growth of commerce and industrialization. According to Previts, Parker, and Perrin (2018), auditing originated in ancient civilizations, where record-keeping and verification of financial transactions were essential for trade and governance. Early forms of audits involved simple checks of accounts to ensure accuracy and prevent fraud. Over time, auditing developed into a formalized profession, incorporating systematic procedures and standards to enhance reliability and accountability (Previts et al., 2018).

In the modern era, auditing has grown in response to the complexity of business operations and regulatory demands. Manufacturing companies, in particular, necessitated a more structured approach to auditing due to their intricate production systems, large-scale financial transactions, and significant investments in equipment and human resources (Arens, Elder, & Beasley, 2017). The industrial revolution marked a significant turning point, as the rise of factories and large-scale production created the need for rigorous financial oversight and internal control systems (Okafor & Nnadi, 2019). Auditing is a critical aspect of organizational management and corporate governance, serving as a mechanism to ensure transparency, accountability, and reliability in financial reporting.

According to Arens, Elder, and Beasley (2017), auditing is the independent examination of financial statements and related operations to ascertain their accuracy and compliance with established standards. Internal auditors are tasked with evaluating and improving risk management, control, and governance processes, while external auditors provide an independent opinion on financial statements to safeguard stakeholder interests (Institute of Internal Auditors [IIA], 2020).

In manufacturing companies, the role of auditors assumes greater importance due to the complex nature of production processes, significant capital investments, and extensive financial transactions. Okafor and Nnadi (2019) reported that effective auditing in manufacturing firms is vital for detecting financial irregularities, reducing operational inefficiencies, and ensuring adherence to regulatory requirements. Auditors not only monitor financial performance but also support management in decision-making and risk mitigation (Messier, Glover, & Prawitt, 2018).

However, studies have identified numerous challenges confronting auditors in manufacturing companies. Onwuchekwa and Okoye (2020) asserted that internal auditors often face limitations such as inadequate resources, insufficient training, and resistance from management, which reduces their capacity to execute audits effectively. Adeniran and Yusuf (2019) contended that external auditors are frequently constrained by independence issues, coordination challenges with internal audit functions, and complex regulatory environments, which may affect the quality and reliability of their audit reports. Chukwu and Nwafor (2021) stated that poor communication and overlapping responsibilities between internal and external auditors further undermine audit effectiveness, potentially compromising organizational governance. This study is set against the backdrop of the critical need to understand the impact and challenges of internal and external auditors in manufacturing companies.

1.3 Statement of Problems

Investigation revealed that the effective functioning of manufacturing companies is heavily reliant on accurate financial reporting and accountability. Internal and external auditors play a pivotal role in ensuring transparency, reliability, and compliance with established financial regulations. Internal auditors are responsible for monitoring internal controls, risk management, and operational efficiency, while external auditors provide an independent assessment of the company’s financial statements to enhance stakeholders’ confidence (Ezeani & Ezeani, 2018).

On the other hand, the effectiveness of auditors is sometimes hindered by inadequate organizational support and conflicting interests, which may lead to delayed reporting, errors in financial statements, or misrepresentation of financial data (Adeniran & Yusuf, 2019). The interaction between internal and external auditors also presents challenges, particularly when there is a lack of coordination, communication gaps, or overlapping responsibilities (Chukwu & Nwafor, 2021).

Furthermore, the inconsistencies and challenges identified in auditing practices have implications on decision-making, investor confidence, and overall organizational performance. Inadequate auditing processes expose manufacturing companies to financial mismanagement, fraud, and inefficiencies, which ultimately affect profitability and sustainability. It is against this backdrop that this study seeks to examine the impact and challenges of internal and external auditors in manufacturing companies.

1.4 Aim and Objectives of the Study

The aim of this study is to evaluate the role and challenges of internal and external auditors in ensuring financial accountability and effective governance in Nigerian manufacturing companies. The specific objectives of this study are:

1. To examine the role of external auditors in enhancing transparency and stakeholder confidence.
2. To identify the challenges faced by internal and external auditors in manufacturing companies.
3. To assess the effectiveness of internal auditors in manufacturing companies.
4. To determine the impact of these challenges on organizational performance.
5. To provide recommendations for improving auditing practices in manufacturing firms.

1.5 Research Questions

Based on the stated objectives, the study will address the following research questions:

• How effective are internal auditors in Nigerian manufacturing companies?
• What role do external auditors play in enhancing transparency and stakeholder confidence?
• What challenges do internal and external auditors face in manufacturing companies?
• How do these challenges affect the performance of manufacturing companies?
• What strategies can be implemented to improve auditing practices in manufacturing companies?

1.6 Significance of the Study

The outcome of this research will promote accountability, efficiency, and sustainability in manufacturing companies, ensuring that both internal and external auditing functions will positively impact organizational performance and stakeholder confidence.

Furthermore, the study will be significant to policymakers and regulatory bodies, as it will accent gaps in auditing practices and provide evidence that will support the formulation of guidelines and standards to ensure transparency and compliance in the manufacturing sector.

For academia, the study will contribute to the body of knowledge on auditing in manufacturing companies, serving as a reference for future research and for students studying accounting, finance, and business management.

1.7 Research Hypotheses

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

• H₀1: There is no significant impact of internal and external auditors on the performance of manufacturing companies in Nigeria.
• H₀2: Internal auditors significantly influence organizational efficiency and accountability in manufacturing companies.
• H₀3: External auditors significantly enhance transparency and stakeholder confidence in manufacturing companies.

1.8 Scope of the Study

This study focuses on manufacturing companies operating in Lagos State, Nigeria, with a detailed assessment of internal and external auditing functions, their effectiveness, and challenges encountered in financial reporting and organizational governance.

1.9 Limitations of the Study

A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:

1. Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
2. Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
3. Lack of Cooperation: Many of the respondents are usually aggressive on issue that border cooperation among the respondents border.
4. Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.

1.10 Definition of Terms

Auditing:

Auditing is the systematic examination of financial statements, operations, and controls to ensure accuracy, compliance, and accountability (Arens, Elder, & Beasley, 2017).

Internal Audit:

Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations by assessing risk management, internal controls, and governance processes (Institute of Internal Auditors [IIA], 2020).

External Audit:

External audit involves the independent examination of financial statements by certified auditors to express an opinion on the fairness and reliability of the financial information (Messier, Glover, & Prawitt, 2018).

Manufacturing Companies:

These are organizations engaged in the production of goods using raw materials, machinery, and human resources for commercial purposes (Okafor & Nnadi, 2019).

Corporate Governance:

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled to ensure accountability, fairness, and transparency in its operations (Ezeani & Ezeani, 2018).