Fega Project One

AUDITING PRACTICE IN NIGERIA AND CORPORATE
FINANCIAL REPORTING
BY
OTOMEWO OGHENEFEGA
CSM/15/16/1635
DEPARTMENT OF ACCOUNTING
COLLEGE OF SOCIAL AND MANAGEMENT SCIENCE
WESTERN DELTA UNIVERSITY
OGHARA, DELTA STATE
AUGUST, 2019
AUDITING PRACTICE IN NIGERIA AND CORPORATE FINANCIAL
REPORTING
BY
OTOMEWO OGHENEFEGA
CSM/15/16/1635
A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING,

COLLEGE OF SOCIAL AND MANAGEMENT SCIENCE, WESTERN
DELTA UNIVERSITY, OGHARA, DELTA STATE.
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD

OF BACHELOR OF SCIENCE DEGREE (B.S HONS) IN ACCOUNTING
AUGUST, 2019
i
APPROVAL PAGE
This is to certify that this project topic “Auditing Practice in Nigeria and Corporate Financial
Reporting a Case Study First Bank of Nigeria” has been approved by Department of Accounting,
Western Delta University, Oghara, Delta State.
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MRS. EJIRO EJUVWIKOKO DATE

(Project Supervisor)
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MR. M. S. MAMUDU DATE
(Project Coordinator)
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MR. A. O. GARUBA DATE
(Head of Department)
ii
DECLARATION
I, Otomewo Oghenefega with matriculation number CSM/15/16/1635 hereby declare that the project
work I have submitted for evaluation for the award Bachelor of Science in accounting was carried out
by me and that all sources and materials used in this project work have been cited and properly referenced
according to western delta university standard.
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OTOMEWO OGHENEFEGA DATE
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CERTIFICATION
This is to certify that this project was carried out by Otomewo Oghenefega with matriculation number
CSM/15/16/1635 and supervised by Mrs. Ejiro Ejuvwikoko in the Department of Accounting, Western
Delta University, Oghara, Delta State, Nigeria.
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MRS. EJIRO EJUVWIKOKO DATE

(Project Supervisor)
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Mr. A. O. GARUBA DATE

(Head of Department)
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EXTERNAL EXAMINER DATE
iv
DEDICATION
I dedicate this project to God Almighty my creator, my strong pillar, my source of inspiration,
wisdom, knowledge and understanding, He has been the source of my strength throughout this
program and on his wings only have I soared.
v
ACKNOWLEDGEMENT
My foremost and profound gratitude goes to the Almighty God for sparing my life and seeing
me through this program.
I am very grateful to my project supervisor Mrs. Ejiro Ejuvwikoko for her invaluable assistance
despite the nature of her tight schedules and unavoidable responsibilities. Her time, energy and
useful advice rendered to the source of this project.
I am also very grateful to my mother Mrs. Justina Otomewo for her infinite love and support
through the period of this program.
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ABSTRACT
Corporate financial report auditing is a monitoring mechanism that helps reduce information
asymmetry and protect the interests of the principals, specifically, stockholders and potential
stockholders, by providing reasonable assurance that management’s corporate financial
reports are free from material misstatements. This study investigated the impact auditing
practice in Nigeria and corporate financial reporting using a study of selected First Bank of
Nigeria. The specific objectives involved ascertaining the relationship between internal control
system and corporate financial reporting, examining the relationship between audit committee
and corporate financial reporting and examining the relationship between auditor’s
independence and corporate financial reporting. The study employed a qualitative research
design and questionnaires were used as instrument for data collection. The population of the
study constituted of 50 person made up of 10 employees of studied area. Simple percentage
analysis method was used to analyze the data retrieved from the administered questionnaire
and the chi-square statistical test method was employed in testing the research hypothesis
respectively. The result of the findings revealed that internal control system, audit committee
and auditor’s independence have a positive significant effect on corporate financial reporting.
