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Project Topic:

AUDITOR’S INDEPENDENCE; A TOOL FOR ACHIEVING TRUE AND FAIR VIEW OF ACCOUNTING RECORDS

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 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 56 ::   Attributes: Questionnaire, Data Analysis ::   365 people found this useful

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ABSTRACT

This 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.


 

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Independence 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.

As 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.

In 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.

The 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.

Auditing 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 professional requirements”.

The definition stated by the International Federation of Accounting Committee (IFAC) exposes some vital features which are expedient for a comprehensive knowledge of auditing via;

(a)       Independent

(b)       Expression of professional opinion

(c)       Term of engagement

(d)       Statutory and professional requirements.

The 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 business.

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.

An 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 bodies.

An 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.

Auditor’s 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 requires:

- 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.

The 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.

AU 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.”

The 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 compromised.

In 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 engagement

According 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.

Hence, 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.

Client 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).

Non-audit 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.

Auditor 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.

Client’s 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

The 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.

However, 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.

Relatively, 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 accounting records.

1.3       AIM AND OBJECTIVES OF THE STUDY

The 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 include:

(1)       To evaluate the variables that influence auditor’s independence on the audit work.

(2)      To examine if auditor’s independence has actually reduced the doubt attributable to authenticity of the auditor’s report.

(3)       To determine the impact of auditor’s report in decision to be made and to make recommendations based on the findings of this study.

(4)       To investigate if auditors are performing their tasks in compliance with the provision of the professional rules.

1.4       RESEARCH QUESTIONS

In achieving the purpose of this study, the following research questions are put forward in the quest for answers to the problem being investigated.

1.         Can auditor’s independence improve the reliance that shareholders, creditors, among others have about an audit report?

2.         Do auditors always operate within the framework of accounting standards and other regulations?

3.         Can an auditor be allowed to participate in the establishment of effective auditing system in an organization?

4.         How could statutory regulations and professional requirements disrupt the smooth implementation of the audit work?

5.         Is the law strong enough to protect the independence of auditors in order to be able to carry out legitimate functions?

1.5       RESEARCH HYPOTHESIS

The following research hypotheses are tested at 0.05 level of                         significance;

H0:      Auditor’s independence will assist the auditors in forming their audit report.

H1:      Auditor’s independence will not assist the auditors in forming their audit report.

1.6       SCOPE OF THE STUDY

This 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.

Although 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

This 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.

This 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.

The 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

ACCOUNTS; a detailed list of everything that a person or company       earns or spend.

AUDITOR; somebody who checks accounts or conducts the audit of an organization.

INDEPENDENCE; freedom from dependence on or control by another person or organization.

REFERENCE

Blay, A. D. 2005. Independence threats, litigation risk, and the auditor’s decision process. Contemporary Accounting Research 22 (4): 759-789

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): 123-140

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 executive officers’ affiliations with CPA firms. Journal of Accounting and Economics 39: 201-23


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Paper Information

Format:ms word
Chapter:1-5
Pages:56
Attribute:Questionnaire, Data Analysis
Price:₦3,000
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