DETERMINANTS OF AUDIT FEE IN THE MANUFACTURING COMPANIES
As the economy is growing, there is the need to evaluate the determinant of audit fees in Nigeria manufacturing company. This project work was carried out with the use of relevant journals, magazines, textbooks and the internet. This helped to increase the scope of the researchers knowledge of the topic under study. Furthermore, to facilitate further research work, questionnaires were administrated among staff. Interviews were also conducted among key officials and this gave a balance view of all parties involved. Regression test was used to analyze and compare the various variable involved. The project work was concluded with summary, recommendation, bibliography and appendix.
TABLE OF CONTENT
Introduction - - - -
1.1 Background Study - - -
1.2 Statement of Research question - - -
1.3 Statement of Research Objective -
1.4 Statement of Hypothesis - - - -
1.5 Relevance of the Study - - -
1.6 Scope of the Study - - -
1.7 Limitation of the Study - - -
18 Operational Definition of Terms -
References - - - - -
2.0 Literature Review -
2.1 Introduction - - - -
2.2 Corporate Complexity - - -
2.3 Corporate Risk - - -
2.4 Audit Risk - - - -
2.5 Audit Firm Size and Earnings Management - -
2.6 Client Firm Size - - -
2.7 Audit Fee - - - -
2.8 Abnormal Audit Fees and Audit Quality -
3.1 Introduction - -
3.2 Research Design - - - - -
3.3 Population - - - - -
3.4 Sample Size - - - - -
3.5 Sampling Techniques - - -
3.6 Source of Data - - - - -
3.7 Method of Data Collection - -
3.8 Development of Research Instrument - - -
3.9 Method of Data Analysis -
3.10 Regression Theory - - - -
4.0 Data Presentation and Analysis - - -
4.1 Introduction - - - -
4.2 Data Presentation - - - - -
4.3 Data Analysis - - - -
5.1 Introduction - - - -
5.2 Summary - - - - - -
5.3 Conclusion - - - - - -
5.4 Recommendations - - - -
Bibliography - - -
Appendix I - - - - -
Appendix II - - - -
BACKGROUND TO THE STUDY
This study is important as it provides, for the first time, evidence on the determinants of audit fees in Nigeria. The choice of Nigeria is for a number of reasons. Since the early work on the pricing of audit services by Simunic (1980), substantial progress has been made in understanding the factors which determine audit fees. In the light of past financial scandals, regulators around the world have passed stricter laws to ensure appropriate financial reporting and audit quality. The newly created and widely debated Public Company Accounting Oversight Board (PCAOB) has implemented a system of periodic independent inspections of audit firms in the U.S. The purpose of these inspections is to improve audit quality (U.S. Congress, 2002).
Whether this can be achieved depends on the extent to which the inspection process triggers changes in auditor behavior. While findings of prior studies mainly relate to changes in financial reporting quality (Carcello et al., 2008) or total audit fees at the audit firm level (Lennox, 2009), this study is the first to examine the impact of inspections on audit fees at the client level, more specifically, using fees as a measure of effort and investigate to what extent inspections cause a change in auditor effort, provided that inspector’s and investor’s quality standards are aligned, increase in auditor effort indicate improvements in audit quality. The insights obtained help to evaluate the costs and benefits of the inspection process. They can be useful to regulators and oversight bodies in setting guidelines regarding the future development of auditor review systems and the implementation of newly established systems in other countries.
The PCAOB inspection process generates a publicly visible report that contains information about each audit firm. Discovered audit deficiencies can lead to a change in the auditor’s incentive structure for two reasons. First, an auditor’s reputation can be harmed, and second, regulatory sanctions and penalties can follow.
Especially in the face of fee pressure, audit firms are tempted to provide low cost audits which forces auditors to cut back on audit effort. I expect fee pressure to be higher for clients with a low demand for audit quality as they use fees as the main selection criterion. Also, competition leads to fee pressure, provided that audit firms have difficulties differentiating themselves based on audit quality ex-ante (Fiolleau et al., 2009). In both cases, firms are pressured to offer a low fee in the bidding process to obtain engagements and the auditor sees himself forced to cut back on audit procedures to stay within the planned audit cost. Hence, the likelihood of providing insufficient audit effort increases. Accordingly, effort adjustments are expected to be largest in those settings of high fee pressure. Audit firms have certain flexibility in adjusting effort due to excess capacity, shifts from non-public clients, hiring of new employees, and more work done by existing team members. Given the assumption that the market for audit services is competitive, adjustments in audit effort are reflected in audit fees.