The study recommended that rotation of auditors should be sustained which will help improve
the quality of corporate financial reporting
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TABLE OF CONTENTS
TITLE PAGE……………………………………………………………………………..……I
APPROVAL PAGE...……………………………………………………………..……....…. II
DECLARATION……………………………………………………………………….....…. III
CERTIFICATION............................................................................................................….....IV
DEDICATION..................................................................................................................….....V
ACKNOWLEDGEMENT……………………………………………………….…………...VI
ABSTRACT…………………………………………………………………….…………...VII
TABLE OF CONTENTS………….…………………………………………..……………VIII
LIST OF TABLES……………………………………………………………………..…...XIII
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY .................................................................................... 1
1.2 STATEMENT OF THE PROBLEM ................................................................................... 4
1.3 RESEARCH QUESTIONS .................................................................................................. 5
1.4 AIM AND OBJECTIVES OF THE STUDY ....................................................................... 5
1.5 RESEARCH HYPOTHESIS ................................................................................................ 6
1.6 SCOPE OF THE STUDY .................................................................................................... 6
1.7 SIGNIFICANCE OF THE STUDY ..................................................................................... 6
1.8 DEFINITION OF TERMS ................................................................................................... 7
CHAPTER TWO
LITERATURE REVIEW
2.1 AUDITING PRACTICE ...................................................................................................... 9
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2.1.1 Audit Committee ............................................................................................................. 10
2.1.1.1 Audit Committee Size .................................................................................................. 12
2.1.1.2 Audit Committee Meetings .......................................................................................... 13
2.1.1.3 Audit Committee Financial Expertise .......................................................................... 14
2.1.1.4 Audit Committee Effectiveness.................................................................................... 16
2.1.2 Auditors Independence .................................................................................................... 17
2.1.2.1 Factor Impinging on Auditor Independence ................................................................ 18
2.1.3 Factors Affecting Audit Quality ...................................................................................... 20
2.1.3.1 Financial Literacy of Audit Committee Members ....................................................... 20
2.1.3.2 Frequency of Audit Committee Meetings .................................................................... 21
2.1.3.3 Multiple Directorship of Audit Committee Members .................................................. 22
2.1.3.4 Independence of Audit Committee............................................................................... 22
2.1.3.5 Audit Firm Tenure ........................................................................................................ 23
2.1.4 Internal Control System................................................................................................... 23
2.1.4.1 Types of Internal Control ............................................................................................. 24
2.1.4.2 Control Environment .................................................................................................... 25
2.1.4.3 Control Activities ......................................................................................................... 25
2.1.4.4 Risk Assessment ........................................................................................................... 26
2.1.4.5 Information and Communication ................................................................................. 26
2.1.4.6 Monitoring .................................................................................................................... 27
2.1.5 Internal Audit .................................................................................................................. 28
2.1.6 Internal Audit Effectiveness ............................................................................................ 28
2.1.7 Internal Audit Performance ............................................................................................. 30
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2.1.8 Internal Control System Viewed As an Aid to Effective Audit ...................................... 31
2.1.9 The Importance of Audit ................................................................................................. 32
2.1.10 Audit Challenges and Financial Reporting In Nigeria .................................................. 33
2.2 CONCEPTUAL FRAMEWORK OF CORPORATE FINANCIAL REPORTING .......... 34
2.2.1 Corporate Financial Reporting ........................................................................................ 34
2.2.1.1 Statement of Comprehensive Income........................................................................... 35
2.2.1.2 Statement of Cash Flow ............................................................................................... 35
2.2.1.3 Statement of Change in Equity ..................................................................................... 37
2.2.2 Corporate Financial Reporting Legal Framework ........................................................... 37
2.2.3 Goals and Objectives of Corporate Financial Reporting................................................. 38
2.2.4 Importance of Corporate Financial Reporting................................................................. 39
2.3 AUDITING PRACTICE AND CORPORATE FINANCIAL REPORTING .................... 40
2.3.1 Internal Control and Corporate Financial Reporting ....................................................... 41
2.3.2 Audit Committee and Corporate Financial Reporting .................................................... 42
2.3.3 Auditors Independence and Corporate Financial Reporting ........................................... 43
2.4 THEORETICAL FRAMEWORK ..................................................................................... 45
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION .............................................................................................................. 49
3.2 RESEARCH DESIGN ....................................................................................................... 49
3.3 AREA OF STUDY ............................................................................................................. 49
3.4 POPULATION OF THE STUDY ...................................................................................... 50
3.5 SAMPLE AND SAMPLING TECHNIQUES ................................................................... 50
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3.6 PILOT TESTING ............................................................................................................... 51
3.6.1 Procedure of Data Administration ................................................................................... 51
3.6.2 Rating and Measure of Scales ......................................................................................... 51
3.7 INSTRUMENT OF DATA COLLECTION ...................................................................... 52
3.8 METHOD OF DATA ANALYSIS .................................................................................... 52
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 INTRODUCTION .............................................................................................................. 53
4.2 DATA PRESENTATION, ANALYSIS AND INTERPRETATION ................................ 53
