Abstract
Measurement
of audit quality over the years has been treated thoroughly. The relationship
between audit tenure and audit quality is treated in this research. The
research instrument used in collecting data is the questionnaire, which is a
primary method of data collection. The analytical instrument used is the
Pearson’s correlation technique. The co-efficient observed are weak negative
(-0.149), weak positive (0.026) and weak negative (-0.059) for the three
research questions used in the study. The values are deemed to be non
significant which hold that there is no significant relationship between the
duration of auditor and the quality of financial reporting, there is no
significant difference between audit objective and ability to maintain
accountability by firms and that there is no significant relationship between
audit rotation and fraud detection. The research recommends that short audit
tenure should be discouraged and long audit tenure should be accepted which
leads to higher financial reporting quality. The research also recommends the
monitoring of audit firms by regulatory bodies to improve efficiency and
transparency in financial reporting.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication
iii
Acknowledgements iv
Table of Contents v
Abstract vii
Chapter One:
Introduction 1
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3 Research Questions 5
1.4 Objectives of the Study 6
1.5 Statement of Hypothesis 6
1.6 Significance of the Study 7
1.7 Scope of the Study 9
1.8 Limitations of the Study 10
1.9 Definition of Terms 10
Chapter Two: Review of Related Literature 12
2.1 Introduction 12
2.2 Concept of Auditing 13
2.3 Enduring principles of auditing 19
2.4 Postulate of Auditing 20
2.5 Demand and supply of audit services 21
2.5.1 Ways to
reduce information risk 25
2.5.2 Theories
on the Demand and Supply of Audit Service 25
2.6 Types of Audit 26
2.7 Advantages of Audit to Various Groups 29
2.8 Internal Audit as a Tool of Ensuring
Accountability
in an Organization 33
2.8.1 Limitation of Auditing 36
2.8.2 Functions of the
Internal Audit 37
2.8.3 The Differences Between Internal and External
Auditing 38
2.9 Auditors’ Tenure
and Perceived Credibility of
Financial Reporting
40
Chapter Three: Research Method and Design 43
3.1 Introduction 43
3.2 Research Design 43
3.3 Description of Population of the Study 43
3.4 Sample/Sampling Technique 43
3.5 Method of Data Collection 44
3.6 Method of Data Analysis 45
Chapter Four: Data Presentation, Analysis and
Interpretation 48
4.1 Data
Presentation 48
4.2 Data
Analysis 66
4.3 Hypothesis
Testing 67
4.5 Interpretation
of Test Results 69
Chapter Five: Summary, Conclusion and
Recommendations
5.1 Summary 71
5.2 Conclusion
71
5.3 Recommendations
72
References
75
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
In
the past few years, auditors had been blamed due to their role in the mega
corporate scandals such as Enron, WorldCom, Global crossing, Imclone system and
Tyco international and in Nigeria
such as Cadbury (Nig) Plc, African Petroleum (Nig) Plc. The criticism had
raised lot of questions regarding auditors’ independence, such criticism
leveled against auditors because they have be auditing their clients for a long
time and subsequently concentrated more on non-audit services rather than
audit.
The
familiarity that exists between the auditors and their clients as a result of
long audit tenure encourages failure in auditor independence. Though, there has
been a call for sweeping changes in the auditing profession to ensure
independence and therefore improved their audit quality (Palmrose, 2006).
The
term audit is derived from the Latin word ‘audire’ which means to hear. In
early days an auditor used to listen to the accounts read over by an accountant
in order to check them. It was in use in all ancient countries such as
Mesopotamia, Greece, Egypt, Rome, U.K and auditing (Ojo, 2009).
Auditing
evolved and grew rapidly after the industrial revolution in the 18th
century with the growth of the joint stock companies the ownership management
became separate. The shareholders who were the owners needed a report from an
independent expert on the accounts of the company managed by the board of
director’s who were the employees. The purpose for this is to ascertain whether
the account was true and fair rather than detection of errors and frauds
(Petersen, 2005).
With
increase in the size of companies and the volume of transaction the main
objective of audit shifted to ascertaining whether the accounts were true and
fair rather than true and correct. Hence, the emphasis was not on arithmetic
accuracy but on a fair presentation of financial reporting (Lennox, 2005).
Accounting and auditing play significant role in principal-agent relationship (i.e.
agency relationship). The agency relationship between owners and manager in a
firm creates a natural conflict of interest because of the information
asymmetry that exists between managers and the owners. This information
asymmetry means that manager generally has more information about “true”
financial position (shown by statement of financial position), and results of
operations (in a statement of comprehensive incomes) of the enterprise than the
absentee owner does. This contract relationship between the shareholders and
managers in a firm lead to the demand for firm auditing.
Auditing
has a significant effect on firms, it helps to determine whether the overall
financial statement present fairly in accordance with the established criteria,
the extent to which rules, policies, laws audit and tracing funds or assets
identification and recovery, investigating the existence, nature., extent and
identification of employee who misappropriate asset.
Long
term audit tenure has created some expectation gap this gap has led to failure
of the auditor, to carryout is duty effectively. This is due, to the fact that
the expectation of the auditors are not met because of the familiarity that
exist between the auditors and their clients, this familiarity has made the
auditors to fail in their area of independence, credibility and confidentiality
because during long term audit tenure, auditors focus on non-audit service than
audit services, and this led to many corporate scandal.
