EFFECTS OF COMPANY ATTRIBUTES ON AUDIT QUALITY - Project Topics & Materials - Gross Archive
EFFECTS OF COMPANY ATTRIBUTES ON AUDIT QUALITY
ABSTRACT The study investigates the effects of company attributes on audit quality. A regression model was used to analyse the existence of significant relationship or otherwise between the dependent and independent variables. The ordinary least regression methodology was utilized in analyzing the specified model.
Audit quality has a significant and positive relationship with board independence, while firm size was also found to be significantly, but inversely related to audit quality. Both ownership structure and audit committee independence were found to exhibit a positive, albeit non-significant relationship with audit quality. The study concluded that the results of the study have significant implications for company regulators and researchers in Nigeria. The results signify the importance of board independence in enhancing the overall quality of the audit.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study- - -
1.2 Statement of the Research Problem- - -
1.3 Objectives of the Study- - -
1.4 Research Hypothesis - - - -
1.5 Scope of the Study - - - -
1.6 Significance of the Study - - -
1.7 Limitations of the Study - -
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - -
2.2 Conceptual Framework Audit Quality -
2.3 Theoretical Framework - - - -
CHAPTER THREE: METHODOLOGY
3.1 Introduction- - - - - -
3.2 Research Design - - -
3.3 Population and Sampling - - -
3.4 Source of Data - - - -
3.5 Measurement of Variables- - - -
3.6 Model Specification and Data Analysis Method - -
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction - - - - - - - -
4.2 Descriptive analysis - - - -
4.3 Correlation analysis - - - -
4.4 regression analysis - - - -
4.5 Test of Hypotheses - - - -
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction - - - - -
5.2 Summary of Findings -
5.3 Conclusion - - - -
5.4 Recommendations - -
Bibliography- -
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
It has been argued by a large number of researchers in the field of study that the fundamental reason of an audit assignment is to create a quality report. The point here is on 'quality report", thus, it is assumed that the most important part of this research is the creation of a quality report; accomplished through strict adherence to the standards of high audit quality (Enofe, Mgbame, Aderin & Ehi-Oshio, 2013). DeAngelo (1981) defines “audit quality as the market-assessed joint probability that a given auditor will both detect material misstatements in the client’s financial statements and report the material misstatements”. DeAngelo (1981) theorized a two-dimensional definition of audit quality that has set the standard for addressing the issue. First, a material misstatement must be noticed, and second, the material misstatement must be reported. Audit quality as such is the increasing function of the ability of an auditor to detect accounting misstatements and is related to the degree of auditor independence. This measure looks upon the broad concept of an auditor’s professional conduct which factors objectivity, due professionalism and conflict of interest (Mgbame, Eragbhe & Osazuwa. 2012).
Alleyne & Howard (2005) propose that a good auditor provides precise information involving the firm’s value. Because the purpose of an audit is to provide assurance as regards the financial statements. Audit quality is defined by Weber; Willenborg & Zhang (2008) as the probability that financial statements contain no material misstatements. Onwuchukwu; Erah; & Izedonmi. (2012) define “audit quality as the ability of the auditor to detect and eliminate material misstatements and manipulations in the earnings reported”. Chang; Dasgupta & Hilary (2009) noted that a good-quality auditor will always detect any misreporting, so its clients announced earnings are the same as its true earnings. Similarly, Gui, Lynn & Tsui (2002) define audit quality as the auditor’s ability to detect and eliminate errors and manipulations in reported earnings. Chan & Wong (2002) noted that audit quality, though unobservable, affects the probability of the successful detection of discrepancies between the firms’ favourable report and the true quality of the project. The implicit common link in all these statement is the auditor’s ability to satisfy their professional obligation is to find material misstatements through the execution of the audit process. The characteristics of audit quality are unquantifiable and have lead to the use of different proxies by researchers to measure it like: audit size, audit hours, audit fees, corporate reputation, board independence and discretionary accruals. Auditors generally perceive audit quality in terms of strict adherence to GAAS/ISA requirements. Auditors of a company would endeavor to avoid audit failure through the reduction of their business risk by minimizing audited dissatisfaction, limiting the damage to their reputation and avoiding litigation (Nagy, 2005). The demise of Arthur Andersen in 2002 is an example of the ultimate result of audit failure. Corporate scandals like Enron's fiasco and Andersen collapse confirmed a requirement for high audit-quality and drew considerable attention to various factors that may have effect on audit quality. High audit quality refers to the production of financial information without misstatements, omissions or biases. From an agency theory perspective, Dang (2004) argues that audited financial statements are a monitoring mechanism to provide assurance for users of financial information. In essence, auditing is used to give investors the needed assurance in an audited financial statements. More precisely, the function of auditing is to reduce information asymmetry on accounting numbers and to lessen the residual loss resulting from managers’ opportunism in financial reporting (Adeyemi & Fagbemi, 2010). Effective and perceived qualities (usually designated as apparent quality) are essential for auditing to produce advantageous effects as a monitoring device. Although so many different proxies have been used, Lennox (1999) believed that most researchers generally agree that auditor independence and size are appropriate indicators of audit quality.
It is therefore, based on these tenets, that this study aims to analyze the relationship between company attributes and audit quality. Having established that the contribution of the auditor to the business environment is basically through the production of a quality report, the study investigates the factors that could influence the achievement of high audit quality and determine the existence of relationships and correlation among these factors.
