research study was carried out to investigate the relevance of auditors
independence as a tool for achieving true and fair view of accounting records.
The specific objectives of the study were to; evaluate the factors that
influence auditors independent on audit reports, examine if auditors
independence actually helps to reduce doubt attributable to the authencity of
auditor reports, determine the impact of auditors reports in decision making
and finally to investigate if auditor are p[erforming their task in compliance
with the provision of the professional rules. In achieving these stated
objectives, data were collected from members of staff of oilbath Nigeria
Limited. The method of data enquiry employed was survey design. Data were
collected using research questionnaires from sixty (60) members of staff of the
case study while chi square analysis techniques was employed for testing
hypotheses of the study. Based on literature review and data presentation and
analysis in the previous chapter, the major findings of the study was that
effective audit practice affects organizational performance positively.
Conclusion was then drawn that auditors independent helps auditors in
performing their core objectives. The
recommendation made was that auditors and auditing organization should be
rotated by the organizations employing g their services and that organizations
management should form audit committee as an internal control measure.
of Content v
of the Study 1
of Problem 6
and Objectives of the Study 7
of the Study 8
of Study 9
of Terms 10
TWO: LITERATURE REVIEW
2.1 Preamble 12
Framework of the Study 13
2.2.1 The Policeman Theory: 13
2.2.2 The Lending Credibility Theory 13
2.2.3 The Theory of Inspired Confidence (Theory
of Rational Expectations) 14
2.2.4 Agency Theory 14
2.3 Empirical Framework: 15
of Legal Framework on Independence 15
to Independence of Auditor 18
to Independence of Auditor 22
Importance of Auditor’s Independence 25
Weakness of the CAMA 26
Regulation on Independence 27
2.3.8 Audit Committee: Functions, Purpose And
Relation With Auditor’s
Audit Committee and the Future of Independence 30
Error And Irregularity 32
Extent Of Auditor’s Investigation And Liability
THREE: RESEARCH METHODOLOGY
3.1 Preamble 42
of the Study 42
Procedure and Sample Size 43
Collection Instrument and Validation 43
of Data Analysis 44
of the Methodology 46
FOUR: DATA ANALYSIS AND INTERPRETATION
Presentation and Analysis of Data
According to Research Question 48
of Research Hypothesis 57
Test of Hypothesis 57
Discussion of Major Findings 58
4.6 Conclusion 59
FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
of Findings 60
5.2 Conclusion 60
5.3 Recommendation 61
1.1 BACKGROUND OF THE STUDY
is fundamental to the reliability of auditor’s reports. Those reports would not
be credible, and investors and creditors would have little confidence in them
if auditors were not independent in both fact and appearance. To be credible,
an auditor’s opinion must be based on an objective and disinterested assessment
of whether the financial statements are presented fairly in conformity with
generally accepted accounting principles.
expressed by council of American Institute of Certified Public Accountants
(AICPA) in a statement adopted in 1947: independence both historically and
philosophically, is the foundation of the public accounting profession and upon
its maintenance depends the strength and its stature.
1932, AICPA council considered prohibitions against auditors serving as
officers or directors of clients, and rejected them as unnecessary. However,
the proposal indicated the first concerns over a need to preserve the
importance of maintaining objectivity, as well as being independent in fact.
term audit is derived from the Latin verb “Audre” which means “to hear”. The
origin of audit dates from ancient time when the land owners allowed tenant
farmers to work on their lands while the land owner themselves did not become
involved in the business of farming. The landlords relied upon an overseer who
listened to the accounting of stewardship given by the tenants.
has been defined by various auditors over the years from different
perspectives. However, the one that was given by International Auditing (IAG)
will be considered for this research project. This guideline was issued by the
International Federation of Accounting Committee (IFAC). The definition view
auditing as “An independent examination of the expression of an opinion on the
financial statement of an enterprise by an appointed auditor, in accordance
with his term of engagement and the observance of statutory regulations and
definition stated by the International Federation of Accounting Committee
(IFAC) exposes some vital features which are expedient for a comprehensive
knowledge of auditing via;
Expression of professional opinion
Term of engagement
Statutory and professional
definition clarifies that an auditor has to be independent of the management
who is responsible for the preparation of (financial statement, and he must be
responsible to the owners who receive and utilize the reports). He must also be
independent of government agencies or other groups who have contact with the
auditor, in his report does not state that the financial statement show a true
and fair view but he can however say that in his opinion, the financial
statement show a true and fair view. If the auditor is known to be independent,
his opinion will be relied upon by the shareholders and creditors.
