CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Within the last one and a half decades, quite a number of very prominent business organizations

around the world have faced many financial Reporting scandals and crisis. Nigeria business and

financial reporting environment is not an exception. We have had cases of reputable entities’

involvement in creative accounting, deliberate overvaluation of closing inventory to achieve

desired profit performance in financial reports and in some cases, outright abuse of codes of

corporate governance. One of the financial reporting quality control mechanisms that have been

of major interest to many researchers and authors is risk based internal audit. Recent studies have

examined the impact of internal audit on the transparency and quality of financial reporting.

However, from this researcher’s investigation, few studies have evaluated the relationship

between risk based internal audit procedures and financial performance of corporate entities.

Abdel-Khalik (2013) found in their study that risk based internal audit function supports the

financial statement audit performed by external auditors. This implies improving audit quality

and therefore the quality of financial reporting. Schneider and Wilner (1990) estimated that risk

based internal audit function detects irregularities. Thus, the study of Gordon and Smith (2012)

concluded that risk based internal audit function plays a key role in improving the control

environment. It avoids irregularities in the financial statements, which involves improving the

quality of financial reporting.

Moreover, increased concerns regarding corporate accountability in various organizations have

been associated with the need for appropriate Risk Based Internal Audit which involves risk

management and internal control systems Beekes and Brown, (2016). This has been reflected
1
through corporate governance guidelines. A major effort, that has caught the attention of the

financial reporting and legislative environment around the globe is Sarbanes-Oxley Act of 2002,

passed by the United States Congress to protect Shareholders and the general public from

accounting errors and fraudulent practices as well as to improve the accuracy of corporate

disclosures. However, the subjectivity of the application and procedures of risk based internal

audit has given rise to different levels of emphasis on risk management and internal control and

is correspondingly, reflected in the governance guidelines of business organizations Basel

Committee on Banking Supervision, (2016). While these voluntary guidelines that have

originated in each organization may provide different levels of focus on Risk based Internal

Audit and governance, it is uncertain as to what extent of influence these different levels of focus

exert; either direct or indirect, on an organizations risk management and internal control

practices Sarens and De Beelde, (2016). It is even more uncertain, the extent of the influence of

risk management procedures on organizational efficiency and profit performance. To determine

this relationship between risks based internal audit procedures and financial performance of

money deposit banks in Nigeria, is the motive of this study. Risk based Internal Audit (RBIA) is

n internal methodology which is primarily focused on the inherent risk involved in the activities r

system of an entity and provides assurance that risk is being managed by the management within

the defined risk appetite level of the enterprise. RBIA is the risk management framework of the

entity and it seeks at every stage to reinforce the responsibility of management and BOD Board

of Directors) for managing risk (https://en.wikipedia). Risk based internal audit helps the risk

management function of the company by providing assurance about risk mitigation. RBIA

allows internal audit to provide assurance to the board that risk management processes are

managing risks effectively, in relation to the risk appetite of the enterprise.

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Risk based audit is a process, an approach, a methodology and an attitude of mind rolled into

The simplest way to think about risk-based audit conceptually is to audit the things that all matter

to your organization (Kasiva, 2010). Risk based internal audit (RBIA) is a term arrived from the

Institute of Internal Auditors (IA) research foundation based in the USA (IA,)2014. In 1999, the

board of directors of IA voted to approve a new definition of internal auditing and a new

Professional Practice Framework (PPF). The board through deliberation came to a conclusion

that a significant gap existed between available guidance and current practice of internal

auditing, and that a new framework was needed to carry the profession into 21st century IA,

2004). Ideally, risk based audit (RBA) is a paradigm shift from traditional approach of pre-

auditing or transactional audit to systems audit and finally to RBA, In pre-audit, management

abdicated their responsibilities to internal audits; there were no audit reports and no view of the

system by management. On the other hand, systems audit was passive and reactive control based

audit with no involvement of management in audit planning. Therefore, for internal audit to be

effective and efficient, RBA was introduced (IIA, )2014.

1.2 Statement of the Problem

Risk-based internal auditing is a new approach to the practice whose aim is to improve the

quality and effectiveness of audits, since determining the appropriate nature, timing, and extent

of substantive testing allows for higher quality audits at shorter time. Substantive testing is

limited where there is internal control reliance and extensive where there is no internal control

reliance (Forsati,) 2012. Risk-based internal auditing is the process of identifying and reporting

3
the risk of significant distortions in financial statements. This approach not only increases the

value of the product (financial statements), but also makes auditing more profitable. In other

words, risk-based internal auditing satisfies both the managers and the auditors Smith, 2016;

Hirrington, (2014). In this approach, the auditor first examines the accounting and internal

control systems (through written narratives, questionnaires, and flowcharts, and by performing a

walk-through test), and then estimates inherent and control risks. Initial estimates of inherent and

control risks help the auditor in determining the reliability of the internal control system. If the

internal control system is effective, the auditor relies on control and carries out minimal

substantive test, otherwise, he performs extensive substantive test. The results can adjust and

finalize the initial estimates of inherent and control risks Moradi & Pourhosseini, (2019) There

are many aspects of the performance of deposit money banks that can be analyzed. The

importance of bank profitability can be appraised at the micro and macro levels of the economy.

At the micro level, profit is the essential prerequisite of a competitive banking institution and the

cheapest source of funds. It is not merely a result, but also a necessity for successful banking in a

period of growing competition on financial markets. Hence the basic aim of every bank

management is to maximize profit, as an essential requirement for conducting business. At the

macro level, a sound and Profitable banking sector is better able to withstand negative shocks d

contribute to the stability of the financial system. Bank profits provide an important source of

equity especially if re-invested into the business. This should lead to safe banks, and as such high

profits could promote financial stability Kasiva, (2010). Return on assets (ROA), Return on

equity (ROE) and Return on Investment (ROl) are accounting based performance indicators

which are widely used to assess the performance of firms, including deposit money banks. Bank

regulators and analysts have used ROA and ROE to assess industry performance and forecast

4
trends in market structure as inputs in statistical models to predict bank failures and mergers and

for decision making purposes that are related to efficiency and profitability. This study is

concerned about the relationship between risk based internal audit procedures and financial

performance of deposit money banks in Nigeria.

There is a generally accepted relationship between risk and return, that is, the higher the risk the

higher the expected return, therefore, traditional measures of bank performance have measured

moth risks and returns. The increasing competition in the national and international banking

markets, the new technological innovations herald major changes in banking environment, and

challenge all banks to make timely preparations in order to enter into new competitive financial

environment. Spathis, and Doumpos, (2012). investigated the effectiveness of commercial banks

based on their assets size. They used in their study a multi criteria methodology to classify Greek

banks according to the return and operation factors, and to show the differences of the bank’s

profitability and efficiency between small and large banks. This study seeks to establish the

impact of risks based internal audit on the quality of financial performance in deposit money

banks in Nigeria.

In summary, it is the view of this researcher that, risk-based internal auditing is a significant tool

for the enhancement of risk management and improvement of financial performance of

organizations. Achieving high level financial performance requires effectiveness of appropriate

risk based audit practices. Risk based audit practices such as risk assessment, risk management,

risk based planning, and internal audit standards are adopted to benchmark the risk appetite of

entity against operational and inherent risk, thereby protecting the entity against avoidable risks

and steering it towards achieving high financial returns.

