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INTERNAL AUDIT AND ORGANISATIONAL PROFITABILITY

ACASE STUDY OF ROCK CLASSIC HOTEL LTD

BY

SSEGIRINYA STEVEN

07/U/5300/EXT

SUPERVISED BY MR. TURYAKIRA NAZARIUS

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

BACHELORS OF COMMERCE DEGREE

JULY 2011

DECLARATION

I Ssegirinya Steven, declare that, the material in this report has never been submitted to

any University or Institution of higher learning for any academic qualifications. This

report is a result of my own independent research effort and investigations. Where works

of other people has been referred to, acknowledgement has been made.

Signature:…………………………………………Date:…………………………….

SSEGIRINYA STEVEN

07/U/5300 EXT

i

APPROVAL

This research report has been submitted for examination with my approval as the

candidate’s University Supervisor.

Signature:…………………………………………Date:………………………………

TURYAKIRA NAZARIUS

(Supervisor)

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DEDICATION

I dedicate this piece of work to my dear Daughter and Son Daniela, Joseph and my late

Mother and Aunties Juliana, marry and Theresa. This dream accomplished is greatly

attributed to you.

I cherish you all.

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ACKNOWLEGMENT

I am extremely grateful to a number of people whose help and guidance has seen me

through the successful completion of this study. First, I would like to extend my sincere

thanks to my supervisor Mr. Turyakira Nazarius who persistently gave me parental

supervisory guidance and spared time to read through my numerous paragraphs of the

entire proposal at every stage. Without his dedication, this work would not have seen the

light of this day.

Secondly, Special gratitude goes to the management of Rock classic hotel especially the

Audit department who helped me get all the necessary information.

I wish to acknowledge my wife, sisters and brothers Lydia, Sarah, Francis, Emmanuel,

Kizito, Vincent, Noah, John, Peter and my friends for the support and encouragement

through out this course, may the almighty God bless you all and reward you abundantly.

Lastly, special thanks go to my father, late mother and Aunties, Joseph, Juliana, Theresa,

and marry for their financial, moral and spiritual guidance, it is unfortunate to loose my

aunties and my mother at this difficult time, without your presence I wouldn’t be what I

am now, may your soul rest in eternal peace we miss physically.

LIST OF TABLES

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DECLARATION................................................................................................................iAPPROVAL.......................................................................................................................iiDEDICATION..................................................................................................................iiiACKNOWLEGMENT.....................................................................................................ivLIST OF TABLES.............................................................................................................vLISTOF TABLES............................................................................................................viiABSTRACT....................................................................................................................viii

CHAPTER ONE................................................................................................................11.0 Introduction....................................................................................................................11.1 Background of the study................................................................................................11.2 Statement of the problem...............................................................................................21.3 Purpose of the study.......................................................................................................31.4 Objectives of the study..................................................................................................31.5 Research questions.........................................................................................................31.6 Scope of the study..........................................................................................................31.6.1 Subject scope..............................................................................................................31.6.2 Geographical Scope....................................................................................................31.6.3 Time Scope.................................................................................................................31.7 Significance of the study...............................................................................................4

CHAPTER TWO...............................................................................................................5LITERATURE REVIEW.................................................................................................52.1 Introduction....................................................................................................................52.2 Definition of key terms..................................................................................................52.3 The concept of profitability.........................................................................................102.4 Relationship between internal audit and profitability..................................................142.5 Conclusion...................................................................................................................17

CHAPTER THREE.........................................................................................................18METHODOLOGY..........................................................................................................183.1 Introduction..................................................................................................................183.2 Research Design..........................................................................................................183.3 Study population..........................................................................................................183.4 Sampling size...............................................................................................................183.5 Sampling Design and Procedures................................................................................183.6 Data collection methods and instruments....................................................................193.6.1 Source of data...........................................................................................................193.6.2 Primary source..........................................................................................................193.6.3 Secondary source......................................................................................................193.6.4 Document study........................................................................................................193.7 Data collection instruments.........................................................................................193.7.1 Questionnaire............................................................................................................193.7.2 Interview...................................................................................................................193.7.3 Coding.......................................................................................................................193.7.4 Editing.......................................................................................................................203.7.5 Data analysis.............................................................................................................20

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3.7.6 Measurements of variables.......................................................................................203.8 Limitations of the study...............................................................................................20

CHAPTER FOUR...........................................................................................................21PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS 214.1 Bio data........................................................................................................................214.2 Internal audit effectiveness in Rock classic hotel........................................................234.3 Level of profitability....................................................................................................274.4 Relationship between internal audit and profitability..................................................304.5 Relationship between internal audit and profitability..................................................34

CHAPTER FIVE.............................................................................................................35SUMMARY, CONCLUSION AND RECOMMENDATIONS OF THE STUDY.....355.1 Summary of findings...................................................................................................355.2 Conclusions..................................................................................................................365.3 Recommendations........................................................................................................365.4 Areas for further study.................................................................................................37APPENDIX 1: QUESTIONNAIRE..................................................................................38REFERENCES..................................................................................................................42APPENDIX 2: TIME SCHEDULE...................................................................................44APPENDIX 3: BUDGET ESTIMATES...........................................................................45

LISTOF TABLESvi

Table 4.1. 1: Gender of respondents..................................................................................21

Table 4.1. 2: Age of respondents.......................................................................................21

Table 4.1. 3: Marital status of respondents........................................................................22

Table 4.1. 4: Level of education of respondents................................................................22

Table 4.1. 5: Period worked in rock classic hotel..............................................................23

Table 4.2. 1: People performing the Audit are knowledgeable about internal controls....24

Table 4.2. 2: Lack of independence affects internal audit effectiveness in reporting.......24

Table 4.2. 3: Lack of enough qualified audit staff affects the effectiveness of internal

audit...................................................................................................................................25

Table 4.2. 4: Poor relationship with other departments affects internal audit...................25

Table 4.2. 5: Internal auditor do plan, control, record and get enough evidence..............26

Table 4.2. 6: Lack of specific scope affects effectiveness of an internal Audit................26

Table 4.3. 1: Rock classic hotel always work within the budget.......................................27

Table 4.3. 2: Gross profit of Rock classic hotel is satisfactory.........................................28

Table 4.3. 3: Operational cost of Rock classic hotel is a minimum..................................28

Table 4.3. 4: Profits of Rock classic have been increasing over the past three years........29

Table 4.3. 5: Sales of Rock classic hotel have been increasing over the past three years.29

Table 4.3. 6: Share holders of Rock classic are always interested to know the profitability

trend of the hotel................................................................................................................30

Table 4.4. 1: Relationship of Audit department with other departments affects internal

audit results........................................................................................................................31

Table 4.4. 2: Internal audit affects organizational profitability.........................................31

Table 4.4. 3: Limited cooperation affects audit evidence and profitability.......................32

Table 4.4. 4: All workers participate in audit evidence gathering.....................................32

Table 4.4. 5: Workers are given chance to participate in giving audit evidence...............33

Table 4.4. 6: Poor results from audit affect organizational profitability...........................33

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ABSTRACT

The study was about Internal audit and organizational profitability in Rock classic hotel

Tororo District basing on the following objectives; to evaluate the effectiveness of the

internal audit system implemented in the company, to establish the level of profitability

in the company and to establish the relationship between internal audit and the

profitability of the company.

The study was cross-sectional both descriptive and analytical research designs were

employed; descriptive design was to enhance a better understanding internal audit and

factors affecting its effectiveness. Analytical research design was used to evaluate factors

gathered and this was considered to be appropriate because of the nature of the study

which depended on opinions of employees. Respondents were selected using random

sampling, and a sample of 30 respondents were taken of whom 4 were from the audit

departments, 10 were from operational departments and 16 were from other departments

like human resource, accounting, finance and planning. Questionnaires were the major

instruments that were used to collect primary data and secondary data was got from the

records in the Rock classic hotel at the selected departments. Data was coded, edited and

entered into SPSS, presented inform of frequency tables and the analysis was presented

inform of Pearson coefficient table which showed the strength of the relationship between

internal audit and organizational profitability.