auditor needs to agree in writing the price scope of the work to be undertaken
before commencing any audit assignment. This is done through the medium of
engagement letter. An auditor complies with statutory regulations and
professional requirements. Nigeria perspective of an auditor is that of one who
is a chartered accountant, who is a member of a recognized professional body
such as ICAN, ACCA and so on. His activities are guided by statutes for example
CAMD 1990, ICAN Act 1965 and so on, and pronouncement of relevant professional
auditor is required to be independent from the entity it audits. The
independence requirement applying to auditors are legally enforceable and are
located within some legislations and standards. Therefore, the auditor should
be an independent person who is appointed to investigate financial activities
of an organization. This may include its records and the financial statements
prepared by the management. The auditor would need a degree of independence to
be able to carry out all the expectations of the shareholders and other
interested parties in the business or organization. An opinion by an
independent public accountant as to the fairness of a company’s financial
statement is of no value unless the accountant is truly independent. Moreover,
they often serve as financial advisers and consultant to management.
independence can be defined as a reference to the independence of internal or
external auditors from parties that might have financial interest in the
business being audited.
Independence of mind: The state of mind that permits the provision of an
opinion without being affected by influences that compromise professional
judgement, allowing an individual to act with integrity, and exercise
objectivity and professional scepticism.
Independence in appearance: The avoidance of facts and circumstances that are
so significant that a reasonable and informed third party, having knowledge of
all relevant information, including safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance team’s, integrity, objectivity
or professional scepticism had been compromised.
use of the word “independence” on its own may create misunderstandings.
Standing alone, the word may lead observers to suppose that a person exercising
professional judgement ought to be free from all economic, financial and other
relationships. This is impossible, as every member of society has relationships
with others. Therefore, the significance of economic, financial and other
relationships should also be evaluated in the light of what a reasonable and
informed third party having knowledge of all relevant information would
reasonably conclude to be unacceptable.
section 220 of the American Institute of Certified Public Accountants (AICPA)
states that for auditor’s independence the auditor “must be without bias with
respect to the client since otherwise he [or she) would lack that impartiality
necessary for the dependability of his [or her] findings, however excellent his
[or her) technical proficiency may be.”
International Federation of Accountants Committee (IFAC) provides a framework
of principles that members of assurance teams, firms and network firms should
use to identify threats to independence, evaluate the significance of those
threats, and, if the threats are other than clearly insignificant, identify and
apply safeguards to eliminate the threats or reduce them to an acceptable
level, such that independence of mind and independence in appearance are not
situations when no safeguards are available to reduce the threat to an
acceptable level, the only possible actions are to eliminate the activities or
interest creating the threat, or to refuse to accept or continue the assurance
to Fagbohungbe (1993), if an auditor is dependent, then the essence of his
appointment is completely lost. The credibility gap mat that created the need
for auditing in the first place will continue to exist; consequently, his
report will be unreliable.
the independence of the auditor is a major attribute that enables him to ensure
accountability. Auditor’s independence is important because it has an impact on
the audit quality. DeAngelo (1981b) suggests that audit quality is defined as
the probability that the auditor will uncover the breach and report the breach.
If the auditor does not remain independent, auditor will be less likely to
report the irregularities and hence, the audit quality will be impaired. Since
the independence of the auditor is a critical issue for the auditing
profession, many studies have been performed in this area.
importance involves the degree of auditors being economically dependent on the
client. When providing service to the client, an audit firm receives
remuneration from the client, resulting in auditors being financially bonded to
the client (DeAngelo, 198Ia). If the client constitutes a relatively large part
of an auditor’s portfolio, an auditor has an incentive to retain the client to
warrant a future source of revenues and profits and therefore, to compromise
independence and act in favor of the client (Blay, 2005).
services can also adversely affect auditor’s independence. When the external
auditors provide non-audit service to the client, they receive more income,
which may result in greater economic dependence, as discussed earlier.
Furthermore, the joint provision of audit and non-audit services by the same
auditor may cause conflict of interest since he may become less skeptical in
reviewing his own work.
tenure can lead to impairment of independence. As the auditor-client
relationship lengthens, the auditor may develop close relationship with the
client and become more likely to act in favor of management, resulting in
reduced objectivity and audit quality.
affiliation with CPA firms involves the situation where part of the client’s
personnel used to work for the current auditor. The affiliation can cause
impairment of independence from personal relationship between the client’s
officer and the auditor or the ex-auditor’s acquaintance and circumvention of
the audit methodology (Lennox, 2005).