5
A company’s internal control practices such as risk based auditing are widely believed to be

crucial to the success of an enterprise as it acts as a powerful brake on the possible deviations

from the predetermined objectives and policies. This means that an organization that puts in ice

an appropriate and adequate system of risk based auditing is likely to perform better than those

that do not. In other words, for there to be effective risk management in an organization, auditing

must be risk-based. In the instances where there have been lack of or inadequate risk-based

auditing, the firms concerned may be prone to fraud and other forms of financial

misappropriation Coram et al. (2014). Recent incidences of entity collapse and financial scandals

have provoked worldwide concern and clamor for risk based internal audit. It has highlighted

apparent failures of traditional risk management strategies in such entities. The failure of the

banking sector in Nigeria, which brought about the mergers of the last decade, is of relevance

here. Risk Based Internal Auditing could improve the precision of operational strategies and

define the risk appetite of the banks so as to focus operations within profitable boundaries. The

level of uncertainty regarding the association between risks based internal audit procedures and

profit performance in deposit money banks has created a research gap in this ea. Quite a number

of essays have given diverse reasons for low quality of financial reports of corporate entities in

Nigeria, research evidence on the effects of risk based auditing practices on financial

performance of deposit money banks in Nigeria is however scanty. Thus absence of risk based

audit could negatively affect the financial performance of deposit money banks in Nigeria. The

existence of risk based auditing is associated with superior organizational performance

Hermanson and Rittenberg, (2013).

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1.3 Objectives of the Study

The following objectives are relevant to the study:

The general objective of this study is to analyze the strength of risk based internal audit as a tool

towards improving the quality of financial performance in deposit money banks in Nigeria. The

following are the specific objectives:

1. To examine the impact of risk based internal audit on financial performance of deposit

money banks in Nigeria.

2. To examine the impact of annual risk based internal audit planning on financial

performance of deposit money banks in Nigeria

3. To examine the impact of internal audit standard on financial performance of deposit

money banks in Nigeria

4. To examine the impact of internal control on performance of deposit money banks in

Nigeria

1.4 Research questions

The following research questions are relevant to the study:

1. Does risk based internal audit influence financial performance of deposit money banks in

Nigeria?

2. Does annual risk based internal audit planning contribute to financial performance of

deposit money banks in Nigeria?

3. Does adoption of internal audit standards influence financial performance of deposit

money banks in Nigeria?

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 4. Does internal control influence financial performance of deposit money banks in Nigeria?

1.5 Research Hypotheses

H01: There is no significant relationship between risks based internal audit procedures and

financial performance of deposit money banks in Nigeria.

H02: There is no significant relationship between annual risks based internal audit planning and

financial performance of deposit money banks in Nigeria.

H03: There is no significant relationship between the application of internal audit standard and

financial performance of deposit money banks in Nigeria

H04: There is no significant relationship between the application of internal control and financial

performance of deposit money banks in Nigeria

1.6 Significance of the Study

The Significance of this study is captured as follows:

This study is significant in that it will enable management of banks in Nigeria to appreciate the

importance of risk based internal audit practices and assist them in rating their level of

compliance against those of their competitors or the entire market, and in determining whether

risk based audit practices improve banks financial performance.

The study will help shareholders to know the various mechanisms through which they can

exercise their control. Potential investors will also benefit as they will be able to determine banks

that are properly governed in making their investment decisions in deposit money banks.

8
It will also guide management of deposit money banks in developing internal control policy

framework and policy making regarding risk based internal audit procedures.

It will also guide the regulatory agencies as to what metrics should be adopted when monitoring

the transactional and reporting activities of the banking sector, to ensure transparency and full

disclosure.

The academic environment will benefit from relevant information regarding the relationship

between risks based internal audit and financial reporting in the deposit money banks. The study

will contribute to the general body of knowledge and form a basis for further research.

1.7 Scope of the Study

Scope of this study is presented as follows:

This study examines the impact of risks based internal audit and the quality of financial

performance in six (6) listed deposit money banks in Nigeria. It is a review of the financial

performance of the six listed banks who claimed to have adopted risk based internal audit

procedures. Consolidated, audited accounts and financial reports of the banks were reviewed;

branch management accounts have been consolidated by their respective head offices and by

implication, were covered under this review.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Concept of Risk Based Internal Audit

The Chartered Institute of Internal Auditors defined Risk based internal auditing (RBIA) as a

methodology that links internal auditing to an organizations overall risk management framework.

RBIA allows internal audit to provide assurance to the Board that risk management processes are

managing risks effectively in relation to the risk appetite of the entity CIIA, (2014). The board of

directors of RBIA voted to approve a new definition of internal auditing and a new Professional

practice Framework (PPF). The board through deliberation came to a conclusion that a

significant gap existed between available guidance and current practice of internal auditing, and

a new framework was needed to carry the profession into the 21st century CIIA, (2004). Ideally,

Risk based internal auditing is a paradigm shift from traditional approach of pre auditing or

transactional audit to systems audit and finally to risk based internal auditing. In pre-audit,

management abdicated their responsibilities to internal audits; there were no audit reports and no

review of the system by management. On the other hand, systems audit was passive and reactive

control based audit with no involvement of management in audit planning. Therefore, for

internal audit to be effective and efficient, risk based internal auditing was introduced CII

A(,2004). Internal Auditing helps an organization to accomplish its objectives by bringing a

systematic, disciplined approach to evaluate and improve the effectiveness of risk management,

control, and quality of financial report CIIA, (2003). This definition is designed to embrace the

expanding role.

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Internal audit which in recent years has evolved from a narrow focus on control to include risk

management and corporate governance Brod and Lowe, (2017). This definition is used as a

framework to develop hypotheses concerning the characteristics of companies that use internal

while there is considerable overlap between the areas of risk management, control and

governance Colbert, 2012; McNamee and Selim, (2019). Besides focusing on the level of risk,

the risk-based method helps to evaluate and build value into the financial reporting process and

the clients company. In order to do this, the auditor must an up to date insight of the clients

business and activities. This knowledge is gained through the way the client operates their

business, management, internal and external environments McNamee and Selim, (2013). The

knowledge gathered can help to design the audit program that includes the most effective and

efficient combination of tests responsive to each client’s unique circumstances. For this reason,

the risk-based approach is then superior to traditional auditing methods (Gibson, (2013).

Although the new system of auditing has become more popular over the years, there are obvious

vantages and disadvantages that need to be considered. For example, the aim of this risk-based

approach is to assess and identify the high-risk areas, while at the same time; the auditor is

minimizing the risk of negligence Griffiths, (2016). This can therefore speed up the audit work it

help to allocate specialists to specific areas of the audit. However, this process can cause the time

to be spent on the audit and raise costs, thus not making economic sense.

Unfortunately, another problem faced by auditors when adopting the risk-based approach is

when identifying high-risk areas. Auditors must decide what evidence is required and in how r.ch

detail Commonwealth of Australia, (2014). Risk-based internal audit focuses on strategic

analysis and business process evaluation and on assessing the goals, risks and controls that must

coalesce for an organization’s success Rivenbark, (2012). By identifying, assessing, and

11
monitoring a company’s risk, internal auditing helps assure that resources are adequate and based

on priorities Kunkel, (2014). Generally, risk-based auditing assesses areas of heightened risk

(Griffiths, (2016) and, importantly, conducts continuous risk assessments O’Regan, (2012);

Marks, (2011). The knowledge gained from a comprehensive annual risk assessment as well as

from risk assessments undertaken at the outset of every internal audit engagement should be

shared with management and the board (Jackson,) 2015.