Findings on effectiveness of internal audit in Rock classic hotel indicated that people

performing the Audit are knowledgeable about the internal controls in Rock classic hotel,

lack of independence affects internal audit effectiveness in reporting, lack of enough

qualified staff affects the effectiveness of internal audit, poor relationship of audit

department with other departments affects internal audit, auditors do plan, control, record

and get enough evidence and lack of specific scope affects effectiveness of internal audit

results. Findings on the level of profitability in the company showed that Rock classic

hotel does not work within the budgets, the gross profit of Rock classic hotel is not

satisfactory, operational costs of Rock classic hotel are not a minimum, sales of Rock

classic hotel have not been increasing over the past three years and the share holders are

always not interested to know the profitability trend of the hotel. There was a strong

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positive relationship between internal Audit and organizational profitability at correlation

coefficient 0.851

Recommendation on internal Audit were that, Rock classic should try to implement

independence when carrying out the Audits, employ qualified staffs, the hotel should also

try to maintain good relationship of the audit department with other departments to help

in gathering audit evidence and they should also define specific scope when carrying out

audit work in order to get the required information. Recommendations on the level of

profitability in the company were that the profitability of Rock classic hotel would be

attained if they tried to minimize unnecessary costs and try to work with in the set

budget, reduce the operating expenses and increase sale in order to maximize profits.

ix

CHAPTER ONE

1.0 Introduction This chapter contains the background, statement of the problem, purpose of the study,

the objective, scope and significance of the study.

1.1 Background of the study According to chambers (1988) internal auditing is defined as independent appraisal

activity within an organization for the reviewing of operation as a sense to management.

It is a management control that functions by measuring and evaluating the effectiveness

of other control. Internal auditing has been performed for centuries. It has come to be

recognized as a modern profession only during the past approximately 50 years (Ratiff

1988). This has been because of increased complexity in large organizations, which

calls for management to derive means to control system.

The Company’s internal audit activities involves the effective and adequacy of internal

control, overseeing the optimum use of the company resources, safe guarding the assets

from losses, and verifying the reliability of financial and management information. For an

internal audit department to be effective, it has to be with enough qualified staff that is

independent from management.

Profitability is the ultimate purpose especially in private firms. (Drucker, 1999).

According to Drucker the sole objective of a company or enterprises is profitability for it

to sustain in business and meet shareholders expectations and objectives, profits are

attained after deducting expenses from revenue among them includes, rent, salaries,

materials, water and electricity bills, taxes and rates plus drawings. A big profits leads to

a company’s expansion, development and puts a smile on shareholders faces throughout

as their dividends are guaranteed. Profitability stands as the major aim of all

organizations. Without it, calls for collapse of business (Monroe, 1990). Hence business

organizations which do not employ internal audit are likely to experience low

profitability.

Since 2007, there has been persistent decline in the level of profitability which was due to

unnecessary expenses by the management of rock classic hotel, of which it is the duty

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and the role of the internal audit department to detect and advise the management on how

to minimize such costs. But because of its weakness it was not able to detect such

unnecessary costs which led to low profitability for the hotel. And it is from such

background that the researcher felt concerned to find out the relationship of internal audit

department and profitability as the general cause of the hotel (secondary source)

1.2 Statement of the problemInternal auditing is the internal examination of the books of accounts and vouchers of the

business that will enable the auditors to report whether he is satisfied that the balance

sheet is properly drawn up so as to give a true and a fair view of the statement of affairs

of the business and profits and losses accounts gives a true and fair view of profit for the

financial period according to the best information and explanation given. (Spicer and

pedgler 1974)

Internal audit is and independent appraisal function established within an organization to

examine and evaluate its activities as service to the organization. It is a control which

functions by examining and evaluating the adequacy and effectiveness of controls

(www..ii.org.uk)

Internal audit is an independent appraisal function within an organization for the review

of activities as a service to all levels of management. It entails constant review of internal

control ensuring that they are effective and can be relied upon in ensuring the safety of

asserts and that the financial statements are reliable (ACC study text, 2000)

Profitability is the excess of revenue over expenditure and profitability is measured in

two perspectives that it gross profit which is the excess of growth profit over operating

expenses. Thus sufficient profit must be earned to sustain the operation of the business to

be able to obtain funds from investors for expansion and growth.

Rock Classic Hotel has instituted a team of internal auditors in order to examine all the

books of accounts for the company, to determine whether the books of accounts show

free and fair value and establish the efficiency and effectiveness of the managerial

controls on the profitability level of the company. The teams of internal auditor have

instituted a lot of measures to bridge the gap of unnecessary costs that reduces the

profitability of the company.

2

Despite the fact that internal audit is instituted in Rock classic hotel but all in vain, profits

have not improved since it is evidenced by the financial statement of 2007- 2009, which

shows a tremendous decline in profitability of the company which influenced the

researcher to find out the cause of such decline in profitability (secondary Source.

Financial statement 2007 – 2009)

1.3 Purpose of the studyThe purpose of the study was to establish the effectiveness of internal audit and cause of

persistent decline in profitability of the company other than internal audit

1.4 Objectives of the study i) To evaluate the effectiveness of the internal audit system implemented in the

company.

ii) To establish the level of profitability in the company.

iii) To establish the relationship between internal audit and the profitability of the

company

1.5 Research questionsi) What affect the effectiveness of the internal audit systems in the company?

ii) What factors that leads to low profitability in the company?

iii) What is the relationship between internal audit and profitability in the company?

1.6 Scope of the study

1.6.1 Subject scope The study focused on the internal audit function with more emphasis on factors affecting

its effectiveness and profitability.

1.6.2 Geographical Scope The study was carried out in the internal audit department and other department in the

company

1.6.3 Time ScopeThe study covered the period activities for one financial year that was 2009/2010.

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1.7 Significance of the study i) The research will benefit management of Rock Classic Hotel ltd to have

independent and qualified audit staff.

ii) The research will help management of Rock Classic Hotel ltd to effectively

improve on its audit skills.

iii) The research will help management of other companies to review and improve on

the internal audit measures to be instituted.

iv) The researcher will act as a local foundation to indicate areas of further research to

subsequent scholars in the filed of improving internal audit.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction In this chapter the researcher will analyze, examine, evaluate and assess the existing body

of knowledge about the topic. The researcher will also try to focus on the weaknesses

while consolidating on the strength of existing literature by various scholars.

2.2 Definition of key terms Auditing

Auditing in an ordinary sense means official examination of Accounts. The word audit is

derived from the Greek Word ‘Audire” meaning to hear. Various writers have come up

with different definitions on auditing.

According to ‘Spicer and Pegler, (1974; audit is such examination of the books of

accounts and vouchers of business as will enable the auditors to report whether he is

satisfied that the balance sheet is properly drawn up so as to give and true and fair view

of the statement of affairs of the business and the profits and loss accounts give a true and

fair view of profits for the financial period according to the best information and

explanation given.

A report of the committee on the basic concept of the American Association defines

auditing as “a systematic process of objectively obtaining an established criteria and

communication the results to interested users” (Walter .G.Kell et al, 1997).

Internal audit

Internal audit is and independent appraisal function established within an organization to

examine and evaluate its activities as service to the organization. It is a control which

functions by examining and evaluating the adequacy and effectiveness of controls

(www..ii.org.uk)

Internal audit is an independent appraisal function within an organization for the review

of activities as a service to all levels of management. It entails constant review of internal

control ensuring that they are effective and can be relied upon in ensuring the safety of

asserts and that the financial statements are reliable (ACC study text, 2000)

5

Internal audit thus is and independent appraisal functions established within an

organization to examine and evaluate the adequacy and effectiveness of the

organization’s internal control system and the quality of the system performance. Internal

audit furnishes management with analyses, appraisal recommendations, counsels and

information concerning the activities reviewed. (www.dortmouth.educ)

The institute of internal audit famed a guidance task force in 1997 and come up with a

new definition of internal auditing. Thus internal auditing is an independent, objective

assurance and consulting activity designed to add value and improve on organization’s

operations. It helps the organization accomplish its objectives by bringing a systematic

disciplined approach to evaluate and improve effectiveness of risk management, control

and governance process. (Virten 1999)

An internal Auditor

This is a person who is an organization and whose duty is to ensure continuous

compliance of internal control as set by management.