1.2
Statement of Problem
Several
studies have attempted to evaluate possible explanatory variables for the state
of audit quality. In the light of these studies, auditor tenure has become the
focus of much debate. Should a firm replace its auditor’s on a regular basis,
or should the auditor be allowed to build long-term relationship with the
client? Studies on the effect of audit tenure on the quality of financial
reporting are at polarity. A considerable number of these studies considered
the rotation of audit firm as a way improving the quality of financial
reporting. This is because familiarity with the client has the effect of
reducing the fresh point of view auditors have in the early years of
engagement. The Sarbanes-Oxley Act of 2002 consolidates this view as it
requires rotation of the lead audit partner every five years so that the
engagement can be viewed “with fresh and skeptical eyes”. The argument
basically is that longer audit tenure trends to result in an opportunity cost
of auditor independence, conversely, other studies also argue that longer
auditor tenure improve auditor quality as auditor may need time to expertise in
the business they audit and acquires client-specific knowledge overtime. This
implies that audit quality is lower during the early year of the Auditor-client
relationship, and the audit quality increases with length of the auditor-tenure
due to the reduction in information asymmetry between auditor and client.
1.3
Research Questions
The
research questions formulated from this research work are:
i. Is there any significant relationship
between the duration of auditor and the quality of financial reporting?
ii. Does audit tenure improve the quality of
financial reporting in achieving organizational objectives?
iii. Does audit objective help in maintaining accountability?
1.4 Objectives of the Study
The
main of objective of the study is to examine the effect of audit tenure on the
quality of financial reporting; others include;
i. To examine the relationship between the
duration of auditor and the quality of financial reporting.
2. To examine if audit tenure help to improve
the quality of financial reporting.
3. To determine whether audit tenure help in maintaining
accountability of financial reporting in an organization.
1.5 Statement of Hypothesis
In
order to achieve the stated objectives of this study, the following hypothesis
were formulated in null and alternative basis.
Hypothesis
1
HO:
There is no significant relationship
between the duration of auditor and the quality of financial reporting.
HI:
There is a significant relationship
between the duration of auditor and the quality of financial reporting.
Hypothesis
2
HO: There is no
significant difference between audit objective and ability to maintain
accountability by firms.
HI:
There is significant difference between
audit objective and ability to maintain accountability by firms.
Hypothesis 3
HO: There is no
significant relationship between audit rotation and fraud detection.
HI: There is significant relationship between
audit rotation and fraud detection.
1.6 Significance of the Study
This
study is relevance in all human endeavors as listed below;
i.
Academic relevance
ii.
National relevance
iii.
Accounting relevance
Academic
relevance: This research work will instill in the
students to have a general insight into the effect of audit tenure on the
quality of financial reporting, which will enable students to make useful
suggestions and contributions on topic under survey.
National
relevance: This research work is relevance to the
nation in the following ways;
a.
It will serve as a referenced point to
management awards achieving their organizational goal and objective.
b.
It will enable the investors to carry
out a check and balance between the auditors and the companies to determine the
extent to which audit tenure has influence the quality of financial reporting
for the purpose of investment decision.
c.
Since the government is also
interested in the financial statement of every company, for the purpose of
taxation, it will be relevance to the government to see how audit tenure has
influence the quality of financial reporting.
d.
It will enable the public and
researchers to make useful suggestions and contributions on the topic under
review.
Accounting
profession: This research work is relevance to the
accounting profession in the following ways.
a.
To encourage the profession to help
increase credibility to financial statement.
b.
To encourage auditor standard to
provide detailed guidance on risk factors that auditor should considered in
assessing whether financial statements may contain material misstatements
caused by fraud and irregularities.
c.
To instill into the profession, the
sense of responsibility, the essence of professionalism, independence and
confidentiality.
1.7
Scope of the study
This research work is to observe the impact of audit
tenure on quality financial reporting of auditors on quality of audit in
southern Nigeria. The researcher focus is on the qualified accountants both in
the public sector and private sector, those in the public sector shall comprise
of qualified lectures in the accounting, banking, management and economics
departments while the private sectors shall comprise of selected accredited
auditing firms in Ondo State, Edo State and Kogi State respectively.
1.8
Limitations of the study
Some
factors limit the extent and depth of this research work. These limitations
include non-availability of adequate literature and the refusal of management
to furnish some important documents/data for more detailed analysis on grounds
of confidentiality.
Again, the unavailability of textbooks that deals
on relevant areas of the study is another constraint. There were only few,
textbooks to consult in the school library and most of them are obsolete. The
researcher had to look outside the polytechnic library for relevant materials
such as journals write-up etc.
Since the research work was done during the normal
course of study, it was not possible to undertake an elaborate study.
1.9 Definition of Terms
Tenure:
The
period of time when somebody holds an important job.
Financial
statement: A structured representation of the financial
position, financial performance and cashflow of an entity.
Financial
reporting: It has to do with making financial
norms to the public and the public in return provides capital to the company
with hope of receiving further benefit.
Auditing:
Auditing
can be defined as an independent examination of the expression of opinion on a
set of financial statement by an appointed person in compliance with all
statutory obligation.
Statutory
obligation: This refers to the legal laws
governing the job, duties or rights of auditing.
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