4.2.1 Ascertain if there is a Relationship between Internal Control System and Corporate
Financial Reporting Via First Bank Nigeria Plc ...................................................................... 57
4.2.2 Examine if there is a Significant Relationship between Audit Committee and Corporate
Financial Reporting .................................................................................................................. 60
4.2.3 Examine the Relationship between Auditor’s Independence and Corporate Financial
Reporting .................................................................................................................................. 63
4.3 TESTING OF HYPOTHESIS ............................................................................................ 67
4.3.1 Hypothesis One: Relationship between Internal Control System and Corporate Financial
Reporting .................................................................................................................................. 68
4.3.2 Hypothesis Two: Relationship between Audit Committee and Corporate Financial
Reporting .................................................................................................................................. 70
4.3.3 Hypothesis Three: Relationship between Auditor’s Independence and Corporate Financial
Reporting .................................................................................................................................. 72
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CHAPTER FIVE
CONCLUSION, FINDINGS AND RECOMMENDATIONS
5.1 CONCLUSION .................................................................................................................. 75
5.2 FINDINGS ......................................................................................................................... 75
5.3 RECOMMENDATION...................................................................................................... 76
REFERENCES ......................................................................................................................... 77
APPENDIX I ............................................................................................................................ 86
APPENDIX II............................................................................................................................89
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LIST OF TABLES
Table 3.1: Population analysis of the study..............................................................................50
Table 4.1: Distribution of Questionnaires to Employees...........................................................53
Table 4.2: Sex of the Respondents............................................................................................54
Table 4.3: Age of Respondent...................................................................................................54
Table 4.4: Martial Status of Respondents..................................................................................55
Table 4.5: Educational level: which one is your highest qualification?.....................................55
Table 4.6: Years of Experience: How long have you been working in to implement its function?
...................................................................................................................................................56
Table 4.7: Maintenance of weak Internal Control System by Management Affect the Quality
of Financial Reporting...............................................................................................................57
Table 4.8: Do Improper Review of the Effectiveness of your Company’s System of Accounting
and Internal Control Affect the Quality of Financial Reporting?..............................................58
Table 4.9: Lack of good Internal Control Policies Affects the Quality of Corporate Financial
Report and makes the Report less Reliable.................................................................................58
Table 4.10: Most Companies do not have strong Internal Control and Accounting System
because of less Qualified and Inexperienced Staffs, hence the Low Quality of Financial
Report........................................................................................................................................59
Table 4.11: Audit Committee Characteristics Affect Different Aspect of Corporate Financial
Reporting...................................................................................................................................60
Table 4.12: Audit Reports has gained more Confidence as a Result of Reports from Audit
Committee thereby making Financial Reporting Reliable.........................................................61
Table 4.13: The Appointment of the External Auditor is influenced by the Audit Committee
and this have a positive impact on Financial Reporting.............................................................62
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Table 4.14: The Presence of a Financial Expert in the Audit Committee helps to strengthen the
Effectiveness and Efficiency of the Committee and this have a Positive Impact on Financial
Reporting...................................................................................................................................62
Table 4.15: Undue Influence by Boards of Directors and Management on External Auditors
Affects the Quality of Financial Reporting...............................................................................63
Table 4.16: Non-Provision of Independent Guidance in the Auditing Profession for External
Auditors Affects the Quality of Financial Reporting..................................................................64
Table 4.17: Compromise by Auditors Affect the Quality of Corporate Financial Reporting
Negatively.................................................................................................................................65
Table 4.18: Lack of Experience by Auditors and Inappropriate Timing in Reporting Financial
Statement makes Corporate Financial Reporting Irrelevant.......................................................66
Table 4.19: Average value table Hypothesis One.....................................................................68
Table 4.20: Calculating Chi-square Value Hypothesis One....................................................68
Table 4.21: Average value table Hypothesis Two....................................................................70
Table 4.22: Calculating Chi-square Value Hypothesis Two....................................................70
Table 4.23: Average value table Hypothesis Three.................................................................72
Table 4.24: Calculating Chi-square Value Hypothesis Three...................................................72
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0
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The concept of corporate financial reporting has gained much significant due to the diversification,
growth and increasing competition of organizations thereby playing an important role in developing
and enhancing the global economy and business firms. Corporate financial reporting involves
disclosure of a company, business firm or organization financial information to various users of
accounting information to make an investment decision, obtaining credit facilities, and other
financing decisions. Furthermore, most financial reports in Nigeria are governed by regulations and
standards from various recognized financial organization. Financial reports are often prepared
according to national standards, corporate governance and professional ethics to avoid financial
reporting fraud and scandals that might hinder effective decision making process by management
and other users of financial reports. Financial report comprises of balance sheet (now called
statement of changes in financial position), profit and loss statement (now called statement of
comprehensive income), statement of equity changes (Statement of changes in equity, the
company’s equity), and cash flow statements (now referred to as statement of cash flow activities).