2.2.1 Duties of internal audit

The objective of the internal audit is to assist members of the organization including that

in management and on board to effective discharge of their responsibilities. This is

accomplished by vanishing them with analyses, appraisal, recommendations, counsels,

and information concerning activities reviewed. The objectives include promoting

effective control at reasonable costs (Standard and Guidance for professional practices of

1A 1994)

2.2.2 The internal auditor’s responsibilities include

Review operations or programs to as certain whether results are consistent with the

established and goals and whether operations or programs are being carried out as

planned.

Appraisal the economy and efficiency with which resources are employed.

Review the means of safeguarding the assets and as appropriate, verify the existence of

such assets.

Review the reliability and integrity of financial and operating information and the means

used to identify measure, classify and report such information. 6

Review the systems established to ensure compliance with those policies, plans,

procedures, loss and regulations that could have significant impact on operations and

reports, and should determine the organization is in compliance.

2.2.3 Internal Audit and internal control

According to Chambers, (1988), the definition of internal control however reveals that it

is not fundamentally different from management control. Control is regarded as a

separate activity of management. Plan and organizing, staffing and directing methods are

components by which control is achieved. Therefore an internal auditor appraisal these

control to reveal iii plans, inappropriate organization structure, incomplete staff, poor

leadership or failure of co-ordination.

Additionally according to chambers, an effective tool of managerial control is the internal

audit as it is now coming to be called the operational Audit. Although limited at most

time to auditing accounts, it is a useful aspect of appraisal of operations. Thus operational

auditors in addition to assuring them selves that accounts properly reflected the fact also

appraises policies, procedures, use of authority, quality of management effectiveness of

methods, special problems and other phases of operations. There is no reason why the

internal audit should not be broadened in practices. But this is limited by lack of qualified

staff to do the broad type of audit and the practical consideration that individuals may not

like to report on.

2.2.4 Internal Audit and internal control in private sector

Internal audit is part of department systems and procedures which means a consequential

loss in its effectiveness. There is confusion over internal audit and internal control.

Internal control is quite clearly management’s responsibility in order that activities are

conducted in an efficient and well ordered manner. But internal audit evaluates these

controls to see if they are working accordingly. The architects of private sector

organizations are responsible for the whole mess. Internal audit is not responsible for

implementation and operation of plans but it’s the responsibility of management.

According to chamber (1987) and Attwood (1987), for internal audit function to be

affective, it should fulfill the following requirements

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2.2.5 Degree of independence

Internal auditors are an employee of organization and can not therefore be independent.

Gerald Vinten 1005, in his journal “managerial auditing” state that internal audit must be

sufficiently independent to enable the auditors perform their duties in a manner which

will enhance professional judgment sound recommendations. This research tried to focus

on this area to see what is the situation like in Rock classic hotel management and how

does it affect the department’s performance (Simmons, 1995)

Internal auditor’s independence can be enhanced by organizational status where they are

able to report to the highest authority to ensure broad audit coverage, adequate

consideration of the audit report and appropriate action on audit recommendations.

Objectively this is a mental attitude which internal auditor should maintain in

performance of audits. Internal auditors are not to carbonate their judgment on audit

matters to that of others. This will improve their performance and enhance organizational

performance.

2.2.6 Due professional care

Internal audit can not give 100% assurance that there are not weakness and irregularities

in the controls but should exercise due care in fulfilling their responsibilities like having

adequate audit manual, audit working papers, audit plans, look for sufficient audit

evidence and supervise their subordinates. An internal auditor should be up to date

technically and have professional standards of knowledge, honesty and integrity (KISSa,

1997)

2.2.7 Technical competence

The internal audit department should have sufficient appropriate staff in terms of

numbers, professional grades, and relevant experience and should be headed by a person

who is professionally qualified with integrity. The audit techniques CAATS, techniques

of planning, documentation, report writing and modern knowledge should be learnt by

staff (The Uganda Accountants Newsletter, June 2002).

Internal auditors should be skilled in dealing with people and in communicating

effectively. Internal auditors should understand human relations and maintain satisfactory 8

relations with audits. They should be skilled in oral and written communications so that

they clearly and effectively convey such matters as objectives, evaluation, conclusions

and recommendations. (Steller, 1986)

2.2.8 Scope of Audit work

The scope of internal audit should encompass the examination and evaluate of the

adequacy and effectiveness of the organization’s systems of internal control and the

quality of performance in carrying out assigned responsibilities. Internal audit should

usually compass administration and operation control. This was the area of focus to the

researcher.

2.2.9 Planning, controlling and Recording

The internal auditors should adequately plan, control and record their work. As part of

planning process auditor should identify the whole range of systems within the

organization.

Evidence

Internal auditor should get sufficient relevant and reliable evidence on which to base their

conclusions and recommendations, reporting and follow up. The internal auditors should

ensure that findings conclusions and recommendations arising from their activities are

communicated promptly to the authority and response should be sought.

Internal audit is intended to act as a watchdog of all other controls in an organization to

satisfy that they are performing as intend. To fulfill the above, the environment within

which they act must be favorable to the organization status, professional due care,

professional proficiency, a wide scope of coverage of work. This area was of focus by the

researcher because many organizations and specifically private organization are

experiencing embezzlement, corruption, misappropriation of resources etc. because these

factors are not given due attention.

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2.3 The concept of profitability Profits have been defined as the excess of revenue over expenditure, wood and songster

(1999) defines profits at two levels; the gross profits which is the excess of sales over

costs of sales one net profit which is the excess of growth profit over operating expenses.

Thus sufficient profits must be earned to sustain the operations of the business to be able

to obtain funds from investors for expansion and growth and contribute towards social

over heads for the welfare of the society.

Profitability is used primarily to describe any ongoing process in which a good or a

service would produce more benefits than consequences. And would be used to describe

the steps you would take to get out of debt.

Frank Wood, 1997) stated that profitability indicates whether then company is

performing satisfactorily. There fore, it measures the performance of management, to

identify whether a company may be worthwhile investment opportunity

According to Pandey (1997) profits are the ultimate output of a company and it will have

no future if it fails to make sufficient profits. Therefore, the financial manager shows

continuously evaluate the efficiency of the company in term of profits. The profitability

ratios are calculated to measure the operation efficiency of the company. Shareholders

are interested to know the portability trend of the company for them to get them to get a

return on their investment and this is only possible when the company earns sufficient

profits (pandey, 1999).

To Kakuru (2002), the ability of any business to operate in the long run depends on

attaining an acceptable level of profits; strategically managed firms characteristically

have a profit objective, usually expressed in earning per share of return on equity.

According to Pearce Hamilton (2001), profitability is an organization’s desired state

whose turnover is greater than the input cost; t he difference is called profit. Lewis and

Pendrill (1985) defined profit as the difference between the cost of providing goods or

services and revenue from the sale.

Like other scholars, Pandey (2003) defined profitability as the difference between

reserves and expenses over a period of time. He also observed that profit is the ultimate

output of a company and it would have no further if it failed to make sufficient profits.

Profit continuously evaluates the efficiency of the company.10

Pearce 11 and Robinson Jr (2002) concurred with Ouchi (1981) that organizations have

other objectives but immediately noted that those objectives would lead to profitability.

There are three economic goals that guide strategic direction of every business

organization. They noted that whether or not they are explicitly stated, a company’s

mission statement reflects the firms’ intention to ensure its arrival through sustained

growth and profitability.

According to Horne (2001), profitability is an organizational state where the firm earns

profits from its sales proceeds. The sales proceeds are financial services that firms often

get from the loans that are extended to customers.

According to Hughes and Weller (1989), profitability is very hard to calculate and

determine. Because of the factors which have great impact on profit, we need to be

certain of the following. Turn over and over heads.

