AUDITING EFFICIENCY AS A TOOL FOR IMPROVING THE FINANCIAL PERFORMANCE OF COMPANIES IN THE MANUFACTURING SECTOR OF CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

An audit is a thorough and impartial examination of an organisation conducted by an independent auditor. The purpose of the audit is to provide neutral findings regarding the allocation of finances by the organisation (IFAC, 2018). The primary objective of auditing is to promote openness and accountability in both the public and private sectors. An audit functions as a mechanism to ensure that both public and private institutions are held responsible and accountable for their obligations. Audit ensures that organisations operate with accountability, openness, equity, and integrity. Karen and Stephen (2023) argue that audit efficiency is achieved when the auditor assumes the duty for detecting fraud. In their study, Moatasem and Abdulqawi (2020) examine efficiency as the effective distribution of capital, human, physical, and information resources in order to maximise output with a given set of resource inputs, or to minimise input for a certain quantity and quality of output.

The evolution of the internal audit profession has resulted in changes to the scope and functions of internal audit clients. In the past, internal auditors were viewed primarily as assistants to accountants and external auditors. However, internal audit has now emerged as a distinct and autonomous profession, playing a crucial role in organisational management. Internal Audit is a component of the internal control system implemented by management to assess, analyse, and evaluate the efficiency and effectiveness of other controls established by management. Its purpose is to ensure efficient administration, minimise costs, optimise capacity utilisation, and derive maximum benefits (Unegbu & Obi, 2019). Internal audit assesses the dependability, accuracy, and honesty of financial and operational information originating from various organisational units, which serves as the foundation for sound business decisions made by management at all levels. Internal audit serves as an extra measure to ensure effective financial control in the public sector (Ljubisavljevic, 2021).

According to Asare (2018), certain organisations have expanded the scope of internal auditing beyond financial matters to encompass value for money, risk assessment, managerial efficiency, and governance procedures. This aids an organisation in achieving its objectives by implementing a methodical and rigorous strategy to assess and enhance the efficiency of risk management control and governance systems. According to Jovanoyi (2021), maintaining audit efficiency is crucial in order to reduce the agency problem in the public sector. The agency problem occurs when the objectives of ministries are not aligned with the interests of the public and government. According to Wheelmen et al. (2022), the agency problem occurs when management refuses to take accountability for the allocation of finances towards achieving the intended objectives. Audit efficiency, whether in the public or private sector, is influenced by various aspects including management's backing, the competence of internal auditors, the presence of information technology, and organisational independence. The effectiveness of Internal efficiency will rely on the level of management's endorsement of the auditing procedure. It is necessary for them to acknowledge that the Internal Audit process holds the same level of significance and importance as any other process within the organisation (Baharud-din & Serjana, 2018).

Management support is demonstrated through the provision of essential resources, financial backing, transportation if needed, training opportunities, introduction of auditors to new technology and procedures, allocation of funds for certification, and other facilities that aid in the execution of internal auditing tasks. According to Ahmet (2021), the endorsement and acknowledgement of internal audit practices within an institution heavily rely on management's support for internal auditing. The operation of internal audit is heavily reliant on management support, since other factors are greatly influenced by it.

Baharud-din and Serjana (2018) define competency as the capacity of an individual to effectively carry out a job or task, which is determined by their educational background, professional experience, and commitment to ongoing professional growth. The effectiveness of auditing in an organisation is determined by the expertise of the auditors. It enhances the auditors' capacity to execute a methodical and rigorous audit approach, hence enhancing the efficacy of Internal Audit. Competency is the measure of an auditor's ability to establish a methodical and disciplined strategy to assess and enhance the efficiency of an organization's activities, financial management, and governance systems. According to the International Standards for the Professional Practice of Internal Auditing (ISPPIA), it is required that an internal auditing unit inside an institution be independent, and that internal auditors maintain objectivity when carrying out their auditing activities (Comfort & Oludayo, 2021). Performance management ability audits involve assessing the auditee's capacity to efficiently and effectively manage its processes and services. (Michael, 2020).

In the current century, technology has experienced a swift and significant advancement. There is little doubt that organisations will increasingly utilise technology both now and in the future for the purposes of management and auditing. For example, Krishna (2021) discovered that the proficient utilisation of audit technology tools is crucial for the achievement of audit activity. This will undoubtedly enhance the quality of internal audit and ultimately impact the efficacy of IA. Moreover, Krishna's (2021) research revealed that the proficient utilisation of audit technology tools is crucial for the triumph of audit operations. This, in turn, would enhance the quality of internal audits and ultimately impact the efficacy of IA. In contrast, Ahmi and Kent (2019) argued that technical availability encompasses not just IT infrastructure but also human resources. Furthermore, the progress in information technology has fostered a strong partnership between IT auditors and financial auditors, leading to an increased need for internal auditors who possess expertise in enterprise resource planning (ERP) (Héroux & Fortin, 2023). By implementing new IT systems, internal auditing has been able to deliver more pertinent information to management at a reduced cost and without any delays. This has been made possible through the use of automated processes, real-time capabilities, and integrated internal auditing (Shin et al., 2019). Hence, Information Technology (IT) will undoubtedly have a significant impact on determining the efficiency of Intelligent Automation (IA).