1.2 Statement of the Research Problem
Hypothetically the auditor is relied upon to be independent of the administration staff of the organization being audited. The creation of a quality audit report is seen to cultivate induced trust in the financial reports by the users of those reports. Investors specifically tend to place better trust in financial statements that are audited as the normal autonomy of the examiner supports the confirmation that significant investment choices can be made on the push of those statements (Hsieh 2011). The increased certainty of these set of financial information users has a tendency to draw in capital which has a positive long-term impact on development and advancement in the business environment.
However, inefficiencies on the part of management could lead to creative accounting,then the resulting financial statements would not be a true reflection of the financial position of the organization hence,any plans based on these statements would not yield the expected results. Poor results on investment would lessen the validity of the financial statements; resulting in a reduction in the level of capital flow,which would have adverse effects on the state of the business environment (Cook & Omer 2012).The onus in this way lays on the auditors to address these issues through proficient and viable execution of the audit assignment, and the resultant generation of a quality report. The study in this manner explores the variables that could influence the nature of the audit assignment, and examine the presence and level of connectedness between these elements and the achievement of high audit quality. Moizer (1997) noted that the appraisal of the indices used in measuring the quality of the audit service is not without its challenges since audit quality is typically unobservable (as cited in Francis 2004). According to Hay & Knechel (2010), “auditing could be categorized as a type of credence good and hence auditors add credibility to corporate financial reports by expressing an opinion about the true and fair representation but only in so far as the user of financial statements perceive that opinion as valuable”. In such manner Hardies, Breesch & Branson (2010) argued that audit quality is not just about auditor competence and independence but also involves the perception of the market about the value of the auditor’s report which is the result of the perceived competence and independence of the auditor. Hence we can say that audit quality refers to the credibility of the audit opinion which is a measurement of the degree of confidence users place upon the information provided by the auditor . In any case, the non quantitative nature of audit quality as a variable has required the presence of plenty of intermediaries and markers for its estimation (Cohen & Hanno, 2000).
A few studies (Francis 2004, Geiger & Raghunandan 2002) measure audit quality with audit or reporting failure in view of the thought that audit quality is inversely related to audit or reporting failure. Different studies (Nagy. 2005, Myers & Omer. 2003) utilized income as a surrogate for audit quality. The underlying supposition is that high audit quality suggests high income quality (Johnson, Khurana & Reynolds, 2002). Researchers have utilized discretionary accruals as a surrogate for audit quality (DeChow, Sloan, & Sweeney 1996). Krishman & Schauer (2000) noted that audit quality is measured by the penchant of the auditor to issue a going concern opinion subsequent to controlling for different variables that may influence this choice.
All of the divergences with regards to the appropriate measure of audit quality may be seen to reflect the need by researches to monitor and provide indices amenable to control so as to make inferences on the audit quality, as the need to monitor necessarily should be preceded by the ability to appropriately define the concept. Subsequently, studies have endeavored to distinguish conceivable control variables for the state of audit quality. In light of these studies, there are clashing discoveries which this examination endeavours to give observational proof from Nigeria utilizing the engagement of the Big-4 audit firms as a variance for audit quality, and exploring the different outcomes when compared with those of former studies. The following research questions are addressed to.
1. What is the relationship between audit committee independence and audit quality in Nigeria?
2. What is the relationship between firm size and audit quality in Nigeria?
3. What is the relationship between board independence and audit quality in Nigeria?
• What is the relationship between ownership structure and audit
quality in Nigeria?
1.3 Objectives of the Study
The broad objective of the study is to investigate the relationship between company attributes and audit quality in Nigeria. The particular goals of the studies are to:
1. evaluate the relationship between audit committee independence and audit quality in Nigeria;
2. investigate the relationship between firms size and audit quality in Nigeria;
3. analyse the relationship between board independence and audit quality in Nigeria and
4. examine the relationship between ownership structure and audit quality in Nigeria.
1.4 Research Hypothesis
The following null hypotheses are tested for the study:
H1: There is no significant relationship between audit committee independence and audit quality in Nigeria.
H2: There is no significant relationship between firm size and audit quality in Nigeria.
H3: There is no significant relationship between board independence and audit quality in Nigeria.
H4. There is no significant relationship between ownership structure and
audit quality in Nigeria.
1.5 Scope of the Study
The study means to research the relationship between company attributes (which for the purpose of this study includes firm size, audit committee independence, board structure and ownership structure) and audit quality. The study will concentrate on 57 organizations cited on the Nigerian Stock Exchange, and will cut crosswise over different businesses. Therefore the study is a pool that will cover from 2008-2013.
1.6 Significance of the Study
The study aims to provide additional insights into the relationship between company attributes and audit quality in the Nigerian context. It is hoped that the evidence would serve as important quantitative information for policy formulation, as well as add to the existing body of empirical literature from a developing stock exchange such as that of Nigeria.
Investors see audited financial statement to be more helpful in making economic decisions. The audited nature of financial statement has however, failed to revise the syndrome of failing organisations. A comprehension of the factors that impinge on audit quality is therefore important for investors and stakeholders alike. It is also hoped that the research will contribute to existing knowledge and act as a guide for future researchers.
1.7 Limitations of the Study
A study of this nature cannot be carried out, without some form of constraints militating against it. These constraints do not only make it execution of the research work difficult, but also limit the scope of study. The difficulty to be encountered in the use of secondary data in this research is the sureness of reliability. The choice of the sample (to be attained through the use of random sampling); despite its representativeness of the population can not be expected to produce exactly the same results as the entire population. Also due to availability of data, the scope of the research is limited to public companies listed on the Nigerian Stock Exchange. It is likewise trusted that the examination will add to existing knowledge and go about as an aide for future research.
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