For a financial report not to be ambiguous, auditing is carried out.
Auditing practice can be traced to as far back as the inception of accounting (Ajao, Olamide, &
Temitope, 2018). This was as a result of the need to check the accounting reports and activities that
have been reported to increase the reliability and assurance placed on the reports. Auditing is an
integral part of the accounting sector guided by standards to ensure the accounting body is effective
and efficient (Fagbemi, Segun, Uadiale, & Uwuigbe, 2017).
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Auditing practice plays an important role in maintaining an efficient market environment; an
independent quality audit underpins confidence in the credibility and integrity of corporate financial
reports which is essential for well-functioning markets and enhanced financial performance (Farouk
& Hassan, 2014). Auditing of corporate financial reports serves as a control mechanism for
shrinking information unevenness and safeguarding interests of the differing claimants by ensuring
that the audited financial reports are free from contents misstatements (Falola, Tams-Alasia, &
Udochukwu, 2018). Auditor’s help to reduce the perils of significant misstatement by ensuring
financial reports are prepared according to preset standards. Lower perils on misstatement intensify
confidence in stock markets, which in turn lowers the cost of capital for firms (Jibrin, Blessing, &
Danjuma, 2016).
Corporate financial reporting is aided by auditing stem from the fact that a lot of person’s requires
corporate financial reports for different legitimacy and enhance companies’ images. Lack of proper
audit or carelessness on the part of the auditors in auditing financial statement of companies, have
led to investors making wrong decision, as well as closure of companies, who otherwise were
thought to be doing well such as Enron in the United State, WorldCom and Lehman Brothers in the
US as well as some companies and banks in Nigeria (Imeokparia, 2016). Corporate financial
reporting is a communication of relevant qualitative and quantitative information. Management is
entrusted with the legal responsibility of preparing and communicating such relevant information
to the users.
Developments in corporate businesses all over the world since the dramatic collapse of the Enron
Corporation, an American company, in 2001, and the subsequent dissolution of Arthur Andersen,
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which was then one of the Big five audit and accountancy partnerships in the world, have put
accounting and auditing profession under scrutiny. In addition to being the largest corporate failure
in history, Bratton (2002) remarks that Enron was attributed as the biggest audit failure at the time.
Coming closely on the heels of the scandal at Enron was the sudden collapse in 2002 of WorldCom,
another American company in telecommunication industry with over 107 billion US dollars in
assets. Each of these corporate scandals was directly linked to accounting and auditing
misinformation and failure. The foregoing developments and the global financial and economic
crunch have resulted in increased attention to improve and enforce corporate financial reporting
worldwide in order to reform the global economy. Nigeria has taking steps to align all corporate
financial reports to the International Financial Reporting Standards (IFRSs) as a means of
enhancing full disclosure and strengthening stakeholder confidence. The Nigerian Stock Exchange
(NSE) had directed all companies that are listed on the exchange to adopt the IFRSs as at December
2011 while the Central Bank of Nigeria had directed Nigerian banks to adopt the IFRSs as at
December 2010 (Madawaki, 2016).
In Nigeria major cases of similar financial and accounting scandal include the collapse of the
banking sector with 26 banks liquidated in 1997 and the falsification of the company financial
statements in Cadbury Nigeria Plc. in 2006 and the more recent post consolidation banking crises
of 2009 in Nigeria when 10 banks were declared insolvent and 8 executive management teams of
the banks removed by the CBN. All of these events had their deep impacts on the psyche of
stakeholders (loss of employment for thousands of employees and loss of value or total investment
to shareholders and other creditors). In all of these scandals, the central issues are the availability
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and reliability of accounting information and the need to review the effectiveness of accounting
standards, auditing processes and financial reporting practices. (Amao & Amaeshi, 2015).