Since one of the primary responsibilities of the audit committee is to review and monitor the

audit process, active and independent audit committees can influence the extent of the audit

Dezoort. (2007). Independent directors on audit committees have incentives to protect their

reputation and avoid potential litigation. These incentives can be explained by the demand-based

perspective in the context of regulatory oversight and the scrutiny of the role of independent

directors ((Lorenzo, 2011). The demand-based perspective suggests that independent directors

differentially higher audit quality. Such greater assurance provided by the external auditor

necessarily requires additional audit work which is reflected in higher audit fees. Evidence

consistent with this view is provided by Carcello et al. (2012) and Abbott et al. (2013).

Given the importance of risk management in financial functioning, the efficiency of listed

deposit money Bank’s risk management is expected to significantly influence its financial

performance (Marker and Satvros, 2014). An extensive body of literature (Santomoro and el,

1997) argues that risk management matters for financial report of firms. According to (2011),

risk management is an important function of financial institutions in creating for shareholders

and customers. The corporate finance literature has linked the importance risk management with

the shareholder value maximization hypothesis. This suggests that Banks will engage in risk

management policies if it enhances shareholder value Ali and Luft, (2012). Thus, effective credit

12
risk management either in non-banking firms or in banking entities is expected to enhance the

value of the firm and shareholder wealth.

2.1.1 Concept of Risk Management

Some Accountants have argued that effective risk based internal audit procedure promotes

improvement in financial performance of entities. An effective internal audit service can, in

particular, help reduce overhead, identify ways to improve efficiency and minimize exposure to

possible losses from inadequately safeguarded company risk assets, all of which can have a

significant effect on the financial performance of the entity. Risk based internal auditing

influences a firm’s use of its internal audit function from risk management, control and

performance perspectives which in turn influences accountability and enhances accuracy of

financial statements thereby influencing financial performance in financial institutions CBK,

(2010). Effective risk management practices diminish earnings volatility and thereby reduce the

costs associated with potential financial distress. Risk based internal audit can be extended to

include a real options perspective where firms are able to develop opportunities and claims on

future that can be evaluated based on assumptions about underlying risk factors Upson, (2008).

Stulz (2014) carried out a study on the rationale of risk based internal audit to organizations and

found that there existed a rationale for RBIA for lenders and financial institutions in the business

of lending thus influencing bank financial performance. Transparency, disclosure and trust,

which constitute the integral part of risk management, can provide pressure for improved

financial performance. Financial performance, present and prospective is a benchmark for

investment Santomero, (2015).

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2.2 Concept of Annual Risk Based Planning

Panning is generally considered a vital internal audit activity and it includes preparing a strategic

plan, annual plans and programs for individual risk based audit assignments. The operational

standard of the Internal Audit, dealing with the planning aspects of the internal audit, requires the

preparation of a strategic plan - usually a five-year plan, a periodic (annual) plan and :ns for

individual audit assignments Kasiva, (2010). Most organizations’ internal audit offices not

develop a strategic plan, the exercise of which would have enabled the audit staff to evaluate risk

and identify high-risk areas that deserve audit attention. It could also have been an exercise by

which the head of internal audit ensures the appropriateness of resources by projecting

requirements in a timely fashion thus enhancing good governance. Proper planning enables

accomplishment of a large number of audits in a given period by improving efficiency.

In some cases the numbers of the audit engagements are completed in the budgeted time and the

number of actual audits performed in a period is usually less than the number of audits stated in

the annual audit plan Sanda, Mikailu and Garba. (2015). This is usually caused by adhoc audit

assignments by the management and urgent requests by external parties. Adhoc audit

assignments signify the relevance of internal audit to management Van Gansberghe, (2005), and

reflect positively on audit effectiveness and also in good governance. The supply side argument

suggests that during the audit planning stage, auditors assess corporate governance risk and plan

procedures or charge risk premiums based on their assessment Kasiva, (2010).

2.1.3 Concept of Internal Auditing Standards

The principles of good governance, transparency and accountability, fairness and equity,

efficiency and effectiveness, respect for the rule of law and high standards of ethical behavior

14
resent the basis upon which to build on OECD, (2005). For Risk Based Internal Audit to provide

good financial report in public sector they must embrace the International Auditing standards

that guide the internal audit’s ethics of work and maintain professional auditing standards.

Organizations grow in size and complexity, effective risk management becomes increasingly

problematic Fraser and Henry (2017). Previous study for demand of internal auditing has been

zed to the cost and benefit from undertaking monitoring Goodwin, Stewart and Kent (2010).

Carcello, et al. (2015) asserts that increased organizational complexity would result in greater

risk and companies facing higher risk will increase their organizational monitoring. In addition,

from transaction cost perspective, larger firms have opportunities to gain economies of scale

from investment in the fixed costs of internal auditing Carey et al. (2012).

2.1.4 Concept of Internal Controls

Events since mid-1970s have contributed to the growth of internal auditing. The United States

foreign Corrupt Practices Act of 1977 mandated public companies to establish and maintain

effective internal accounting controls to provide reasonable assurance that assets are safeguarded

and that transactions are properly authorized and recorded. To accomplish this, many companies

established internal audit functions, increased internal audit staffing, and strengthened internal

audit independence. Coram et al. (2008) find that organizations with internal audit staffs are

more likely than those without internal auditing to detect and self-report occurrences of fraud.

The number and magnitude of errors requiring adjustment by the external auditors have been

found to be substantially lower for entities that had an internal audit department compared to

those that did not have an internal audit department, Wallace and reutzfe1dt, (2011). The internal

15
audit function is important because it adds value and therefore reduces detected errors Goodwin

and Kent, (2004).

In 1987, a report by the Treadway Commission recommended that public companies establish an

internal audit function to be fully supported by top management and have effective reporting

relationships. This means that the internal auditors’ qualifications, staff, status within the

company reporting lines, and relationship with the audit committee and the board of directors

must be adequate to ensure the internal audit function’s effectiveness and objectivity Treadway

commission, (2017). The report urged that the internal audit function be staffed with an adequate

number of qualified personnel appropriate to the size and the nature of the company Treadway

commission, (2013).

The New York Stock Exchange enacted a requirement in 2003 that all listed companies must

have an internal audit function, either in-house or outsourced. This requirement was approved by

the Securities and Exchange Commission (SEC) later in that year. Relying on internal auditing

avoid unnecessary duplicating audit procedures. It also can benefit external auditors because

External auditors have certain advantages. The internal auditors generally have more knowledge

rut the company’s procedures, policies, and business environment than do the external auditors.

However, external auditors must reconcile the advantages of relying on internal auditing with the

need to maintain both the appearance and reality of independence as defined external auditors

Gramling, Maletta, Schneider and Church, (2004).According to Norman Marks (2007), emerging

request from boards is that internal auditors review and comment on the organization’s

governance policies, processes, and practices. The IIA recognizes this in its International

Standards for the Professional Practice of Internal Auditing.

16
 The internal audit activity should evaluate and contribute to the improvement of risk

management, control, and governance processes using a systematic and disciplined approach.