The internal audit function should have a direct reporting line to the highest level of management and the audit committee in public sector organisations. To ensure proper monitoring of the audit findings and recommendations, it is necessary to send a duplicate of the report to the Ministry of Finance and Economics Development. The audit activity must possess adequate autonomy from the entities it is mandated to audit, enabling it to carry out its task without any external influence or perception of such interference (Sobel, 2022). The internal audit function should be independent in establishing the extent of internal auditing, conducting the task, and conveying the findings without any interference.

Auditing is an essential component of financial management in firms, as it serves as a means to guarantee precision, openness, and responsibility in financial reporting. Efficient auditing is crucial in the manufacturing sector, where activities are intricate and diverse, in order to maintain financial well-being and improve performance (Kapoor, 2017). The manufacturing sector in Cameroon plays a crucial role in the country's economy. It includes a wide variety of activities, ranging from the processing of food and textiles to the manufacturing of construction materials and consumer items. This industry not only makes a substantial contribution to the Gross Domestic Product (GDP), but it also generates employment opportunities and encourages other economic activity (Mahmoud, 2022). Notwithstanding its significance, the industrial industry in Cameroon has numerous obstacles. These factors comprise insufficient infrastructure, restricted availability of funding, elevated production expenses, regulatory and bureaucratic obstacles, and competition from imported commodities. These problems require strong financial management methods to ensure long-term viability and expansion. Auditing, an essential element of financial management, can enhance efficiency and accountability by addressing these concerns. The effectiveness of auditing processes is vital for the financial well-being and performance of manufacturing enterprises in Cameroon. This study seeks to better financial management practices in the auditing sector by analysing its existing status, identifying obstacles, and suggesting solutions. The ultimate goal is to promote economic growth and development.

1.2 Statement of the problem

The manufacturing industry in Cameroon plays a crucial role in the country's economic progress by creating jobs and stimulating GDP expansion. Nevertheless, this industry encounters substantial obstacles that impede its capacity for growth. The constraints encompass restricted availability of funding, elevated costs of manufacturing, insufficient infrastructure, and fierce competition from imported commodities. In the face of these challenges, effective financial management techniques, including auditing, are crucial for maintaining and improving the financial performance of manufacturing organisations.

Although auditing is widely acknowledged as crucial, numerous manufacturing companies in Cameroon have challenges with inefficiencies in their auditing procedures. Delayed and less effective audits are frequently caused by traditional auditing processes, low levels of technological adoption, a scarcity of trained auditors, and insufficient resources. These inefficiencies can lead to unnoticed financial imbalances, heightened operational risks, and potential failure to comply with regulations, ultimately affecting the financial well-being and performance of these firms. 

In addition, Momo (2021) asserts that it can be difficult to uphold independence and objectivity, particularly when auditing departments or individuals with whom they have established professional connections. The primary responsibility of the internal auditor is to deliver an impartial evaluation, and any potential conflicts of interest must be effectively controlled. He proposes that the organisation might implement explicit standards and practices to guarantee the autonomy and impartiality of internal auditors. Methods to promote ethical behaviour within an organisation may involve the practice of rotating auditors throughout various departments, offering training programs on ethical standards, and establishing a transparent reporting system that encourages whistleblowing without the risk of reprisal (Momo, 2021).

In addition, internal auditors may encounter resource limitations, such as a restricted budget, limited staff, or inadequate technology, which might hinder their capacity to conduct comprehensive audits or appropriately address all aspects of the organisation. According to Mane (2020), the manufacturing industry in Cameroon lacks current auditing technology and tools, such as data analytics and automated auditing software. These technologies and tools have the potential to improve the accuracy and efficiency of audits. Organisations must acknowledge the significance of allocating sufficient resources to internal audit operations. This entails setting aside an adequate budget for training, recruiting extra auditors when needed, and utilising technology to optimise audit procedures and enhance productivity (Moses, 2018).

The study focusses on the inefficiencies of auditing methods in the manufacturing sector in Cameroon and how it negatively impacts financial performance. It is crucial to investigate ways to boost the financial management and overall performance of manufacturing organisations by improving auditing efficiency. The study is to examine the present condition of auditing processes, identify obstacles to effective auditing, and suggest ways for enhancing auditing efficiency to facilitate improved financial outcomes in the manufacturing sector of Cameroon.

