COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
CHAPTERS: Chapter 1-5
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The independence of auditors is critical to the dependability of their reports. If auditors were not independent in both fact and appearance, those reports would be untrustworthy, and investors and creditors would have little faith in them. An auditor’s opinion must be based on an objective and disinterested assessment of whether the financial statements are presented fairly in accordance with widely accepted accounting principles in order for it to be trustworthy.
As stated by the American Institute of Certified Public Accountants (AICPA) council in a 1947 statement: “Independence, both historically and philosophically, is the cornerstone of the public accounting profession, and its strength and stature are dependent on its maintenance.”
The AICPA council examined and rejected limitations against accountants serving as officers or directors of clients in 1932. However, the plan raised the initial worries about the need of maintaining impartiality as well as independence in fact.
The word audit comes from the Latin verb audre, which meaning “to hear.” Auditing stems back to ancient times when landowners allowed tenant farmers to labor on their grounds while not being involved in the farming business themselves. The landlords depended on an overseer who listened to the tenants’ stewardship accounting.
Diverse auditors have characterized auditing from various angles over the years. However, the one provided by International Auditing (IAG) will be taken into account for this research endeavor. The International Federation of Accounting Committee issued this guideline (IFAC). According to the definition, auditing is “an independent evaluation of an appointed auditor’s expression of an opinion on an enterprise’s financial statements in line with his term of engagement and the fulfillment of legislative regulations and professional requirements.”
The International Federation of Accounting Committee’s (IFAC) definition reveals certain critical aspects that are useful for a thorough understanding of auditing: (a) independence (b) expression of professional opinion (c) term of engagement (d) statutory and professional obligations.
The definition specifies that an auditor must be independent of the management responsible for the compilation of financial statements (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 parties with whom the business has communication.
The auditor does not assert in his report that the financial statements are honest and fair, but he can state that the financial statements are true and fair in his opinion. The shareholders and creditors will rely on the auditor’s advice if he is known to be independent.
Before beginning any audit assignment, an auditor must agree in writing on the pricing scope of the work to be performed. This is accomplished through the use of an engagement letter. An auditor follows statutory regulations as well as professional standards. An auditor in Nigeria is one who is a chartered accountant and a member of a recognized professional body such as ICAN, ACCA, and so on. His operations are guided by statutes such as CAMD 1990, the ICAN Act 1965, and other relevant professional groups’ pronouncements.
An auditor must be independent of the entity being audited. The independence requirement for auditors is legally enforceable and is found in several statutes and regulations. As a result, the auditor should be an independent individual appointed to investigate an organization’s financial activity. This includes its records as well as the financial statements prepared by management. To fulfill all of the expectations of the shareholders and other interested parties in the firm or organization, the auditor would need to be independent. An assessment on the fairness of a company’s financial statements by an independent public accountant is worthless unless the accountant is actually independent. Furthermore, they frequently work as financial advisers and management consultants.
Auditor independence refers to the independence of internal or external auditors from parties with a financial interest in the firm being audited.
Independence necessitates: – Mind independence: The state of mind that allows an individual to provide an opinion without being influenced by influences that undermine professional judgment, allowing an individual to behave with integrity, impartiality, and professional skepticism.
– Appearance of independence: The avoidance of facts and circumstances so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards used, would reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity, or professional skepticism had been compromised.
The use of the term “independence” alone may lead to misunderstandings. Standing alone, the term may lead spectators to believe that a professional judge should be free of any economic, financial, and other links. This is impossible since every member of society interacts with others. As a result, the importance of economic, financial, and other links should be assessed in light of what a reasonable and informed third party with all relevant information would reasonably determine to be undesirable.
The American Institute of Certified Public Accountants (AICPA) states in AU section 220 that an auditor “must be without bias with respect to the client because otherwise he [or she] would lack that impartiality necessary for the dependability of his [or her] findings, regardless of how 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 not clearly insignificant, identify and apply safeguards to eliminate or reduce the threats to an acceptable level, so that mental independence and physical independence are not compromised.
When there are no protections available to lower the threat to an acceptable level, the only options are to discontinue the activities or interests that are causing the concern, or to decline to accept or continue the assurance engagement.
According to Fagbohungbe (1993), if an auditor is dependant, the purpose of his position is gone. The credibility deficit that prompted the need for auditing in the first place will persist, making his report untrustworthy.
As a result, the auditor’s independence is a critical characteristic that enables him to ensure accountability. The independence of auditors is significant because it affects audit quality. According to DeAngelo (1981b), audit quality is defined as the likelihood that the auditor will discover and disclose the violation. If the auditor is not independent, he or she is less likely to report problems, and so the audit quality suffers. Many research have been conducted in this area since auditor independence is a crucial problem for the auditing profession.
Client significance refers to the extent to which auditors are financially dependent on the client. An audit business receives remuneration from the client for providing services to the customer, resulting in auditors being financially bound to the client (DeAngelo, 198Ia). If a client accounts for a sizable portion of an auditor’s portfolio, the auditor has a motive to keep the client in order to ensure a future source of revenue and profits, and therefore to compromise independence and act in favor of the client (Blay, 2005).
Non-audit services might potentially have a negative impact on an auditor’s independence. When external auditors give non-audit services to clients, they earn more money, which may lead to increasing economic reliance, as previously discussed. Furthermore, providing audit and non-audit services by the same auditor may result in a conflict of interest since he may become less cautious in examining his own work.
Auditor tenure might result in diminished independence. As the auditor-client relationship grows longer, the auditor may have a close relationship with the client and become more prone to act in favor of management, resulting in decreased objectivity and audit quality.
Client affiliation with CPA firms refers to the situation in which a portion of the client’s workforce previously worked for the current auditor. The affiliation can damage independence due to a personal relationship between the client’s officer and the auditor or an acquaintance of the ex-auditor, as well as circumvention of the audit process (Lennox, 2005).
1.2 STATEMENT OF PROBLEM
The basic goal of the auditor’s reliance is to gain and maintain the trust of users of financial information in the audit report. Over the years, financial information users in Nigeria have relied on auditors’ reports, along with other sources of information, to make financial decisions. Their assessment of their client’s financial statements is critical for users of accounting information.
However, recent distortion and misleading reports in most companies’ financial reports have indicated that auditors do not have the independence to present the true problem of such companies to the outside world, which is the reason for this research work.
Many accounting records presented to shareholders and interested parties in a company’s report have not been prepared to demonstrate 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 the effect of auditor’s independence on achieving true and fair view of accounting records within First bank Plc, a business terrain in Nigeria. Specifically, the study aims:
(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 SCOPE OF THE STUDY
This research endeavors to provide insight into auditor independence, which is viewed as the only tool for attaining an accurate and fair perspective of accounting data. It will investigate the definition of independence, the types of independence and their varied benefits, as well as the statutory and professional regulations that ensure auditor independence, as well as their appointment, dismissal, liabilities, and obligations.
Although the research topic is one that will cover a wide area and aspect to the development of the accounting and auditing profession, due to time and cost constraints, it will not be feasible to visit all audit firms in the country to learn their opinion on this issue, so the study is only limited to First bank Plc and chartered accountants in Lagos state.
1.6 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.