Internal audit quality, which is determined by the internal audit department’s capability to

provide useful findings and recommendations, is central to audit effectiveness. Internal audit has

proved that it is of value to the organization and earn a reputation in the organization, Internal

audit has to evaluate its performance and continually improve its service. According to

2.1.5 Relationship between Risk Based Internal Audit and Financial Report

The empirical findings by Al-Tamimi (2002) and Al-Mazrooei (2007) highlighted that UAE

banks are efficient in risk based internal auditing. Drzik (1995) found out that bank administered

risk based internal audit survey showed that large banks in the US had made substantial progress

in their financial reporting. Comprehensive risk based internal auditing influence effective

financial reporting activities and the application of risk based internal audit, particularly for

credit and overall banking risks, is important for banks. The presence of real options based

flexibilities should enhance effective risk management practices that diminish earnings volatility

and thereby reduce the costs associated with potential financial distress (Andersen. 2008). To the

extent an organization is able to manage risks imposed by dynamic global conditions, potential

under investment problems would be reduced resulting in higher earnings (Froot, Scharfstein and

Stein, 1994). Hence, risk based internal audit can be extended to include a real options

perspective where firms are able to develop opportunities and claims on the future that can be

evaluated based on assumptions about underlying risk factors (Leiblein, 2003). Stulz, (1984)

carried out a study on the rationale of risk based internal audit to organizations. He indicated that

there exist rationales for risk based internal audit for lenders and financial institutions in the

business of lending, influencing bank financial report (Santomero, (2015). Transparency,

17
disclosure and trust, which constitute the integral part of corporate governance, can provide

pressure for improved financial report. Financial report, present and prospective is a benchmark

for investment. The Mckinsey Quarterly surveys suggest that institutional investors will pay as

much as 28% more for the shares of well governed companies in emerging markets Mark,

(2000). According to the corporate governance survey( 2012), carried out by the Kuala Lumpur

stock exchange and accounting firm Price Water House Coopers (PWC), the majority of

investors in Malaysia are prepared to pay 20% premium for companies with superior corporate

governance practices. It was disclosed that all the dimensions of financial transparency,

disclosure and trust had positive relationships with most of the financial report dimensions in

commercial banks in Nigeria. For instance capital adequacy, earnings, assets quality highly

showed positive correlations with openness, competence, honesty and kindness. Regression

analysis was used to find the influence of the independent variable (corporate Governance) on

the dependent variables of the financial report (capital adequacy, asset quality, earnings and

liquidity). An analysis of variance was produced reflecting the influence of the independent

variable of corporate governance on the financial report. Results indicated that Corporate

Governance (Transparency, Trust and Disclosure) predicts 34.5 % of the variance in the general

financial report of Commercial banks in Nigeria. The significant contributors to financial report

were openness and reliability. Openness and reliability are all measures of trust. Prior research

has examined the effect of corporate governance on auditors decisions (judgments). Cohen and

Hanno (2000) find that management control philosophy and corporate governance structure

affect auditors’ pre-planning (client acceptance) and planning (extent and timing of testing)

judgments; specifically, auditors were more willing to recommend client acceptance and more

likely to reduce substantive tests in the presence of a stronger corporate governance or

18
management control philosophy. Bedard and Johnstone (2004) examined auditors assessments of

and planning and pricing decisions related to earnings manipulation risk and corporate

governance risk, and showed that auditors plan increased effort and billing rates for clients with

earnings manipulation risk and that the positive relation between earnings manipulation risk and

both effort and billing rates are greater for clients that have heightened corporate governance

risk. Lee et al. (2004) found that an independent audit committee and board members who are

concerned about incurring legal liability and harming reputation support external auditors in

accomplishing their assurance duties. Yatim et al. (2006) examined the relationship between

corporate governance and audit fees, finding that external audit fees are positively and

significantly associated with good audit committees. Cohen et al. (2007) examined the effect of

the role of the board of directors in monitoring management (agency role) and/or the role of the

board in helping to formulate corporate strategies (resource dependence role) on the auditors

planning judgments, and showed that auditors respond to the role of the board when making

judgments with respect to control risk assessments and the planned scope of audit tests. The way

management and control are organized affects the companys performance and its long run

competitiveness. It determines the conditions for access to capital markets and the degree of

investors’ confidence Brownbridge, (2007).

Banking institutions around the world face a number of challenges in meeting the changing

expectations and needs of their citizens. Responses to these challenges typically include setting

up and delivering service delivery reforms, fiscal management, seeking to operate more

effectively, efficiently and openly and developing new capabilities for civil society participation,

partnership and resource management Brownbridge, (2007). The principles of good governance

transparency and accountability, fairness an equity, efficiency and effectiveness, respect for the

19
rule of law and high standards of ethical behavior represent the basis on which to build upon

OECD, (2005). IIA (2005) in their submission to the Turnbull Review Group requested that

boards should be responsible for determining acceptable risks and for managing them. While

board members have ultimate responsibility for risk management and internal control, they

require assurance that risks throughout the organization have been identified assessed and

managed Fraser and Henry (2007). Hence, internal auditing risk-based orientation would be a

key component for such assurance. Haniffa and Hudaib (2006) indicated that board size affects

the extent of monitoring and controlling. As a small board may be seen to be more effective, we

would expect a higher percentage of risk based internal auditing may be used. However, as

bigger boards seem to be more symbolic rather than being a part of the management process

Haniffa and Hudaib (2006;) Chen (2003), they would require internal audit activities to have

more risk orientation, as a substitute mechanism.

2.2 Theoretical Review

The study examines the effect of internal audit on the financial performance of deposit money

banks (DMB) in Nigeria. Specifically, the study ascertained the effect Audit Committee

independence, Audit committee size, Audit committee gender diversity on the financial

performance of deposit money banks. The study employ ex post facto research design. The

sample size for this research work is 12 listed DMBs from 2010–2018. The sources of data

employed in this study are secondary data from the Nigeria Stock Exchange Fact Books and

related companies’ Annual Financial Reports for the period covered in the study. The study

made use of spearman rank correlation analyze and also employed panel least square regression

analyses in order to analyze the data for the study. The findings of this study indicated that audit

committee independence has a negative insignificant effect on the performance of listed DMBs

20
in Nigeria, audit committee size has a positive significant effect on the performance of listed

DMBs in Nigeria, audit committee gender diversity has a positive insignificant effect on the

performance of listed DMBs in Nigeria. The researcher recommends that there is need for banks

to have an audit committee that is not too small such that there will be no lack of expert advice

and too large such that it has free riders that are prone to follow other member’s opinion. The

size of the audit committee should also be in a way that the process of accounting and finance are

protected such that it will lead to increased performance

2.2.1 Agency Theory

A significant body of work has built up in this area within the context of the principal- agent

framework. The work of Jensen and Mecklin (2016) in particular and of Faina and Jensen (2013)

are important. Agency theory identifies the agency relationship where one party, the principal,

delegates work to another party, the agent. The agency relationship can have a number of

disadvantages relating to the opportunism or self interest of the agent: For example, the agent

may not act in the best interests of the principal, or the agent may act only partially in the best

interests of the principal. There can be a number of dimensions to this including for example, the

agency misusing his power for pecuniary, or other advantages, and the agent not taking

appropriate risks in pursuance of the principals interests because the agent views those risks as

not being appropriate and the principal may have different attitudes to risks. There is also the

problem of information asymmetry whereby the principal and the agent have access to different

levels of information; in practice this means that the principal is at a disadvantage because the

agent has more information. In the context of financial institutions and issues of risk based

internal auditing, agency theory view risk based internal auditing as being an essential

monitoring device to try to ensure that any problem that may be brought about by the principal-

21
agent relationship, are minimized. Blair (2006) states; managers are supposed to be the ‘agents’

of a financial Institutions ‘owners’ but managers must be monitored and institutional

arrangements must provide some checks and balances to make sure they do not abuse their

power. The costs resulting from managers misusing their position, as well as the costs of

monitoring and disciplining those who try to prevent abuse have been called ‘agency costs’.