Objectives of the study

The primary objective of this study is to critically evaluate auditing efficiency as a tool for improving the financial performance of companies in the manufacturing sector of Cameroon. Specific objectives of this study are to:

To ascertain the Efficiency of Auditing Processes in the manufacturing sector of Cameroon

To identify the standards of auditing practices used in the manufacturing sector of Cameroon

To assess the Impact of Auditing Efficiency on Financial Performance in the manufacturing sector of Cameroon

To identify common challenges faced by auditors and manufacturing companies in achieving efficient auditing

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

How efficient are Auditing Processes in the manufacturing sector of Cameroon?

What are the standards of auditing practices used in the manufacturing sector of Cameroon?

What is the Impact of Auditing Efficiency on Financial Performance in the manufacturing sector of Cameroon?

What are the common challenges faced by auditors and manufacturing companies in achieving efficient auditing?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: Auditing efficiency have no significant impact on financial performance in the manufacturing sector of Cameroon

Ha: Auditing efficiency have significant impact on financial performance in the manufacturing sector of Cameroon.

1.6 Significance of the study

The importance of this study lies in its ability to enhance financial performance by improving the efficiency of auditing, strengthening internal controls, promoting transparency, guiding strategic decision-making, informing policy and best practices, supporting organisational growth, and providing practical insights for the manufacturing sector. It plays a role in both academic research and the practical improvement of auditing and financial management procedures.

Effective auditing procedures can pinpoint areas where firms can enhance resource management, decrease expenses, and enhance financial efficiency. This can directly result in improved financial performance by identifying inefficiencies and suggesting cost-saving strategies. Efficient audits play a crucial role in improving financial management for manufacturing organisations by guaranteeing accuracy and reliability in financial procedures and reporting. This, in turn, can lead to increased profitability and financial stability.

Moreover, conducting effective audits enhances internal controls by identifying vulnerabilities and proposing enhancements. This mitigates the likelihood of financial mismanagement, fraudulent activities, and mistakes, therefore safeguarding the company's assets and enhancing its overall financial well-being. Efficient auditing processes offer a methodical way to recognising and reducing financial risks. Implementing proactive risk management strategies enables manufacturing organisations to navigate economic uncertainty and operational issues with greater effectiveness. Effective audits guarantee the accuracy and transparency of financial accounts and reports, fostering trust among stakeholders such as investors, creditors, and regulatory organisations. Efficient audits promote ethical behaviour and compliance with financial regulations by ensuring that management is held responsible for their financial practices. This, in turn, can improve the company's reputation and credibility.

Moreover, the study offers valuable insights on enhancing auditing efficiency in the manufacturing sector, thereby helping to the establishment of industry norms and optimal approaches for auditing and financial management. The study's findings can provide valuable insights to politicians and regulatory authorities regarding the efficacy of existing auditing processes. Additionally, these findings can identify specific areas where regulatory adjustments could enhance financial performance within the industry.

In addition, enhancing the effectiveness of auditing processes enables manufacturing organizations to achieve superior financial management and stability, so facilitating sustainable growth and expansion. Implementing effective auditing procedures can result in improved financial performance, hence strengthening the competitive standing of manufacturing firms in the market.

Ultimately, this study contributes to the existing academic information on the efficiency of auditing and its influence on financial performance, offering significant insights for researchers and scholars. The findings provide valuable insights for auditors and financial professionals on how to better auditing processes and maximize their influence on financial performance.

1.7 Scope of the study

Broadly, this study focus is to critically evaluate auditing efficiency as a tool for improving the financial performance of companies in the manufacturing sector of Cameroon. Specifically, this study seeks to ascertain the Efficiency of Auditing Processes in the manufacturing sector of Cameroon and identify the standards of auditing practices used in the manufacturing sector of Cameroon. 

Further, this study will focus on assessing the Impact of Auditing Efficiency on Financial Performance in the manufacturing sector of Cameroon and it also seeks to identify common challenges faced by auditors and manufacturing companies in achieving efficient auditing.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As with any human endeavour, the researchers faced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the topic, due to the limited availability of data regarding the use of auditing efficiency to enhance the financial performance of manufacturing enterprises in Cameroon. Hence, a significant allocation of time and exertion was necessary to ascertain the appropriate materials, books, or information and amass data. 

Furthermore, this study is constrained by its small sample size and narrow geographic scope, focusing just on Cameroon. Therefore, the conclusions of this study cannot be extended to other situations, thus requiring further investigation. 

Moreover, the limits faced by the researcher were primarily due to financial constraints, as they are a student without any source of income to sustain themselves. The exorbitant transportation costs at the research location posed a challenge in covering the expenses for transportation.

Furthermore, the researcher faced a time constraint due to the need to do this research while still fulfilling the obligations of attending lectures and participating in other educational activities.

1.9 Definition of terms

Audit: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

Corporate governance: Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance.

Accountability: Accountability is the practice of being held to a certain standard of excellence. It is the idea that an individual is responsible for their actions and, if that individual chooses unfavorable actions, they will face consequences.

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