1.2 STATEMENT OF THE PROBLEM
The issue of efficient corporate financial reporting and auditing practice has become topical in the
last two decades. A series of financial scandals that happened both at national and international
level have raised a lot of questions on the capacity of auditing firms and corporate financial
reporting globally. However, one of the major issues that are of concern in the public domain has
been the incessant problems that have be devilled the major firms in Nigeria. In recent times,
financial crime has become more pervasive and the probability of corporate fraud occurring has
become more severe. These aspects of business failure have put greater responsibility on financial
experts particularly auditors to improve their capability in order to identify at the right time the
symptoms and fraud so as to nip in the bud any case of corporate failure.
In Nigeria, it is important to note that the regulatory agencies have responded by compelling
companies to comply with stringent corporate governance codes to ensure sound and efficient
financial reporting in Nigeria. Despite the interventions of the regulatory authorities, the challenges
of ensuring credibility in financial reporting and auditing are still prevalent. It therefore becomes
pertinent to investigate corporate financial reporting and auditing practice in Nigeria.
4
1.3 RESEARCH QUESTIONS
The following research questions are asked by the researcher as a guide in the choice of data.
i. What is the relationship between internal control system and corporate financial
reporting?
ii. What is the relationship between audit committee and corporate financial reporting?
iii. What is the relationship between auditor’s independence and corporate financial
reporting?
1.4 AIM AND OBJECTIVES OF THE STUDY
The study is aimed at understanding and identifying the impact of auditing practice in Nigeria and
corporate financial reporting. The study is set to achieve the following highlighted objectives;
i. Ascertain if there is a relationship between internal control system and corporate
financial reporting.
ii. Examine if there is a significant relationship between audit committee and corporate
iii. Examine the relationship between auditor’s independence and corporate financial
reporting.
5
1.5 RESEARCH HYPOTHESIS
i. Hypothesis One
(Ho): There is no significant relationship between internal control system and corporate
ii. Hypothesis Two
(Ho): There is no significant relationship between audit committee and corporate
iii. Hypothesis Three
(Ho): There is no significant relationship between auditor’s independence and
corporate financial reporting.
1.6 SCOPE OF THE STUDY
This research work is an empirical study of auditing practice in Nigeria and corporate financial
reporting a case study First Bank of Nigeria. The population of the study is Nigeria, while the
sample are some selected branches of First Bank of Nigeria in Sapele Government Area and Uviwe
Local Government Area of Delta State. The targeted audience of this study are the employees of
First Bank of Nigeria. This study is centered on assessing the impact of audit practice on corporate
financial reporting quality in Nigeria.
1.7 SIGNIFICANCE OF THE STUDY
The financial scandals and corporate failures are proven to have had a detrimental effect on the
public’s perception of audit. Audit quality has a significant impact on accounting firms and indeed
has the power to destroy the quality of financial reporting as a whole. This study is significant in
6
providing empirical evidence that could ensure the credibility and integrity of accounting and
auditing profession with regards to its practice on improving corporate financial reporting in
Nigeria. The study is significant to accountants and auditors, Managers, Regulators and Standard
Setters, Potential and Existing Investors and Researchers.
1.8 DEFINITION OF TERMS
i. Corporate Financial Reporting: This is a system of communication between the
management and the user-groups of the financial statements; in order to report the results
of the business activities of a corporate enterprise and also to demonstrate the credibility,
accountability and reliability of its work
ii. Auditing: This is the process of examining an organizations (or individual’s) financial
records to determine if they are accurate and I accordance with any applicable rules,
regulations and laws.
iii. Internal control: This is a process for assuring achievement of an organization’s
objectives in operational effectiveness and efficiency.
iv. Auditors: An auditor is a person or a firm appointed by a company to execute an audit.