Much of agency theory, as related to financial Institutions is set in the context of the quality of

report and control as described in the work of Berle and Pears (2011). In this context, the agents

are the managers and the principals are the shareholders and this is the most important

commonly cited agency relationship in the corporate governance context. However, for the

internal audit function to be effective as an essential monitoring device, it is the view and

considered opinion of this researcher that the independence of the internal auditor, from the

overbearing influence of management, is crucial. This should also impact positively on the

quality of financial performance of the entity. This is a gap that should be addressed by

researchers.

2.2.2 Stakeholder Theory

In juxtaposition to agency theory, Stakeholder’s theory takes into account, a wider group of

constituents rather than focusing on shareholders. A consequence of focusing on shareholders is

that the maintenance or enhancement of shareholders’ value is paramount whereas when a wider

stakeholder group such as employees, providers of credit, customers, suppliers, government and

the local community is taken into account the overriding focus on shareholders’ value become

less self evident. Nonetheless, many companies do strive to maximize shareholders value whilst

at the same time trying to take into account the interests of the wider stakeholder group. One

rationale for effectively privileging shareholders over other stakeholders is that they are

22
recipients of the residual cash flow (being the profits remaining once other stakeholders such as

loan creditors, have been paid).This means that the shareholders have vested interest in trying to

ensure that resources are used to maximum effect, which in turn should be to the benefit of the

society. Risk-based internal audit derives largely from models that assume that inherent risk (IR)

and control risk (CR) are distinct concepts and that inherent risk arises from attributes of the

entity and the audit environment that are completely independent of attributes that determine the

level of control risk. Operationalizing the distinction between inherent risk and control risk has

however proved troublesome as the literature review below indicates. There appears to be little

consensus regarding attributes that may identify inherent risk and there is little published

evidence regarding how inherent risk is considered by practitioners. Also, it is not yet clear,

neither is it logical, to separate inherent risk and control risk in the manner demanded by

standard setters DeFond et al., (2000).

Assessing the risk of material misstatement at the financial statement level as well as at the

planning stage, adds to and clarifies the direction on performing a combined assessment of

inherent, and control risk, leaving the ability for the internal auditor to assess other risk factors in

an internal audit McCord, (2012). This approach to internal auditing has also changed the view

of substantive procedures performed by internal auditors. For example, the use of statistical

sampling has significantly reduced, but remains an important part of auditor’s substantive

procedures, once they wish to ensure that it is efficient and effective. In order to improve the

risk-based approach, ways must be identified in which internal auditors’ judgment of inherent

risk and control risk can become more accurate and consistent Kasiva. (2012). One area in

particular that would seem to warrant significant reliance on internal audit work is that of fraud

risk assessment. Because internal auditors have greater knowledge about a company’s operations

23
than external auditors, they are particularly adept at fraud risk assessment. This assertion is

supported by KPMG studies which indicate that internal auditors are more likely to discover

fraud than external auditors (KPMG. (2013). For instance, while 65% of frauds were discovered

in 2003 by internal auditors, only 12% were discovered by external auditors KPMG. (2013). So,

it is important that external auditors should rely on internal audit work relating to fraud risk

assessment.

2.3 Empirical Review

Chen, (2018) investigated the relationship between quality of financial report and risk-taking

behavior in Taiwanese Banking Industry. Sample consists of all of the 39 domestic banks, and of

the 39 surveys mailed, 24 completed responses were returned for a response rate of 61.54%. Of

the 24 survey responses, 13 (54.1%) of the credit unions report that more than 60% of their

internal audit activities are risk oriented. It was found that 8 of 24 (33.3%) respondents

indicating that they use a relatively high level of risk based internal audit, about 61 %- 80%.

while 6 (25%) of the domestic banks report that about 21 %-40% of their internal audit work are

risk-based Sarens and de Bcelde, ( 2006).

Liebesman (2004) strongly advocates that ISO 9000 and ISO 14000 can be used to reduce risks

with compliance with the Sarbanes-Oxley Act SOX, (2002): Because of SOX, the CEOs and

CFOs of public companies must certify their financial reports, and each year they must certify

the effectiveness of their systems of internal controls mandated by the law, Top management

needs to obtain better information about the effectiveness of their organizations. Quality and

environmental people should be at the table when the internal financial auditors present their

reports to top management and the board of directors Verschoor, (2012).

24
Kibara (2007) in his study on a survey of internal auditors risk management practices in the

banking industry in Kenya found out that, most banks in Kenya were in process of drafting the

Early Rate Mode process and strategies. Kibet (2008) concluded that risk based internal audit

function played a role in financial reporting. The limitations of the study were time constraints,

restriction to state owned corporations and having to make prior arrangement in order to meet the

heads of IADs. Recommendations of further study were effectiveness and contribution of

internal audit in promoting quality financial reports for companies listed in the NSE.

Additionally, a study on the influence of internal audit and audit committee on financial

reporting quality was recommended.

The Sarbanes-Oxley Act of 2002 has also contributed to the growth of internal auditing. Internal

auditors have enjoyed increased prominence, higher salaries, and a greater public appreciation

for the role that internal auditing can play in a well-governed organization (Hermanson, 2006).”

In particular, companies are using internal auditors to strengthen and evaluate their internal

control systems to comply with the internal controls provisions of Sarbanes-Oxley. A 2003

survey by the Institute of Internal Auditors indicated that 20% of companies included in the

Fortune 1,000 did not yet have internal audit departments but 50% of the Fortune 1,000

companies planned to increase their internal audit staffs to comply with Sarbanes-Oxley

Harrington, (2004). A later survey of 117 chief audit executives of public companies subject to

the provisions of Sarbanes- Oxley indicated that 111 reported that their companies increased

internal audit budgets from 2002 to 2005 (Kaplan & Schultz, 2006). Of these 111, 32% increased

internal audit budgets by more than 50%. Another survey of 402 companies reports that more

than half of them increased internal audit resources as a result of Sarbanes-Oxley, with 15%

indicating more than a 50% increase Price, water house Coopers, (2006). Kibara (2007)

25
conducted a survey of internal auditors risk management practices in the banking industry in

Kenya. The study sought to establish banking internal auditors perception of their distinct role in

the bank wide Enterprise Risk Management (ERM) process, and whether there was any conflict

between internal audit and risk management departments being established to take over the ERM

process. Bank internal auditors risk assessment practices in Kenya were also probed. To achieve

the objectives set, a survey, involving 27 Executives - all heads of internal audit departments in

the banking industry in Kenya was conducted. Data analysis was done, and 14 with response rate

of 52%, it was concluded that the outcome of the study fairly represented the banking industry

internal auditors’ practices and perception of risk management. It also emerged that only 14% of

the internal auditors could clearly list the distinct role of quality financial reporting and those of

Risk Management Department. For institutions both departments, a conflict was already brewing

between IAD and RMD in 29% of the institutions. The conflict centered mainly on lack of

clarity on the distinct roles to be played by those two departments in the whole ERM process.

The study found that, most banks in Kenya were in process of drafting the ERM process and

strategies.

According to Heath and Norman, (2004), when senior managers were given multiple objectives

to achieve, it may become almost impossible to measure their success in improving the firm

performance through accountability to achieve firm value, leading to failure. Several studies

suggest that firms with more independent directors perform worse than those with relatively

fewer independent directors. For example, Agrawal and Knoeber (2016) reported a negative

correlation between the proportion of outside directors and Tobin’s Q index (which is a measure

of growth prospects of assets, defined by the future profitability of the asset in relation to its

replacement cost). This is consistent with evidence established by Bhagat and Black (2017) that

26
a high proportion of independent directors is strongly correlated with slower past growth across a

number of accounting variables, but not so with future performance. Evidence from Bhagat and

Black (2007) and Klein (2007) also shows that a high proportion of independent directors

correlate with lower past profitability.