2.3.1Turn over

According to Hornne (2001), turnover is the total income of a business from sales or

services over a given period of time. Turn over takes no account of profit or expenses. It

is simply a record of money coming into business.

According to Van Horne et al (1997), two major types of profitability ratios are

calculated, profitability of relations to shares and profitability in relation to investment.

Profitability in relation to sales consider gross profit margin / grown margin ratio. The

growth profit margin reflects the efficiency with which the management producers each

unit production. A high gross profit margin ratio is a sign of food management.

A low gross profit margin may reflect higher costs of goods sold due to the firm’s

inability to purchase raw materials at favorable terms, and inefficient utilization of plant

machinery. Net profit margin ratios establish a relationship between net profit and sales

thus indicating management’s efficiency in manufacturing administering and selling the

products. This ratio is the overall measured of the firm’s ability to turn each rupee sales

into net profit.

11

Profitability in relations to investment considers the rate of return on equity and rate of

return on assets return on equity measures the return on shareholder, equity when

possible (Mc Naughton 1996) this ratio tells us his earning power on shareholder’s book

investment and is frequency used in comparing two or more firms in an industry.

Profits are very important in the running of an organization. It is a measure of

performance, pandey (1995) and Van Horn (1994). Likewise other financial management

writers contend that profits are still the biggest measure of how well or bad the company

is performing. A company is performing. A country that makes profits is said to be a

good performer while one which makes losses is said to be a poor performer. According

to Stoner profitability has been the most widely used performer of financial performance.

Like the gross profit margin, net profit margin and return on equity. However profit as a

measure of performance has got a lot of limitation.

2.3.2 Accounting profits

Traditionally, farm profits have been computed by using “accounting profits”. To

understand accounting profits, think of your income tax return. Your Schedule F provides

a listing of your taxable income and deductible expenses. These are the same items used

in calculating accounting profits. However, your tax statement may not give you an

accurate picture of profitability due to IRS rapid depreciation and other factors. To

compute an accurate picture of profitability you may want to use a more accurate

measure of depreciation.

Accounting profits provide you with an intermediate view of the viability of your

business. Although one year of losses may not permanently harm your business,

consecutive years of losses (or net income insufficient to cover living expenditures) may

jeopardize the viability of your business.

2.3.3Economic profits

In addition to deducting business expenses, opportunity costs are also deducted when

computing “economic profits”. Opportunity costs relate to your money (net worth), your

labor and your management ability. If you were not farming, you would have your money

invested elsewhere and be employed in a different career. Opportunity cost is the

investment returns given up by not having your money invested elsewhere and wages

12

given up by not working elsewhere. These are deduced, along with ordinary business

expenses, in calculating economic profit

Pandey (1997) argues that profits are ambiguous as it can be looked at differently by

different people for example economists and accountants. It also involves a lot of

estimation like depreciations and stock, which end up giving different values according to

this method used.

2.3.4 Reasons for Computing Profitability

Whether you are recording profitability for the past period or projecting profitability for

the coming period, measuring profitability is the most important measure of the success

of the business. A business that is not profitable cannot survive. Conversely, a business

that is highly profitable has the ability to reward its owners with a large return on their

investment (http//www.articlebase.com)

Increasing profitability is one of the most important tasks of the business managers.

Managers constantly look for ways to change the business to improve profitability. These

potential changes can be analyzed with a pro forma income statement or a Partial Budget

partial budgeting allows you to assess the impact on profitability of a small or

incremental change in the business before it is implemented (http//www.articlebase.com)

A variety of Profitability Ratio (Decision Tool) can be used to assess the financial health

of a business. These ratios, created from the income statement, can be compared with

industry benchmarks. Also, Income Statement Trends (Decision Tool) can be tracked

over a period of years to identify emerging problems( http//www.articlebase.com)

According to Hayes (1998), profits as a measure of performance might lead to developing

strategies aimed at improving bottom line results, but perhaps to the long term detriment

of the organization. Drucker (1990) points out the common accounting performance

measures of profit and cost rarely support changes in the organizational structure and

size, thus no financial measure like management and employee skills and their turnover

must be used to fit within the strategic frame work.

Economist like Tayebwa (1995) argues that profits are truly important towards the

survival of firms in various industrials. Profits are useful in meeting the needs of the firm; 13

investors would reap maximum returns and be satisfied. Similarly Lipsey (1993) suggest

that investors always undertake business ventures to get returns in form of dividends on

their investments, these dividends are paid only when the firm makes profit. Growth is

because profit boosts the growth of the firm without restoring to borrowing loan, which

are obtained at interest rate, which hinder growth of the firm.

Considerable research conducted by various scholars highlighted various factors that

affect profitability of the firms, Lucy (1996), Pandey, Van Horne (1998), Tayebwa

suggested that that nature of investment determines its ability to make profits to looses:

inventory management, Van Horne (1998) and Lucey also contend that inventory

management affect the level of profits made in any given firm.

Economic conditions, Tayebwa (1995) identified such factors to include, level of

inflation, unemployment rate, foreign exchange rates and then stability as important

factors that directly affect profit, competition, stiff competition leads o less profit since it

increases operating costs like advertising shares market segments among others.

Customer services, poor customer service results into a negative word of month on

company product to fellow customer who may stop buying that product, thus reducing

company sales and profits. Finally Magerero considered location, as another factor

affecting profitability. He asserts that locations has cost and revenue implication that is if

it has a good strategic location then it reduces in costs, increases revenue and profits

unlike non – strategic locations.

2.4 Relationship between internal audit and profitabilityInternal audit helps accompany accomplish its objectives by bringing systematic

disciplined appraisal to evaluate and improve the effectiveness of risk management

control and governance process. The manager are responsible for designing control

process (internal control) that provides reasonable assurance in the achievement of the

company objectives that is company profitability (Simon 19995)

Although not of necessity located with the organization, The services role should read to

a define benefit to the organization and improve the operation also identifies one or more

weakness when expressing an adverse opinion to a weakness, the management try to

control the miss cost, that will be improve the organization revenue which improve

operating efficiency and reduce the workload. http//www.articlebase.com)

14

The object of an internal audit of financial statement is enable to express an opinion as to

the fairness of presentation in all material respects of an organization entity financial

position ,So that result of operations and cash flow ,revenue, profits will increase

Internal audits help companies to meet customers' expectations with greater consistency.

It is profit that drive's return on investment. Managers should be profit professionals and

experts; internal audit empowers employee confidence by reducing their supervision and

by enabling a quality behavior in performing their work. The internal auditors provide

reliable picture of company's processes and results to top management.

http//www.articlebase.com)

According to Gitman (1992), internal audit vary from organization to organization but all

were designed for the same objective of ensuring timely check up. These include among

the following; collateral security, salary loans and group guarantee. However, these

should work under umbrella of the three variables, credit policy, credit standards and

credit terms in order to ensure efficiency.

According to Gitman (1992), internal audit can be tight or loose depending on the set

variables. The resultant effects on profitability in his writing indicate that the two

variables; credit management and profitability are related.

According to Kakuru (2000), a firm that employs very tight audit standards may sell

most on cash basis. It may also extend credit to only financially strong customers and

such standards result in no or less bad debts and less costs of credit management thus

earning profits. However, the firm may not be able to extend its sales. The profits

sacrificed on lost sales may be higher than the cost saved by the firm and vice versa.

According to Gitman (1995), Campsey, Brighan, (1985) and Discerson et al (1995).audit

standards must be emphasized such that the credit supplier gains an acceptable level of

confidence to the lowest possible risk or loss to be profitable. Firms should make use of

optimal credit standards in order to average out the weakness of both tight and loose

credit standards. At the optimal tight level, the firm will be able to run its business with

an acceptable level of risk but be sure of increasing earnings and profitability. As already

noted, credit terms stipulations under which a firm grants credit to customers. It refers to

the period of time during which the entire loan must be paid.

15

According to Hornne and Wachowics (1995), credit period is another means by which a

firm may increase the product demand and hence profitability.