1.2 STATEMENT OF PROBLEM
primary objective underlying the dependence of the auditor is to obtain and
sustain the confidence of users of financial information in the audit report.
Financial information users in Nigeria have over the years relied on the
auditors’ reports alongside other sources of information to take financial
decision. Their opinion on the financial statement of their client company is
very important to users of accounting information.
the recent distortion and misleading report in the financial reports of most
companies have indicated that the auditors are not enjoying the independence
that will make them present the real problem of such companies to the outside
world, the reason upon which this research work is based.
many accounting records presented to shareholders and interested parties in the
report of a company have not been prepared to show the true and fair state of
1.3 AIM AND OBJECTIVES OF THE STUDY
major purpose of this study is to examine auditor’s independence and how it
will achieve true and fair view of accounting records within Qilbath Nigeria
Ltd, a business terrain in Nigeria. In achieving this, other derivation
objectives are considered and will serve as guidance for the study, they
evaluate the variables that influence auditor’s independence on the audit work.
examine if auditor’s independence has actually reduced the doubt attributable
to authenticity of the auditor’s report.
determine the impact of auditor’s report in decision to be made and to make
recommendations based on the findings of this study.
investigate if auditors are performing their tasks in compliance with the
provision of the professional rules.
1.4 RESEARCH QUESTIONS
achieving the purpose of this study, the following research questions are put
forward in the quest for answers to the problem being investigated.
auditor’s independence improve the reliance that shareholders, creditors, among
others have about an audit report?
auditors always operate within the framework of accounting standards and other
an auditor be allowed to participate in the establishment of effective auditing
system in an organization?
could statutory regulations and professional requirements disrupt the smooth
implementation of the audit work?
the law strong enough to protect the independence of auditors in order to be
able to carry out legitimate functions?
1.5 RESEARCH HYPOTHESIS
following research hypotheses are tested at 0.05 level of significance;
H0: Auditor’s independence will assist the auditors in forming their
H1: Auditor’s independence will not assist the auditors in forming
their audit report.
1.6 SCOPE OF THE STUDY
research work attempts to give insight into auditor’s independence and see it
as the only tool for achieving true and fair view of accounting records. It
will examine the meaning of independence, the class of independence and their
various advantages and also the statutory and professional regulations that
ensure auditor’s independence together with their appointment, removal,
liabilities and duties.
the research topic is one which will cover a wide area and aspect to the
development of accounting and auditing profession, but as it will not be
convenient to visit all audit firms in the country as to know their opinion on
this issue due to time and cost constraint, the study is only limited to
Oilbath Nigeria Limited and chartered accountants in Lagos state.
1.7 SIGNIFICANCE OF STUDY
study will bring increase in investment from the shareholders because the
financial reports so presented to them could be relied upon. This research work
will change the orientation of the general public especially the shareholders
as to their dependability on the accounts audited by an independent auditor.
work will also seek to make known areas where auditors need much assistance and
full backing of the law in the discharge of their duties.
study will also give vital information to those aspiring to be auditors as regard
their appointment, remuneration, removal and independence in the various
organization set ups and parastals they find themselves. The possible outcome
of the study will reduce the chance of conspiracy, fraud and misappropriation
of shareholders’ funds and also embezzlement can be minimized where there is a
qualified independent auditor to cover document.
1.8 DEFINITION OF TERMS
a detailed list of everything that a person or company earns or spend.
somebody who checks accounts or conducts the audit of an organization.
freedom from dependence on or control by another person or organization.
Blay, A. D. 2005. Independence threats,
litigation risk, and the auditor’s decision process. Contemporary Accounting
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Casterella, J. R., J. R. Francis, B. L.
Lewis, and P. L. Walker. Auditor industry specialization, client bargaining
power, and audit pricing. Auditing: A Journal of Practice and Theory 23 (1):
DeAngelo, L. E. 1981b. Auditor size and
audit quality. Journal of Accounting and Economics 3: 183-199
Gaynor, L. M., L. S. McDaniel, and T. L.
Neal. 2006. The effects of joint provision and disclosure of non-audit services
on audit committee members’ decisions and investors’ preferences. The
Accounting Review 81(4): 873-896
Lennox, C. 2005. Audit quality and
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Economics 39: 201-23