USES AND PERCEPTION OF AUDIT REPORTS IN NIGERIA
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of Research Problems
Objectives of the Study
Statement of Research Hypothesis
Scope of the Study
Significance of the Study
Limitations of the Study
CHAPTER TWO: REVIEW OF RELATED LITERATURE
Audit of Financial Statements
Benefits of Auditing
The Auditors Report
Audit Failure- Causes and Effects
The Audit Expectation Gap
CHAPTER THREE: METHODOLOGY
The Population and Sample
Source of Data
The Research Instrument
Operationalization Of Variables
Model Specification And Analysis Plan
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Test of Hypotheses
Discussion of Findings
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
“Accounting information about a business entity is required by a variety of users” (SAS 2). This need dictates the fundamental objectives of accounting and the mode of reporting information. Firms, organizations and enterprises carry on business activities in a given economic, social and political environment and there is public interest in their operations. This information is the product of the firm’s accounting system and is the source of information contained in the financial statements. Due to the public interest in the operations of the enterprise, the, information expected to be provided in the financial statements are those that are qualitative and quantitative in nature to aid the users in making informed decisions.
Managements of publicly owned enterprises have a responsibility to periodically issue financial statements addressing the enterprises’ current position and past operating performance. Since users of these financial reports rarely, if ever, have an opportunity to check on their accuracy, an independent person (known as an external auditor) is often retained to form and express an opinion on the fairness of managements presentations. The auditor reviews the company’s internal control procedures to assure the accounting system is producing reliable information. Prior research demonstrates that the expression of an opinion by the external auditor makes the user of the financial statement associate an absolute level of assurance when they read such messages, often resulting in naïve and unreasonable expectations (Epstein & Geiger 1994).
However, in reality, the auditor only provides a reasonable level of assurance as opposed to absolute assurance due to inherent audit limitations (Gay, Schelluch & Baines, 1998). Also financial statements users often assume audits to have a broader scope than they actually have. For instance they believe that the expression of an opinion by the auditor is a guarantee for the absence of fraud and a recommendation to invest in the respective firm ( Frank, Lowe & Smith, 2001). This difference between what users expect and what the external auditor actually provides is what is known as the expectation gap.
Also, due to some factors such as illiteracy, it has been discovered that users find financial disclosures inadequate to satisfy their needs, some prior studies have also found that users understanding of the intended message of the auditors report was inadequate (Fess & Ziegler 1977; Epstein 1978). Also in recent times, the integrity of the audited financial statement has been questioned and management has been accused of succumbing to environmental pressures and engaging in what is known as “creative accounting” whereby financial statements are doctored to look attractive in order to attract capital(mostly in the case of joint stock companies) and also to gain other advantages such as tax holidays. Widespread attention has also been brought to the practice of earning management by Arthur Levitt (past SEC Chairman, United States) (Levitt, 1998). Hence, auditor independence has been called into question.
In Nigeria, public confidence in the financial statement provided by public companies has taken a downward plunge due to fraudulent practices by management. In the past year, there has been a shake up in the banking Industry and these scandals have been linked to corporate disclosures. This resulted in auditors and the accounting profession in general to be subjected to scrutiny and the integrity of the accounting profession in Nigeria has been called into question. This is due to the fact that these misleading financial reports presented by the affected banks were approved by certified auditors.
This study is concerned with investigating the uses and perception of audit reports in Nigeria.
STATEMENT OF RESEARCH PROBLEMS
Questionable accounting practices/disclosures and the fall of large publicly held companies like Enron, Global Crossing, and WorldCom have shaken public confidence in the auditing profession. Further, the integrity of public accountants and the profession’s effectiveness through self-regulation to protect user interests has been questioned. To address these public concerns and to counter future corporate scandals and restore investor confidence, the Sarbanes-Oxley Act was signed into law in July 2002, which establishes the Public Company Accounting Oversight Board (PCAOB) to regulate auditors of public companies in the United States and also the ISA 700 in the Netherlands.
This study attempts to find answers to the following questions:
To what extent do users have confidence in audit?
Can the auditor be influenced to produce misleading reports?
Do users believe that the auditors’ report enhances the credibility of audit reports?
OBJECTIVES OF THE STUDY
In consideration of the questions that have been raised, the objectives of the study include:
To determine the extent to which users have confidence in audit reports.
To find out if the auditor can be influenced to produce misleading reports.
To verify if users believe that the auditors’ report enhances the credibility of audit reports.
STATEMENT OF RESEARCH HYPOTHESIS
In order to study users perception of audited financial statements and ascertain the needs of users of financial statements the following hypotheses will be tested:
H0 (Null Hypothesis): Users do not have confidence in audit reports in Nigeria.
H1 (Alternative Hypothesis): Users have confidence in audit reports in Nigeria.
H0: The auditor cannot be influenced to produce misleading reports.
H1: The auditor can be influenced to produce misleading reports.
H0: Users do not believe that the auditors’ report enhances the credibility of audit reports.
H1: Users believe that the auditors’ report enhances the credibility of audit reports.
SCOPE OF THE STUDY
This research work is an empirical study to investigate the uses and perception of audit reports in Nigeria.
The population of the study is the entire audit report users in Nigeria, while the sample size is selected audit reports users in Benin City, Edo State.
The length of period covered by the study was five (5) years (2007 – 2011).
Geographically, the study is specifically restricted to Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
This study will be useful to the government (i.e. agencies and parastatals), the Securities and Exchange Commission, The Central Bank of Nigeria and other regulators of the financial system of Nigeria, accountants, financial analysts, investors, students and the general public.
This research work will also be important to regulatory bodies such as the Nigerian Accounting Standards Board (NASB), as it will help to determine the adequacy of existing disclosures as regards users needs. It will aid in identifying additional disclosures (if any) to be included in the annual accounts.
This study will also be of significance to the auditor in the sense that it will make available information for the auditor in order to ascertain the extent to which it objectives are being met. This study will also be useful to financial analysts because with knowledge of the abilities and irritations, they will be able to perform their duties more effectively.
Finally, this study will be of immense significance to the accounting profession and is also relevant to students of accounts and other finance related courses as it can form the basis for further research.
LIMITATIONS OF THE STUDY
Although users of financial statements are numerous and cut across the general public, due to the huge costs involved in studying the perceptions of all category of users, this study was limited to only investors in Benin-city.
And also due to time constraints, it will not be possible to cover all categories of users alongside academic activities. The return of questionnaires distributed may not be one hundred percent complete due to non response for reason or the other by some respondents.
Butler, S. A., Ward, B. and Zimbelman, M. F. (2010) ‘An exploration of differences in auditors’ and users’ perceptions of key terms used to define auditors’ responsibilities’, Int. J. Accounting, Auditing and Performance Evaluation, Vol. 6, No. 1, pp.80–107. An exploration of differences in auditors’ and users’ perceptions
Epstein, M. J. (1978) Corporate Shareholders view of the Auditors Report. AICPA Committee or Auditors Responsibilities. New York, NY: AICPA.
Epstein, M. J., and M. A. Geiger. (1994) Investor Views of Audit Assurance: Recent Evidence of the Expectation Gap. Journal of Accountancy 177(1): 60 – 66.
Fess, P. E., and R. E. Zeigler. (1997) Readership of the Audit Report. The CPA Journal (June): 5 – 6.
Frank, K. E., D. J. Lowe, and J. K. Smith. (2001) The Expectation Gap: Perceptual Differences between Auditors, Jurors and Students. Managerial Auditing Journal 16(3): 145 – 149.
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