The Pandy (2002) in any industry, customers frequently dictate terms given. The closer

the organization matches credit terms to its clients needs the easier it is for the clients to

carry the credit and make payments on time.

According to Brighan and Campsey (1985), there is a general agreement that a firm’s

internal audit will increase its operating profit through expanded sales. However, the

scholars also observed that there would be net increase only when the cost of extended

credit period is less than the incremental operating profit. As already seen in credit

standards, similarly, the trade off are between the profitability of additional sales and the

required return on the additional investment in receivables at optimum level.

Pandey (2003), Brigham (1985), Hornne and Wachowic (1995) concur that a firm may

follow a lenient or stringent internal audit. The firm following a lenient credit policy

tends to sell credit to customers on very liberal terms while standards credits are granted

for longer periods. Those customers whose credit worthiness and financial positions are

doubtful are likely to create a lot of book debts and running cost hence leading to losses.

On contrary, the scholars noted that with concern that a firm following a stringent credit

policy sells credit on a highly selective basis only to those customers who have power,

margins therefore the firm uses it credit policy variables to influence its investment in

accounts receivables and to guarantee profits.

To Pandey (2003), Hornne and Wachowicz (1995) intern audit influence organizational

profits depending on how they are administered.

Kakuru (2003) insists that stringent audit standards make a firm lose a big number of

clients. On centrally, when standards are loose, the firm gets increased number of clients.

But this does not mean that there will be the same increase in profitability because the

increased number of customers leads to increased costs in checking and reminding

customers.

The internal audit reinforces the discipline, liberates employees working in the audited

areas and enables their involvement in the continual improvement process.

16

In most business conversations only moments pass before some reference is made to

improving profits. Profit improvement is the main goal of business internal auditors

capable to provide actual information, suggest & effective plan supportively for

organization profit improvement

Further to that, internal audit staff is required to produce quarterly audit reports indicating

the performance of all departments in the company and whether proper books of accounts

have been kept, accounting principles and standards have been followed, how far the

company assets have been safeguarded and whether the accounts give a true and fair view

(www. Dotmouth.educ)

2.5 Conclusion

The object of an internal audit of financial statement is enable to express an opinion as to

the fairness of presentation in all material respects of an organization entity financial

position ,So that result of operations and cash flow ,revenue, profits will increase

Internal audits help companies to meet customers' expectations with greater consistency.

It is profit that drive's return on investment. Managers should be profit professionals and

experts; internal audit empowers employee confidence by reducing their supervision and

by enabling a quality behavior in performing their work. The internal auditors provide

reliable picture of company's processes and results to top management.

Activities need to be efficiently managed by streamlining internal audit. It is against this

background that there is need to establish the effect of internal audit on the profitability

of Rock classic hotel l

17

CHAPTER THREE

METHODOLOGY

3.1 Introduction.This chapter is to acquaint the reader with ways and methods through which the study

was conducted. It clearly shows the research design sampling design and procedures, date

collection methods and instruments, data processing and analysis measurements as well

as problems and limitations of the study.

3.2 Research DesignThe research study used was cross-sectional, both descriptive and analytical research

designs were employed; descriptive design was to enhance a better understanding internal

audit and factors affecting its effectiveness.

Analytical research design was used to evaluate factors gathered and this was considered

to be appropriate because of the nature of the study which depended on opinions of

employees.

3.3 Study population

The study focused on 50 employees of Rock Classic Hotel and particularly the internal

audit staff and other departments in the hotel like finance, Human resource, Accounts and

operational department.

3.4 Sampling size The research study was basically focused on 30 respondents, of whom 4 were from

audit departments, 10 were from operational departments and 16 were from other

departments, like human resource, accounting, finance and planning.

3.5 Sampling Design and Procedures The study was carried out using purposive method of sampling. This was dedicated by

the nature of the study, which was aiming at getting specific information from specific

individual that is internal audit staff. Conveniences methods of sampling were also used

for taking on staff who readily available.

18

3.6 Data collection methods and instruments

3.6.1 Source of data The research study used both primary and secondary data.

3.6.2 Primary sourceHere the data was collected mainly from internal audit department staff and staff from

other department.

3.6.3 Secondary source The researcher used already existing information from internal audit report to get data

related to the study.

Data was gathered from document study, analysis sheets, and budget audit programs. The

rest of support data was gathered from journals, new papers, previous research report and

text on internal audit. The internet was also used particularly Google search engine

(http:/www.google.com).

3.6.4 Document studyThe document was searched to analyze existing records and literature like audit manuals,

audit reports, work plans organizational charts.

3.7 Data collection instruments

3.7.1 QuestionnaireThe questionnaires were used to get the required information from the respondents.

Respondents were requested to select from range of possible answers and were self –

administered because the study population were literate.

3.7.2 Interview Direct interviews were used to get response from the management and some staff who

were not comfortable with questionnaires. With this researcher used the questionnaire as

an interview guide.

3.7.3 Coding Data collected was coded and put in suitable frequency tables that enabled qualifications

of results with ease. The aim here was to classify answers that were provided into

meaningful categories to reduce the answer detail.

19

3.7.4 Editing Each questionnaire was ranked for consistency, accuracy and completeness, editing was

carried out after interview to correct any inconsistencies.

3.7.5 Data analysis Data collected was edited and coded to allow the use of frequencies as units of

measurements and presented using frequency tables and manipulated using SPSS

software for analysis.

3.7.6 Measurements of variables The measurements were basically conceptual and contextual. Factors affecting

effectiveness was broken down to independence, competence and professionalism.

Further profitability was measured using budget, report, and plan.

3.8 Limitations of the studyThe problems the investigators meet during the time of conducting the study.

i) Suspiciousness, the study group taken was so cautious and reluctant to answer

questions and to provide some of the records in order not to spill Rock classic

Hotels secrets. With suspicious, the investigators used indirect questionnaires to

alive to the necessary answers in order to avoid suspicion and promise them

maximum confidentiality.

ii) Members of the staff were always busy with routine work. They were not

available all the time. This was solved through adoption of friendly approaches

when dealing with investigator and was reminded so often.

iii) Financial constraint was also a problem to the researcher however this was not

compromised the quality of the findings. The investigator always tried to

minimize on unnecessary costs to overcome the limitation of financial constraint

iv) Relevant references related to the study were scarce to the researcher. The

investigator researched for material on internet about internal auditing to

overcome the problem of lack of information

v) Language barriers were another problem met during research study since a variety

of nationalists with different mother tongues were employed in rock classic hotel.

With this problem, the investigator used the top officials in the hotel or the literate

staff to interview the illiterate in their mother tongue and later helped to translate

the statements in English to overcome the problem of language barriers

20

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS

4.1 Bio dataFindings on the bio information of respondents were considered and can be evidenced

below:

4.1.1 Gender of respondents

Findings on gender were considered and were tabulated as below:

Table 4.1. 1: Gender of respondents Frequency Percent Cumulative Percent

Male 11 37 37

Female 19 63 100

Total 30 100

Source: primary data

From table 4.1.1shows that 37% were male and 63% were female. This indicates that

there are gender imbalances in Rock classic hotel since it employees more females than

male.

4.1.2 Age bracket of respondents

The study captured different age brackets of respondents in order to establish the most

prevailing age group employed by the hotel and the distribution were as follows:

Table 4.1. 2: Age of respondents Frequency Percent Cumulative Percent

Below 20 years 2 7 7

20-30 Years 15 50 57

30-40 years 10 33 90

Above 40

years

3 10 100

Total 30 100


From table 4.1.2, 7% of the respondents were aged below 20 years, 50% between 20-30

years,33% between 30-40 years and 10% were above 40 years. This indicates that, the

respondents were mature enough to give responsible answers in the questionnaires.

21

4.1.3 Marital status of respondents.

Findings on marital status were obtained and were as in the table below.

Table 4.1. 3: Marital status of respondents Frequency Percent Cumulative Percent

Single 18 60 60

Married 10 34 94

Divorced 1 3 97

Separated 1 3 100

Total 30 100


Table 4.1.3 findings showed that, 60% of the respondents were single, 34% were married,

3% of the respondents were divorced and 3% of the respondents were separated. This

shows that, the respondents of different marital status were willing to contribute views

toward internal audit and profitability.