To act as an auditor, a person should be certified by the regulatory authority of
accounting and auditing.
v. Audit committee: an audit committee is the section of an organization’s board of
directors that is in charge of monitoring an organization’s financial reporting and
authenticating its accuracy.
vi. Internal auditing: this is an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operation. It helps an organization
7
accomplish its objective by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control and governance processes.
vii. External auditing: This a process whereby an external auditor performs an audit, in
accordance with specific laws or rules, of the financial statements of a company,
government, entity, other legal entity, or organization, and is independent of the entity
being audited.
viii. Management: This refers to the top official in the organization, they are often
responsible for ensuring quality financial statement in quoted organizations.
ix. Organization: This refers to a group of people who come together to make profit, they
usually have a singular objective and purpose.
x. Investors: These are individuals who make their daily leaving by investing in the stock
market.
xi. Financial Scandal: These are fraudulent occurrences in the financial world, caused by
lapses in the management and other regulatory agencies in charge of quoted
organizations.
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CHAPTER TWO
LITERATURE REVIEW
2.1 AUDITING PRACTICE
Auditing practices is one of the key sub-components of public financial management aimed at
delivering of services to the citizens. Siswana (2014) define an audit as an independent, objective
assurance activity designed to add value and improve an organization’s operations. On the other
hand, McKenna (2016) posits that auditing could be defined as a systematic and independent
examination of data, statements, records, operations, performances, financial or otherwise of an
enterprise for a stated purpose. Jordaan (2013) also clarifies that, in any auditing, the auditor
perceives and recognizes the propositions before him or her for examination, collects evidence,
evaluates the same and on this basis, formulates his/her judgment which is communicated through
an audit report. Morin (2016) explains further that, quality auditing should not only report non-
conformance and corrective actions but should also highlight areas of good practice and evidence
of conformance. In this way, other departments may share the information and amend their working
practices. As a result, Goddard & Malagila (2015) argue that continuous improvement should be
enhanced as it helps an organization accomplishes its objectives by bringing a systematic,
disciplined approach to assess and improve the effectiveness of risk management, control and
governance processes.
Emphasizing the relevance and importance of auditing, Lee & Johnson (2010) provide that auditing
has a role to ensure that public finances are not subject to fraud, waste and abuse or subject to error
in reporting. Opportunities for dishonesty and waste or poor management of funds may occur when
financial reports cannot be verified (Salem, 2014). In view of the fact that the public sector’s success
9
is measured by its ability to deliver successfully, and carry out programs in an equitable and
appropriate manner, Ferry & Eckersley (2015) argue that public sector audit activities should have
the authority and the competency to evaluate financial and program compliance, effectiveness,
economy and efficiency. Further, auditors must also protect the core values of the public sector, as
it serves all citizens.
Athmay (2014) using New Public Management (NPM) approach notes that auditing has brought
some significant changes in the meaning of public sector accountability. For example, Athamy
observes the prevalence of traditional regularity and financial forms of auditing which focus on
compliance with laid down procedures. According to Asare (2012) public auditing is still grappling
with the questions of financial control and compliance with rules and regulations. Likewise, Unegbu
& Kida (2011), note that compliance auditing has remained the dominant form, despite the statutory
provision for performance auditing.
2.1.1 Audit Committee
The popularity of this concept in literature can be traced to the American Institute of Certified
Public Accountants (AICPA), who in 1967 recommended the establishment of audit committee
boards in order to assist with reporting process. More so, bodies such as the Tread Way
Commission, Blue Ribbon committees, US Security and Exchange Commission, cannot be left out
in the discourse on the development of audit committees (BRC 1999, Treadway Commission 1987).
According to Abbott, Parker, & Peters (2002) and Lin, Li, & Yang (2014) the recommendations of
the Blue Ribbon Committee of 1999 was aimed at strengthening the effectiveness of audit
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committees (AC) as it relates to quality reporting and since then, studies have emerged that try to
investigate the effectiveness of audit committees. Enofe, Mgbame, Osa-Erhabor, & Ehiorobo
(2016) also noted that the historic development of audit committees can be seen from two broad
periods: a period of obligatory establishment of audit committees (before 1978) and a period of
mandatory establishment (after 1978). Audit committee can be described as a corporate governance
mechanism (Li, Mangena, & Pike, 2017), an arm of the board of directors saddled with
responsibility of ensuring quality reporting by performing oversight functions of the activities of
management and external auditors as well as help mitigate the agency problem between ma-
nagement and owners (Dhaliwal, Naiker, & Navissi, 2013). Nnadi (2011) describes it as (audit
committee) a company committee that should foster the independence of the external auditor. Thus,
the presence of the audit committee should engender quality and independent reporting. The
Sarbanes Oxley Act of 2002 defines it as a committee established by the board of directors to
oversee the processes involved in accounting and auditing of company financials. According to Li,
Mangena, & Pike (2017) the audit committee can be used as an effective tool to ensure quality-
reporting process. However, if this must be achieved, audit committees must possess some
characteristics such as independence, frequent meetings, and financial expert as resource persons
(Li, Mangena, & Pike, 2017).