2.4 Theoretical framework

This study is adopting the agency theory and stakeholder theory as the theoretical background for

this study.

2.5 Gap indentified in the literature

At present, little is known about the level of influence that risk based internal audit practices

have on the financial performance of deposit money banks in Nigeria. It is in an attempt to fill

this gap that this study seeks to question and obtain evidence on the effects of risk assessment on

the financial performance of deposit money rinks in Nigeria. The financial crisis experienced in

Nigeria banking sector in the last decade, to large extent, is attributable to excessive risk-taking

by deposit money banks. Given that risk cased internal audit is essentially a mechanism for

addressing agency problems and controlling risk within the firm, it is not surprising that the

recent steps by the Central Bank of Nigeria, and their regulatory authorities have emphasized the

importance of effective risk based internal auditing practices in the banking sector for efficiency

and a guide against distress. Thus, it is now widely acknowledged that shortcomings in the

traditional approach to internal audit may have served as a central role in the instances of bank

distress from poor performance.

27
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design

The research design employed in this study is partly survey, ex post facto and partly descriptive

research design. These designs form the basis upon which the research was carried out. It is ex

post facto research design in that the financial data generated were already put in place and are

not subject to the manipulation of the researcher. Similarly it also includes a descriptive research

design in that the data generated from questionnaire were analyzed and the outcome described

with a view to making inference.

3.2 Population of the Study

The target population for this study is the 15 deposit money banks listed in the Nigeria Stock

Exchange as at 31 December, 2018.

Table 3.1

S/NO NAME OF BANKS YEAR OF LISTING

1 Access Bank Nigeria Plc 1998

2 Diamond Bank Nigeria Plc 2008

3 Eco Bank Nigeria Plc 2006

4 Fidelity Bank Plc 2005

5 First Bank Nigeria Plc 1974

6 First Monument Bank Plc 2004

28
7 Guaranty Trust bank Plc 1996

8 Skye Bank Plc 2006

9 Stanbic-IBTC 2005

10 Sterling Bank plc 1992

11 Union Bank of Nigeria 1971

12 United Bank for Africa Plc 1970

13 Unity Bank plc 1980

14 Wema bank plc 1990

15 Zenith bank Plc 2004

Source: NSE official website as at 2021 (www.nse.com.ng)

3.3 Sample Size and Sampling Technique

Sample size is the portion of the population selected by the researcher to represent the entire

population. Osuala (2005) and Asika (2006) argued that a sample that is either too large or too

small may lead to getting results that lack validity; for the purpose of this research work six (6)

listed deposit money banks were selected as sample size.

Table3.2 Sample size of the study

S/NO NAMES OF BANKS YEAR OF LISTING

1 Access Bank Nigeria Plc 1998

2 Fidelity Bank Plc 2005

3 First Bank Nigeria Plc 1974

4 Guaranty Trust bank Plc 1996

29
5 First Monument Bank Plc 1983

6 Diamond bank Plc 1990

Source: generated by the researcher from Table 3.1

3.4 Sources of Data

The source of the data for this study is both primary and secondary source. The primary source is

the responses from questionnaires distributed to internal control departments of the sample size,

to collect data on the independent variables. With regards to the secondary source, data were

extracted from the deposit money bank’s published financial statements.

3.5 Research Instrument

Simple random sampling technique is employed in selecting the sample size for the study. The

use of this technique gives every member of the population an equal and independent chance of

being selected. The technique was used through a raffle draw after the name of all the elements

of the population were written on pieces of paper and picked randomly.

3.6 Method of Data Analysis

The data generated for this analysis are analyzed by using three techniques; Descriptive

Statistics; Pearson Correlation and Multiple Regressions.

3.6.1 Descriptive Statistics

Descriptive statistics is used to compute measures of central tendency, such as mean, median,

mode, range, standard deviation, maximum and minimum values of both dependent and

30
independent variables. The computed values could enable us to determine the variability among

the values.

3.6.2 Pearson Correlation

Pearson Correlation is the second technique to be use in order to determine whether mutual or

complimentary relationship exists between two or more variables. It is also used to show whether

one variable is as a result of another: that is the degree to which the independent variable

explains the dependant variable.

3.6.3 Multiple Regressions

The research will use multivariate regression analysis, employing the Panel data regression

technique as used by Loncan and Caldera (2014). Panel data has advantage of enabling the

researcher to observe the behavior of entities across time and includes the variables at different

levels or period of analysis. Therefore, it is suitable in this research because the study analyzes

data from six (6) listed deposit money banks, using SPSS version 16. The method employed by

the researcher to analyze the data generated from field is ordinary least multiple regressions

(OLSR). The regression is used to analyze the impact of two or more variables, that is, the

dependent and independent variables. The study is a model which attempts to determine the

impact of X on Y. It is presumed that the performance of the banks (ROA) is dependent on risk

management; annual risk based planning, application of internal auditing standard and internal

controls (independent variables). Multiple regression analysis was applied for the data analyses.

31
3. 7 Definition and Variable Measurements

The variables of this study comprise two sets: (1) the dependent and (2) independent variables.

The dependent variable is financial performance of the banks, which surrogate in this study is

Return on Asset (ROA). The independent variables are: risk management, annual risk based

planning, internal audit standard and internal controls.

3.7.1 Measures of Financial Performance

Measurement of financial performance by ratio analysis helps identify organizational strengths

and weaknesses by detecting financial anomalies and focusing attention on issues of

organizational importance. Given that the mission of a profit organization is the reason for its

existence, it is appropriate to focus on financial resources in their relationship to the mission. The

key to analysis and measurement of the financial and operational control and impact is related to

the central question. Their model reflects the interrelationship between a series of questions

about the mission and the financial resources and control of the organization. Financial ratio is a

framework which provides an appropriate analysis for past performance and helps organizations

to move towards its future direction. The profitability analysis is achieved on a set of indicators

to measure banks’ performances. Profitability of banks is affected by a number of factors. Some

of these are endogenous, some are exogenous and yet structural. Banking structure and

profitability structure of banking system across countries have a bearing on the profitability of

banks.

Return on Equity:

32
Return on Equity is the amount of net income returned as a percentage of shareholders equity. It

reveals how much profit a company earned in comparison to the total amount of shareholder

equity found on the balance sheet. ROE is one of the most important financial ratios and

profitability metrics. It is often said to be the ultimate ratio or the ‘mother of all ratios’ that can

be obtained from a company’s financial statement. It measures how profitable a company is for

the owner of the investment, and how profitably a company employs its equity. Return on Equity

or profit to equity, is the most significant indicator for profit, which measures the banking

management in all its dimensions, and offers an image over the way to use the capital brought by

shareholders, the effect of their retainer in bank’s activity. The higher the ratio percentage, the

more efficient management is, in utilizing its equity base and the better return is to investors.

The other measure of financial performance in the bank is return on investment. Return on

Investment (ROI) is one of several commonly used financial metrics for evaluating the financial

consequences of business investments, decisions, or actions. ROI analysis compares the

magnitude and timing of investment gains directly with the magnitude and timing of investment

costs. A high ROT means that investment gains compare favorably to investment costs (Ball and

Shivakumar, 2004).

33
profitability structure of banking system across countries have a bearing on the profitability of

banks.