4.1.4 Level of education of respondents

Findings on the level of education were also obtained and were as in the table below:

Table 4.1. 4: Level of education of respondentsFrequency Percent Cumulative Percent

Primary Level 1 3 3

Secondary Level 6 20 23

Certificate 10 34 57

Degree Level 7 23 80

Degree 3 10 90

Masters 2 7 97

PHD 1 3 100

Total 30 100


From table 4.1.4, 3% of the respondents attained primary level of education, 20%

attained secondary level of education, 34% attained certificate level of education, 23%

attained diploma level of education, 10% attained degree level of education, 7% of the

respondents attained masters’ level of education and 3% of the respondents attained

22

PHDs level of education. This indicates that, workers attained the minimum level of

education to perform the work effectively in the hotel.

4.1.5 Period the respondents worked in Rock classic hotel.

The study also captured the length of time the respondents had worked in Rock classic

hotel in order to determine the experience of workers and the results below were

obtained:

Table 4.1. 5: Period worked in rock classic hotel. Frequency Percent Cumulative Percent

For 1-5 years 11 37 36.7

For 5-10 years 12 40 77

For 10-15 years 4 13 90

For 15 years and above 3 10 100

Total 30 100


Table 4.1.5 Findings indicated that, 37% of the respondents had worked for the period

between 1-5 years, 40% had worked for a period between 5-10 years, 13% had worked

for a period between 10-15 years and 10% of the respondents had worked for a period of

15 years and above. This indicates that, the respondents were experienced and

knowledgeable a enough to provide relevant information on the variables of the study.

4.2 Internal audit effectiveness in Rock classic hotel.Findings on the effectiveness of internal audit were considered and the following

information was obtained.

4.2.1 Knowledge of internal controls in Rock classic by those performing the Audit

Findings on whether the people performing the Audit were knowledgeable about the

internal controls in Rock classic were sought and the findings were as in the table below:

23

Table 4.2. 1: People performing the Audit are knowledgeable about internal controls Frequency Percent Cumulative Percent

Strongly agree 18 60 60

Agree 8 27 86

Uncertain 1 3 90

Disagree 2 7 97

Strongly disagree 1 3 100

Total 30 100


From table 4.2.1 findings indicate that 60% of the respondents strongly agreed that

people performing the Audit are knowledgeable about internal control, 27% agreed, 3%

were uncertain, 7% disagreed while 3% of the respondents strongly disagreed. This

indicates people performing the Audit are knowledgeable about the internal controls in

Rock classic hotel

4.2.2 Independence of internal auditor.

Findings on independence of internal auditor were also considered and were as in the

table below:

Table 4.2. 2: Lack of independence affects internal audit effectiveness in reporting. Frequency Percent Cumulative Percent


Agree 5 17 84

Uncertain 1 3 87

Disagree 2 7 93


Total 30 100


From table 4.2.2 findings showed that 67% of the respondents strongly agree that lack of

independence affects internal audit effectiveness in reporting, 17% agreed, 3% were

uncertain, 7% disagreed while 6% of the respondents strongly disagreed. This indicates

that lack of independence affects internal audit effectiveness in reporting.

24

4.2.3 Qualified staff affects effectiveness of internal audit results.

Findings on whether qualified staff affects the effectiveness of internal were also

considered and results were as in the table below:

Table 4.2. 3: Lack of enough qualified audit staff affects the effectiveness of internal audit. Frequency Percent Cumulative Percent

Strongly agree 19 63. 63

Agree 5 17 80

Uncertain 2 7 87

Disagree 1 3 90

Strongly disagree 3 10 100.0

Total 30 100.0


Table 4.2.3 findings showed that, 63% of the respondents strongly agree that lack of

enough qualified staff affects internal audit results, 17% agreed, 7% were uncertain, 3%

disagreed and 10% of the respondents strongly disagreed. This means that lack of enough

qualified staff affects the effectiveness of internal audit.

4.2.4 Poor relationship with other departments affects internal audit

The study also determining whether poor relationship with other departments affects

internal audit in Rock classic hotel and the findings were as in the table below:

Table 4.2. 4: Poor relationship with other departments affects internal audit Frequency Percent Cumulative Percent


Agree 7 24 77

Uncertain 1 3 80

Disagree 5 17 97


Total 30 100


From table 4.2.4 findings indicate that, 54% of the respondents strongly agreed that poor

relationship of audit department with other departments affects internal audit

effectiveness, 23% agreed, 3% were uncertain, 17% disagreed while 3% strongly

25

disagreed. This indicates that, poor relationship of audit department with other

departments affects internal audit.

4.2.5 Internal auditors plan, control, record and get enough evidence.

Findings on whether internal auditor do plan, control, record and get enough evidence

were also considered and findings were as in the table below.

Table 4.2. 5: Internal auditor do plan, control, record and get enough evidence Frequency Percent Cumulative Percent


Agree 21 70 90

Uncertain 1 4 93

Disagree 1 3 97


Total 30 100


According to table 4.2.5 findings showed that, 20% strongly agree that auditors do plan,

record, control and get enough evidence when carry out audit work, 70% agreed, 3%

were uncertain 3% disagreed and 4% strongly disagreed. This means that, auditors do

plan, control, record and get enough evidence as evidenced from the findings obtained.

4.2.6 Specific scope and its effect on effectiveness of an internal Audit

Findings on whether lack of specific scope affects internal audit effectiveness were also

considered and the results were tabulated as below:

Table 4.2. 6: Lack of specific scope affects effectiveness of an internal Audit Frequency Percent Cumulative Percent


Agree 22 74 87

Uncertain 1 3 90

Disagree 1 3 93


Total 30 100


From table 4.2.6, 13% of the respondents strongly agreed that lack of specific scope

affects internal audit effectiveness, 74% agreed, 3% were uncertain, 3% disagreed and

26

7% of the respondents strongly disagreed. This means that lack of specific scope internal

affects effectiveness of internal audit results.

4.3 Level of profitabilityFindings on the level of profitability were considered and the information below was

obtained:

4.3.1 Rock classic works within budgets

Findings on whether Rock classic works within the budgets were considered and the

information below was obtained:

Table 4.3. 1: Rock classic hotel always work within the budget Frequency Percent Cumulative Percent


Agree 4 13 20

Uncertain 5 17 37

Disagree 16 53 90


Total 30 100


According to table 4.3.1, 7% of the respondents strongly agree that Rock classic hotel

works within the budget, 13% agreed, 17% were uncertain, 53% disagreed and 10%

strongly disagreed. This means that Rock classic hotel does not work within the budget.

4.3.2 Gross profit of Rock classic hotel

Respondents were asked to comment on whether gross profit of Rock classic hotel was

satisfactory and findings were as below:

27

Table 4.3. 2: Gross profit of Rock classic hotel is satisfactory. Frequency Percent Cumulative Percent


Agree 2 7 10

Uncertain 3 10 20

Disagree 20 67 87


Total 30 100


Table 4.3.2 showed that, 3% of the respondents strongly agreed that gross profit of Rock

classic hotel was satisfactory, 7% agreed, 10% were uncertain, 67% disagreed, and 13%

strongly disagreed. This indicates that, the gross profit of Rock classic hotel is not

satisfactory.

4.3.4 Operational cost of Rock classic hotel

Findings on whether operational costs of Rock classic hotel area minimum were

considered and the findings were as in the table below:

Table 4.3. 3: Operational cost of Rock classic hotel is a minimum Frequency Percent Cumulative Percent


Agree 1 3 10

Uncertain 2 7 17

Disagree 6 20 37


Total 30 100


According to table 4.3.3 showed that, 7% of the respondents strongly agreed that the

operational cost of Rock classic hotel are adequate, 3% agreed, 7% were uncertain, 20%

disagreed and 63% strongly disagreed. This means that the operational costs of Rock

classic hotel are not a minimum.