To what extent deficiencies mentioned in the inspection report present a sufficient incentive for the auditor to adjust effort is uncertain for several reasons. First of all, there has been extensive criticism of the inspectors’ technical and in-depth expertise (Glover et al., 2009). It takes an extended period of time before the inspection results get published (Offermanns and Peek, 2010), the identity of the inspected clients remain unknown, and the high quality Big4 audit firms have repeatedly received deficient inspection reports in the US. Thus, the inspection result is unlikely to be perceived as signal of an audit firm’s overall audit quality. Also, it is uncertain to what extent the PCAOB will use its discretion in imposing sanctions on audit firms. If the pressure of the PCAOB is sufficiently large, audit effort and fees are expected to rise for clients of deficient firms, and particularly under conditions of high pre-inspection fee pressure.
STATEMENT OF RESEARCH PROBLEMS
The services rendered by auditors are obviously not for free the remuneration for these services is popularly known as audit fee. Determining the actual amount of total remuneration given to these auditors is a very difficult task, hence, this research seeks to answer the following research questions.
What is the relationship between audit size and audit fee?
What is the relationship between audit complexity and audit fee?
What is the relationship between audit risk and audit fee?
OBJECTIVES OF THE RESEARCH STUDY
The primary aim of this study is to determine the factors that affect audit fee among listed companies in the Nigerian Stock Exchange. This aim is further classified into the following objectives:
To examine the effect of audit size on audit fee among firms.
To examine the effect of audit risk and audit fee.
To examine the effect of audit complexity on audit fee.
This study intends to find answers to the following questions:
What is the relationship between Nigeria manufacturing company and the determinant factors of audit fees?
STATEMENT OF RESEARCH OBJECTIVE
This study aims at finding out the determinant factors of audit fees and its relationship to Nigeria manufacturing companies. To this end this research objective was arrived at:
To find out the relationship between Nigeria manufacturing companies and audit firm status.
To find out the relationship between Nigeria manufacturing companies and audit risk.
To find out the relationship between Nigeria manufacturing companies and competitiveness of the market for audit services.
1.4 STATEMENT OF HYPOTHESIS
H0 There is no positive relationship between Nigeria manufacturing companies and audit firm status.
H1 There is a positive relationship between Nigeria manufacturing companies and audit firm status.
H0 There is no positive relationship between Nigeria manufacturing companies and audit risk.
H1 There is a positive relationship between Nigeria manufacturing companies and audit risk.
H0 There is no positive relationship between Nigeria manufacturing companies and competitiveness of the market for audit services.
H1 There is a positive relationship between Nigeria manufacturing companies and competitiveness of the market for audit services.
RELEVANCE OF THE STUDY
This study aims not only to add knowledge of users of the audited bank financial statements, but also to increase the knowledge of the external auditors on how significant their reports are to users.
Others that are benefiting are:
The internal and external auditors
Analyst and other researchers
SCOPE OF THE STUDY
This research work will cover the manufacturing companies within Benin City, Edo State as this will be my sample size.
LIMITATION OF THE STUDY
The limitation of this study is the difficulty in getting materials as the relevant journals that was needed have to be paid for before downloading. Financial limitation therefore was one of my setbacks.
OPERATIONAL DEFINITION OF TERMS
AUDIT: According to Clifton (1990) is the examination of the financial statements of an entity by an independent third party.
AUDITOR: According to Wikipedia (2008) is any person who examines accounting data and then forms an opinion as to the reliability of the data
PCAOB: Public Company Accounting Oversight Board
Carcello, J. V., Hollingsworth, C. & Mastrolia, S. (2008). The effect of PCAOB Inspections on Big4 Audit Quality. Working Paper University of Tennessee, 4(1): 1 – 24.
Fiolleau, K., Hoang, K., Jamal, K. & Sunder, S. (2009). Engaging Auditors: Field Investigation of a Courtship. Journal of Accounting and Management, 1(3): 14 – 30.
Glover, S. M., Prawitt, D. F. & Taylor, M. H. (2009). Audit Standard Setting and Inspection for U.S. Public Companies: A Critical Assessment and Recommendations for Fundamental Change. Accounting Horizons, 23(2): 221-237.
Lennox, C. (2009). PCAOB Inspections of Small Audit Firms and Audit Quality, Working Paper Hong Kong University of Science and Technology, 4(4): 12 – 26.
Offermanns, M. & Peek, E. (2010), Market Reactions to PCAOB Inspection Reports - Working Paper, 16(7) 34 – 51.
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