Return on Equity:

Return on Equity is the amount of net income returned as a percentage of shareholders equity. It

reveals how much profit a company earned in comparison to the total amount of shareholder

equity found on the balance sheet. ROE is one of the most important financial ratios and

profitability metrics. It is often said to be the ultimate ratio or the ‘mother of all ratios’ that can

be obtained from a company’s financial statement. It measures how profitable a company is for

the owner of the investment, and how profitably a company employs its equity. Return on Equity

or profit to equity, is the most significant indicator for profit, which measures the banking

management in all its dimensions, and offers an image over the way to use the capital brought by

shareholders, the effect of their retainer in bank’s activity. The higher the ratio percentage, the

more efficient management is, in utilizing its equity base and the better return is to investors.

The other measure of financial performance in the bank is return on investment. Return on

Investment (ROI) is one of several commonly used financial metrics for evaluating the financial

consequences of business investments, decisions, or actions. ROI analysis compares the

magnitude and timing of investment gains directly with the magnitude and timing of investment

costs. A high ROI means that investment gains compare favorably to investment costs (Ball and

Shivakumar, 2004).

34
Return on Asset

Return on Assets is an indicator of how profitable a deposit money bank is relative to its total

assets.

Return on Asset = Net Income

Total Assets

ROA gives an idea as to how efficient management is at using its assets to generate earnings.

Calculated by dividing a company’s annual earnings by its total assets, ROA will be displayed as

a percentage. Using ROA as a comparative measure is best to compare it against a company’s

previous ROA numbers or the ROA of a similar company thus this study will make use of ROA.

3.7.2 Focus of Risk Based Audit (RBA)

Changes in policies monitored by RBA are exogenous to the system. This includes changes in

monetary policy, changes in quantitative credit control like changes in Credit Risk Regulation

Short and long-term Rates, manipulation of bank rates, qualitative credit controls like selective

credit control measures, C/D ratio, recognized guidelines on lending to priority sectors, changes

in interest rates on deposits and advances, levy of tax on interest income (Kasiva, 2010). Various

other factors like careful control of expenditure, timely recovery of loans are endogenous.

Various structural factors include geographical spread of bank branches, decentralization in the

management and structural changes in deposits and advances. Risks based audit is independent

35
variable just as risk management, annual risk based planning, internal auditing standards and

internal controls. These variables are measured by taking the average of the questionnaires

administered to each variable.

3.8 Model Specification

The model used, based on the above variables, is of the mathematical form:

ROA = f (RM, ARBP, IAS, IAC)

The stochastic form of the above model is

ROA = βo+ βiRM+ β2ARBP+ β3IAS+ β4IAC + e

Where:

ROA Return on Assets as the financial performance of bank under audit

β° Is the constant.

βI - β4 is the coefficient of the independent variables measuring contribution of risk based audit

to financial performance of the banks.

RM = Risk Management

ARBP Annual Risk Based Planning IAS = Internal Audit Standard

IAC = Internal Audit Controls (Internal Controls).

E = Standard errors

36
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Description Statistics

A total of ninety (90) copies of the questionnaire were administered to the respondents but only

eighty-two (82) copies were returned out of which sixty (60) were properly filled while twenty

two (22) were not properly filled. Hence the total number of duly completed and returned copies

of the questionnaire is sixty (60).

This shows that thirty (30) which represent 5 0.0% of the respondents are male while thirty (30)

which represent 50.0% of respondents are female.

Table 4.2 above shows that twenty-nine (29) which represents 48.3% of the respondents falls

between the ages of 18-29 and thirty-one (31) represents 51.7% of the respondents falls between

26 - 50 years.

37
Table 4,3: shows that twenty-nine (29) which represent 48,3% of the respondents are single

while thirty-one (31) represent 51.7% of the respondents are married.

Table 4.4: shows the educational qualification of the respondents. Nineteen (19) which represent

31.7% of the respondents are holders of Bachelor Degree (B.Sc) and Higher National Diploma

(HND).Also, seventeen (17) respondents representing 38.3% of the employees are holders of

Senior Secondary School Certificates while twenty-four (24) representing 40% of the

respondents are holders of National Diploma (ND).

38
Table 4.5: shows the year of working experience of the respondents, it shows that eighteen (18)

represent 30.0% are not more than 5 years, twenty- four (24) representing 40.0% of the

respondents falls between 6-l0years while eighteen (18) representing 30,0% falls between 1 l0

years and above.

Table 4.6: shows the number of professionally qualified respondents. It shows that nineteen (19)

representing 3 1.7% of the respondents are (ICAN) professionals, fifteen (15) represent 25.0%

are; (ANAN) professionals, and nine (9) representing 15% are Institute of Taxation of Nigeria

(TIN) professionals, while seventeen (17) representing 28.3% are not professionally qualified.

4.2 Inferential Analysis

A multivariate regression model was applied to test the relationship between the percentages of

Risk Based Audit practices and financial performance of listed deposit money banks in Nigeria.

The logistic regression used in this model was

ROA f(RM, ARBP, lAS, IAC)

The stochastic form of the above model is

ROA = β° +β1RM+ β2ARBP+ β3IAS+ β4IAC + e

39
Where:

ROA = Return on Assets as the financial performance of bank under audit

β° Is the constant.

- is the coefficient of the independent variables measuring contribution of audit to financial

performance of banks.

RM Risk Management ARBP = Annual Risk Based Planning lAS Internal Audit Standard TAC

= internal Audit Controls E Standard errors

Adjusted R2 is called the coefficient of determination and gives the extent to which return on

assets varies with variation in factors influencing financial performance listed deposit money

banks in Nigeria. From the table above, the value of adjusted R2 is 0.023. This implies that, there

was a variation of 2.3% of return on asset, which varied with variation in factors influencing

financial performance of listed deposit money banks in Nigeria. These factors are risk

management, annual risk based planning, internal auditing standards and internal auditing

capacity at a confidence level of 99.9872%. The unexplained variation could be attributed to

other factors not included in the model as well as random factors.

40
The strength of variation of the predictor values that influence the financial performance of listed

deposit money banks in Nigeria is at 0.01 significant levels.

ROA = 0.017 + 0.001(RM) + 0.002(ARBP) + 0.003(IAS) + 0.00 1(IAC) + e

From the above regression model, it was found that return on asset in listed deposit money banks

in Nigeria would be at 0.017, holding risk management, annual audit risk based planning,

internal auditing standards and internal audit capacity constant. A unit increase in effective risk

management would lead to increase in return on asset in commercial banks by factor of 0.001

41
with a P Value of 0.822; a unit increase in annual audit risk based planning would lead to

increase in return on asset in banks by factor of 0.002 with a P Value of 0.608. a unit increase in

internal auditing standards would lead to increase in return on asset in banks by factor of

0.003with a P Value of 0.276 while a unit increase in internal audit capacity would lead to

increase in return on asset in banks by factor of 0.001 with a P Value of 0.906.

Therefore, positive impact exists between return on asset (ROA) and risk based audit factors

influencing financial performance in listed deposit money banks in Nigeria, clearly indicating

that effective risk management, annual audit risk based planning, internal auditing standards and

internal audit capacity influence financial performance in the banks, as they are statistically

significant with a P-Value of 0.822, 0.608, 0.276 and 0.906 at 95% confidence levels. This

implies that risk management, annual risk based planning, internal auditing standards and

internal audit capacity influence return on assets in listed deposit money bank in Nigeria.

4.3 Discussion and Implication of Findings

The impact of each variable of the study has been analyzed and investigated using multivariate

regression analysis. Preliminary analysis was performed on the data to ensure no violation of the

assumptions underlying the application of multivariate regression analysis. The empirical

investigation reveals a positive impact between risks based internal audit procedures such as

selection, risk management; annual audit risk based planning, internal auditing standards and

internal audit capacity (Independent Variables) and quality of financial performance (Dependent

Variable) of listed deposit money banks in Nigeria.