28

4.3.4 Profits of Rock classic hotel

Respondents were asked to comment on whether profits of Rock classic hotel have been

increasing over the past three years and findings were as in the table below:

Table 4.3. 4: Profits of Rock classic have been increasing over the past three years Frequency Percent Cumulative Percent


Agree 4 13 23

Uncertain 1 3 27

Disagree 17 57 83


Total 30 100


Table 4.3.4 above findings indicate that 10% of the respondents strongly agreed that,

profits of Rock classic hotel have been increasing over the past three years, 13% agreed,

3% were uncertain, 57% disagreed and 17% strongly disagreed. This implies that profits

of Rock Classic hotel have not been increasing over the past three years.

4.3.5 Sales of Rock classic hotel

.The study obtained information on whether sales of Rock classic hotel have been

increasing over the past three years and finding were as in the table below:

Table 4.3. 5: Sales of Rock classic hotel have been increasing over the past three years Frequency Percent Cumulative Percent


Agree 4 14 47

Uncertain 2 7 53.3

Disagree 13 43 96.7


Total 30 100


Table 4.3.5 findings showed that, 33% of the respondents strongly agreed that sale of

rock classic hotel have been increasing over the past three years, 14% agreed, 7% were

uncertain, 43%disagreed and 3% strongly disagreed. This means that the sales of Rock

classic hotel have not been increasing over the past three years

4.3.6 Share holders of Rock classic

29

Respondents were asked to comment on whether share holders of Rock classic were

always interested to know the profitability trend of the hotel and the findings were as

below:

Table 4.3. 6: Share holders of Rock classic are always interested to know the profitability trend of the hotel Frequency Percent Cumulative Percent


Agree 2 7 10

Uncertain 5 17 27

Disagree 15 50 77


Total 30 100.0


Table 4.3.6 showed that, 3% of the respondents strongly agree that the share holders of

Rock classic are always know the profitability trend of the hotel, 7% agreed, 17% were

uncertain , 50% disagreed and 23% strongly disagreed. This means that the share holders

are always not interested to know the profitability trend of the hotel.

4.4 Relationship between internal audit and profitabilityFindings on the relationship between internal audit and profitability were also considered

and information below was obtained:

4.4.1 Relationship between internal audit and other department

Findings on whether the relationship of the audit department with other department

affects internal audit results were also considered and results were as in the table bellow:

Table 4.4. 1: Relationship of Audit department with other departments affects internal audit results Frequency Percent Cumulative Percent

30

Strongly Agree 15 50 50

Agree 4 13 63

Uncertain 3 10 73

Disagree 5 17 90

Strongly Disagree 3 10 100

Total 30 100


Table 4.4.1 showed that 50% of the respondents strongly agreed that, relation of internal

audit with other department affects internal audit results, 13% agreed with the same

finding, 10% were uncertain, 17% disagreed, and 5% strongly disagreed. This implies

that a relationship between the audit departments with other departments affects internal

audit results.

4.4.2 Internal audit affects organizational profitability

The study asked respondents as to whether internal audit affects organizational

profitability and response was as in the table below:

Table 4.4. 2: Internal audit affects organizational profitability Frequency Percent Cumulative Percent


Agree 3 10 73

Uncertain 4 14 87

Disagree 3 10 97


Total 30 100


According to findings in table 4.4.2 results showed that, 63% of respondents strongly

agreed, 10% agreed, 14% were uncertain, 10% disagreed and 3% strongly disagreed. This

means that, the internal audit affects organizational profitability basing on the results

obtained.

4.4.3 Limited cooperation affects audit evidence and profitability.

31

Finding on whether limited cooperation within the company affects audit evidence and

profitability and results was as in the table below.

Table 4.4. 3: Limited cooperation affects audit evidence and profitability Frequency Percent Cumulative Percent


Agree 6 20 67

Uncertain 1 3 70

Disagree 4 13 83

Strongly Disagree 5 17 100

Total 30 100


According to table 4.4.3 findings showed that 47% strongly agreed, 20% agreed, 3%

were uncertain, 13% disagreed while 17% strongly disagreed that lack of cooperation do

not affects audit evidence and profitability. This implies that, lack of cooperation within

the hotel among different departments affects audit evidence and profitability.

4.4.4 All workers participate in audit evidence gathering.

The study equally determined whether all workers participate in audit evidence gathering

in the hotel and the findings were as tabulated below:

Table 4.4. 4: All workers participate in audit evidence gathering Frequency Percent Cumulative Percent


Agree 18 60 80

Uncertain 1 3 83

Disagree 4 14 97


Total 30 100


Table 4.4.4 showed the 20% of the respondents strongly agreed that, they all participating

in audit evidence gathering, 60% agreed with the same finding, 3% were uncertain, 14%

disagreed, and 3% strongly disagreed. This implies that, all workers participate in audit

evidence gathering.

4.4.5 Worker are given chance to participate in giving audit evidence.

32

Findings on whether all workers are given chance to participate in giving audit evidence

as and results were as in the table below

Table 4.4. 5: Workers are given chance to participate in giving audit evidence Frequency Percent Cumulative Percent


Agree 17 57 80

Uncertain 1 3 83

Disagree 2 7 90


Total 30 100


Findings of table 4.4.5 indicated that, 23% of the respondents strongly agreed that all

workers are given chance to participate in giving audit evidence, 57% agreed, 3% were

uncertain, 7% disagreed and 10% strongly disagreed. This implies that workers in Rock

classic hotel are given chance to participate in giving audit evidence gathering.

4.4.6 Poor results from audit internal audit affect organizational profitability.

Findings on whether poor results from internal audit affect organizational profitability

were also considered and results were as in the table below:

Table 4.4. 6: Poor results from audit affect organizational profitability Frequency Percent Cumulative Percent


Agree 4 14 83

Uncertain 1 3 87

Disagree 3 10 97


Total 30 100


According to table 4.4.6 findings showed that 70% strongly agreed, 14% agreed, 3%

were uncertain, 10% disagreed while 3% strongly disagreed that poor results from

internal audit affect organizational profitability. This implies that, poor results from

internal audit affect organizational profitability.

33

4.5 Relationship between internal audit and profitability

From table 4.5 above, findings revealed that there is a strong positive relationship

between internal auditing and profitability at Pearson correlation coefficient r = 0.851

(**). This implies that a small change in the way of handling the internal audit program

would bring about a big change in the profitability by 72%.

Table 4.5: Correlation between internal auditing and profitability

1.000 .851 **. .000

30 30.851 ** 1.000.000 .

30 30

Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N

Internal Audit

Profitability

Internal Audit Profitability

Correlation is significant at the 0.01 level (2-tailed).**.

34

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS OF THE STUDY

5.1 Summary of findings 5.1.1 Findings on Internal Audit.

Findings on internal Audit showed that people performing the Audit are knowledgeable

about the internal controls in Rock classic hotel, lack of independence affects internal

audit effectiveness in reporting, lack of enough qualified staff affects the effectiveness of

internal audit, poor relationship of audit department with other departments affects

internal audit, auditors do plan, control, record and get enough evidence and lack of

specific scope affects effectiveness of internal audit results.

5.1.2 Findings on organization profitability

Findings on organizational profitability showed that Rock classic hotel does not work

within the budget, the gross profit of Rock classic hotel is not satisfactory, operational

costs of Rock classic hotel are not a minimum, profits of Rock Classic hotel have not

been increasing over the past three years, sales of Rock classic hotel have not been

increasing over the past three years and the share holders are always not interested to

know the profitability trend of the hotel.

5.1.3 Findings on the relationship between internal audit and Profitability.

Findings on relationship showed that, lack of cooperation within the hotel among

different departments affects audit evidence and profitability, all workers participate in

audit evidence gathering as evidenced, workers in Rock classic hotel are given chance to

participate in giving audit evidence, poor results from internal audit affects organizational

profitability .

Findings also revealed that there is a strong positive relationship between internal

auditing and profitability at Pearson correlation coefficient 0.851. This implies that a

small change in the way of handling the internal audit program would bring about a big

change in the profitability by 72%.

35

5.2 Conclusions 5.2.1 Conclusion on Internal Audit

It was concluded that, people performing the Audit are knowledgeable about the internal

controls in Rock classic hotel, lack of independence affects internal audit effectiveness in

reporting, lack of enough qualified staff affects the effectiveness internal audit, poor

relationship of audit department with other departments also affects internal audit and

lack of specific scope affects effectiveness of internal audit results

5.2.2 Conclusion on organization profitability

It was concluded that, Rock classic hotel does not work within the budget, the gross

profit of Rock classic hotel is not satisfactory, operational costs of Rock classic hotel are

not a minimum, profits of Rock Classic hotel have not been increasing over the past three

years and sales of Rock classic hotel have not been increasing over the past three years

5.2.3 Conclusion on the relationship between internal audit and Profitability

It was concluded that, lack of cooperation within the hotel among different departments

affects audit evidence and profitability, all workers participate in audit evidence

gathering, workers in Rock classic hotel are given chance to participate in giving audit

evidence and poor results from internal audit affects organizational profitability .

It was further concluded that, there is a strong positive relationship between internal

auditing and profitability at Pearson correlation coefficient 0.851. This implies that a

small change in the way of handling the internal audit program would bring about a big

change in the profitability by 72%.

5.3 Recommendations 5.3.1 Recommendations on Internal Audit

Rock classic should try to implement independence when carrying out audit work on the

audit team in order to carry out their work effectively, they should also try to employ

qualified staffs to avoid poor results, the hotel should also try to maintain good

relationship of the audit departments with other departments to help in gathering audit

evidence and they should also define specific scope when carrying out audit work in

order to get the required information.

36

5.3.2 Recommendations on organization profitability

Rock classic hotel should also try to minimize unnecessary costs in order to work with in

the set budget, they should also try to reduce the operating expenses in order to have

maximum profits, and the hotel should also try to increase its sales in order to maximize

profit.

5.4 Areas for further study The following should be areas of interest for further research

i) Computerized accounting and quality of audits

ii) Accountability and transparency in private organizations

iii) Independent of auditors and quality of audit reports

APPENDIX 1: QUESTIONNAIRE

37

MAKERERE UNIVERSITYFACULTY OF ECONOMICS AND MANAGEMENT

RESEARCH QUESTIONIARE

Dear respondent,

I am a student of Makerere University pursuing a Bachelor of Commerce degree and you

have been selected to participate in the ongoing study of internal auditing and

organizational profitability focusing on Rock Classic Hotel as a case study. For that

pursuit, I kindly seek your opinion and answers to the questions raised in this

questionnaire to facilitate my study by ticking the appropriate option. The information

obtained thereafter shall be used for academic research purposes only and shall be treated

with utmost confidentiality. It’s only through your positive response that this study can be

completed successfully. Thanks for your cooperation and time.

PART I

Tick in the appropriate box

1. Bio data

a) Sex

Male female

b) Age

Below 20 years

20-30 years

30-40years

Above 40 years

c) Marital status

38

Single Married Divorced Separated

d) Educational level

Primary level Secondary level Certificate level

Degree level Masters PHD level

Others specify………………………………………………………

e) I have been in Rock Classic Hotel

For 1-5 years For 5-10 years For10-15 years

For 15 years and above

39

PART II

2. FACTORS AFFECTING THE EFFECTIVENESSOF INTERNAL AUDIT

Tick in the appropriate box

Strongly agree

Agree Uncertain

Disagree Stronglydisagree

a People perfuming the audit are knowledgeable about internal controls of rock classic

b Lack of independence affect internal audit effectiveness in reporting

c Lack of enough qualified audit staff affects the effectiveness of internal audit.

d Poor relationship with the other department affects internal audit

e Internal auditors plan, control, record and get enough evidence

f Lack of specific scope of internal audit affects its effectiveness

3. The level of profitability in Rock Classic Hotel

Tick in the appropriate box Strongly agree

Agree Uncertain


a Rock classic hotel always work within the budget

b The gross profit of Rock classic hotel is satisfactory

c The operational costs of Rock classic hotel are minimum.

d Profit of Rock classic has been increasing over the past three years.

e The sale of Rock classic hotel has been increasing over the past three yeas.

f The share holders of Rock are classic always interested to know the profitability trend of the hotel.

40

4. Relationship internal auditing and organizational profitability.

Tick in the appropriate box Strongly agree

Agree Uncertain


a Relationships between internal audit with other department affect internal auditing results.

b Internal auditing affect organizational profitability

c Limited cooperation affects audit evidence and profitability

d All workers participate in audit evidence gathering.

e All workers in Rock Classic hotel is given chance to participate in giving audit evidence.

f Poor results from internal audit affect organizational profitability.

Thank you very much for your time, God bless you.

41

REFERENCES

Articles of internal Auditing and Fraud Investigation (www.mrscacfe.cjb..net)

Balunywa Waswa (1998) Business administration

Clugn. C.M (Jan-march 1997): changing the role of Internal Auditors, the Accountant

Journal of institute of Certified Public Accountants of Kenya

Coso (1992): Internal control Integrated Frame work (2volumes 1994). The Committee

of sponsorship organizations of Tread way commission, American institutes of CPA,

Jersey city, USA.

De Paula, Attwood, Frank A, De Paula’s Auditing (Pitman)

Durm J, Auditing theory of practices (prentice Hal)

Ewolf, Auditing Today (prentice Hal)

Flunt D, Phillosoph and principles of Auditing. An Introduction, (Mac mull an)

Gerald Vintner (1999): Articles of managerial Auditing, Managerial Auditing Journal,

volume 14 issue 8.

Honfstrand (December 2009) Understanding profitability

Institute of Internal Auditors UK and Ireland on line 28th June 2004.

Institute of Internal Auditors UK and Ireland on line 28th June 2004 (www.ija.org.uk.)

Julius K.Ishugisa (June, 2004): Articles on changes of An internal Auditor.

Kakuru (2002) financial management

Kotler, p.(2001). Principles of management.

Lower M. (1998): Internal Auditing Financial Times Management Briefings in London.

Mark Simons CIA CFE (1995): Articles on internal Auditing and Fraud Investigation,

Internal Auditing Journal, ( www.dotmouth.educ.)

Monroe. KB (1991) Pricing and marketing profitable decision 2nd edition

42

http://www.dotmouth.educ/

http://www.ija.org.uk/

Ratliff, Wallace, Loebbeck and McFarland (1988): Leading Edge International Auditing

principals and techniques.

Ridley Jeffery and chambers Andrew (1998): leading Edge Internal Auditing (ICSA)

Publishing London.

Spincer and pedler (1994) practical auditing (15th Edition) H FL Publisher ltd London.

Stoner N F.etal, 1985, management. (Prentice hall International Inc.Bombay). London

The Institute of International Auditors (1994): standards and guidelines for professional

practices of internal Auditing. (www.bitwise.net)

The Uganda Accountants News letter volume 7 issue 2.

43

http://www.bitwise.net/

APPENDIX 2: TIME SCHEDULE

TIME SCHEDULENo. Month Year Activity

1 March 2011 Proposal writing

2 March 2011 Approval of the proposal

3 April 2011 Data collection

4 June 2011 Data analysis interpretation

5 July 2011 Discussion of findings recommendations and

conclusions, print first draft

6 July 2011 Printing final copy and presentation

44

APPENDIX 3: BUDGET ESTIMATES

BUDGET ESTIMATESItem Quantity Unit cost (Ushs) Amount (Ushs)

Stationery 2 reams 12000 24000

Flash 1 35000 30000

Transport To and from Tororo 15000 per Journey

250005 days in Tororo. 5000 per day

Typing 60 page 500shs per page 30000

Photocopying 500 pages 50shs per pages 25000

Data analysis 60 questionnaire 1000shs per

questionnaire

60000

Printing 180 page 100shs per pages 18000

Binding 3 copies 6000shs per book 18000

Miscellaneous 20000

Total 250,000

45

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