The findings for the study reveal that hypothesis 1, which states that there is no significant

relationship between risks management and financial performance of deposit money banks in

42
Nigeria was statistically rejected by the analysis where p value 0.822 and r = .001 which indicate

that there is significant positive impact between risks management and financial performance of

listed deposit money banks in Nigeria. This suggests that risk assessment relates positively with

financial performance of listed deposit money banks in Nigeria. The findings are similar to that

of Maiteka (2010) who found that there existed a strong and positive relationship between risk

assessment and corporate governance in public sectors.

Hypothesis 2, which states that there is no significant relationship between annual risk based

internal audit planning and financial performance of listed deposit money banks in Nigeria was

tested and the result rejected the hypothesis, where p value 0.002, and r = 0.608. This indicates

that annual risk based internal audit planning is a significant predictor of financial performance

of listed deposit money banks in Nigeria.

The findings were similar to that of Maiteka (2010) who found that there existed a strong and

positive relationship between risk based audit and corporate governance in public sectors with an

adjusted R2 of 0.78 3 indicating that the risk based audit explain 78.3 % of the variability in the

corporate public governance in enhancing public service delivery. Also, the findings were similar

to that of Chen, (2003) who investigated the relationship between corporate governance and risk

taking behavior in Taiwanese Banking Industry. He took a sample consisting of 39 domestic

banks, and of the 39 surveys mailed, 24 completed responses were returned thus a response rate

of 6 1.54% of the 24 survey responses. 13 (54.1%) of the credit unions reported that more than

60% of their internal audit activities are risk oriented. It was found that 8 of 24 (33.3%)

respondents indicated that they use a relatively high level of RB1A, at about 61 %-80%, while 6

(25%) of the domestic banks reported that about 21%-40% of their internal audit work are risk-

based.

43
Test of hypothesis 3, which states that there is no significant relationship between internal audit

standard and financial performance of deposit money banks in Nigeria was tested and the result

rejected the hypothesis, where p value = 0.002, and r 0.276. This indicates that internal audit

standard is a significant predictor of financial performance of deposit money banks in Nigeria.

This concurred with hA, (2004) which states that the internal audit activity should evaluate and

contribute to the improvement of risk management, control, and governance processes using a

systematic and disciplined approach. The findings are similar to Cohen and Hanno (2000) whose

findings indicated that Corporate Governance (Transparency, Trust and Disclosure) predicts 34.5

% of the variance in the general financial performance of Commercial banks in Uganda.

Test of hypothesis 4, which states that there is no significant relationship between internal audit

control and financial performance of deposit money banks in Nigeria was tested and the result

rejected the hypothesis, where p value = .005, and r 0.906. This indicates that internal audit

control has a positive significant relationship with financial performance. This concurred with

the study conducted by Kibet (2008) who concluded that internal audit control played a

significant role in corporate governance for companies listed on the NSE hence improving

financial performance of the financial institutions. Also, in the study conducted by Millichamp,

(2002) who indicated that Internal Audit controls are required in risk management, in

determining processes and their objectives, identifying risks that hinder the processes put in

place by management, identifying controls mitigating the risks, reporting where risks are not

sufficiently mitigated by controls and assure management that risks are mitigated to an

acceptable level.

44
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

The general objective of this study is to analyze the impact of risk based internal audit on the

quality of financial performance in listed deposit money banks in Nigeria, while the following

are the specific objectives: to examine the impact of risk management, annual risk based

planning, internal auditing standard and internal controls on the quality of financial performance

of listed deposit money banks in Nigeria.

5.2 Conclusion

The study concludes, from the result of data analysis that, there is a significant relationship

between risks based internal audit procedures and the quality of financial performance of listed

deposit money banks in Nigeria. Risks based internal audit will help detect risks and enhance

quality of financial performance of listed deposit money banks in Nigeria. Risks based internal

audit procedure helps to minimize risk, increases transparency and accountability hence

enhancing quality of financial performance of listed deposit money banks in Nigeria. Internal

auditors’ understanding of the bank’s risk, consideration of risks based internal audit in the

detection of errors, audit of recognition of work environment in risk assessment and

management, auditor’s involvement of management in risk evaluation processes and auditors

identification of changes in banking operations, are the indicators of risks assessment, which

influence the quality of financial performance of listed deposit money banks in Nigeria. Finally

the study concludes that risks based internal audit procedures impact positively on the quality of

financial performance of listed deposit money banks in Nigeria.

45
5.3 Recommendations

This study recommends that management of deposit money banks in Nigeria should adopt

effective risk based audit practices such as risk assessment, risk management, annual risk based

planning, application of internal auditing standards and risk based internal controls, to enhance

effective and efficient financial performance of their Banks. From the findings and conclusions,

this research recommends a similar study to be carried out in the Public Sector, particularly

government ministries, departments and agencies. There is also the need for a study to be

conducted to determine the challenges facing the application of risk based internal audit in

deposit money banks in Nigeria, this will help in enhancing the effectiveness of internal audit

and risk assessment in deposit money banks in Nigeria and thus positively enhancing their

financial performance.

From the findings and conclusions, the study recommends that risk based internal audit should

be enhanced through adoption of better risk assessment, constant review of internal auditing

standards, annual risk based planning and internal auditing staffing practices so as to achieve

success in financial performance in deposit money banks. Generally, there is need for an

extensive study to be conducted on the roles and challenges of internal auditing in the banking

industry in Nigeria. The study recommends that an in-depth study should be done on the role of

internal audit in strengthening central bank’s regulations and the requirement for compliance

with regulations in listed deposit money banks in Nigeria.

46
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 DEPARTMENT OF ACCOUNTANCY
SCHOOL OF FINANCIAL STUDIES
THE FEDERAL POLYTECHNIC
P.M.B 55, BIDA
STUDENT PROJECT QUESTIONNAIRE
Topic: THE IMPACT OF RISK BASED INTERNAL AUDIT ON THE QUALLITY OF

FINANCIAL PERFORMANCE IN LISTED DEPOSIT MONEY BANKS IN NIGERIA.

Dear Sir/Madam

I am a student of the above named polytechnic, conducting a research on the impact of risk based
internal audit procedures on the quality of financial performance of listed deposit money banks
in Nigeria.

I hereby ask for permission to source relevant data, through the administration of questionnaire
and an extract of published financial statements of the bank. The research is in partial fulfillment
of the requirements for the award of a Bachelor degree in accounting I therefore depose to the
undertaking that all data collected shall be used for the purpose of the research only, and nothing
more.

I will be grateful if this request is granted. I assure you that any information given to me would
be treated with utmost discretion and will be used exclusively for the purpose of this research.
Thank you for the anticipated cooperation and assistance.

Yours faithfully,

Joseph Cecilia Atuaneyi

52
 APPENDIX B

QUESTIONNAIRE

Please, tick [I] the appropriate answer on the available options.

SECTION A: Personal Data

1. Sex:

Male [ ] Female [ j

2. Age of respondents:

18-25years[ ]

3. Marital status:

26-5Oyears[ ]

Single [ ] Married [ ]

4. Educational qualification:

B.Sc./RND [ ]SSCE [ ]

5. Working Experience:

Not more than 5 years

6. Professional Qualification:

ICAN [ j ANAN [ ] uN [ ] Others []

SECTION B: RISK BASED AUDIT AND FINANCIAL PERFORMANCE

OND[ ]

]6-lOyears[ ] ll years and above[ ]

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