In Nigeria audit committees are created in accordance to the provision of Companies and Allied
Matters Decree, CAMD ‘90 (CAMA 2004). Section 359 (3) states, inter alia, ‘the auditor shall in
the case of a public company, also make a report to an audit committees which shall be established
by the public company’. According to Sub-Section 4 of the above Section, the committees shall
consist of equal number of directors and representatives of the shareholders of the company (subject
11
to a maximum number of 6 members), and shall examine the auditor’s report and make
recommendation therein to the Annual General Meeting (AGM) as it may think fit, provided
however, that such member of the Audit committee shall not be entitled to any remuneration and
shall be subject to re-election annually.
From the above, the intact of the statute in establishing Audit committees could be summarized as:
i. To enable directors and shareholders be aware of important transaction carried out by
management.
ii. To enable external auditors alert management where problem exists.
iii. To enable directors to take their statutory responsibilities seriously.
iv. To control the activities of dominant executives.
2.1.1.1 Audit Committee Size
By audit committee size, in the context of this study is described as the number of persons that
make up the committee. Regulatory bodies such as the Companies and Allied Matters Act (2004 as
amended) and the Security and Exchange Commission code of corporate governance of 2011 have
specified the number of persons that should be on the audit committee board. Specifically, the Act
stipulates that audit committees must be six (6) in number and should be made up of equal numbers
of directors and shareholders representatives S359 (4). For a committee to function properly, it is
expected to have adequate manpower hence, the size criteria. Several studies such as (Bedard,
Chtourou, & Courteau, 2014; Olubukunola, Uwuigbe, F, & Omankhanlen, 2016; Uwuigbe,
Uwuigbe, Ebeguki, Jinadu, & Otekunrin, 2016) have examined the relationship between the size of
audit committees and audit quality.
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Lin, Li, & Yang (2014) observed that a committee with at least 4 members has a significant negative
relationship with earnings restatement. However, a thorough analysis from a theoretical point of
view, the theory of critical mass as stated earlier supports the claim that a minimum number
(persons in this case) is required to cause a chain reaction (audit quality, in this case). Thus, the
theory did not provide any criteria to determine what that number is. Therefore, if regulations
specify a particular number, what informed this and what will be the expected outcome? It is noted
that this size criteria differs across countries. For example, while in Nigeria, a specific number (6)
is expected, in the US, Lin, Li, & Yang (2014) noted that the US SEC specified a minimum of 4
members while in the UK, a minimum of 3 members is specified.
2.1.1.2 Audit Committee Meetings
With respect to the recommendations of the Blue Ribbon Committee, Audit committees are
expected to meet regularly in order to be effective in the discharge of its oversight functions
(Abbott, Parker, & Peters, 2002). Casual empirics suggests that a group or committee that meets
regularly is expected to outperform a group or committee that does not, since it is expected to have
more time to deliberate and take decisions. Bryan, Liv, & Tiras (2004) as cited in Madawaki &
Amran (2016) observed that companies with audit committees that meet regularly experienced
improved quality because of better transparency in reporting. They also found out that those audit
committees that regularly meet are able to perform monitoring tasks more effectively than audit
committees that are irregular in meeting. They recommended that such meetings should not be
reactive in nature but proactive if it must be termed effective. Similarly, casual empirics suggested
that committee meetings should be complementary to size criteria. That is, if audit committee size
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is small (in size), they would require more time to meet so as to do what probably a large sized
committee would do in less time. Blue Ribbon Committee (BRC) specifically stated that audit
committees should meet at least quarterly and this they argued shows the level of diligence expected
from audit committees. Stewart & Munro (2015) using an experimental design, observed that
respondents align to the perception that audit committee meeting; a proxy for the diligence and
activity of the audit committee should be within 2 to 6 times in a year. Specifically, they believe
that meeting just twice in a year is too infrequent to allow for effectiveness and meeting about 6
times in a year is too frequent and would be cost ineffective. Thus, they advocated for a midpoint
of 4 times in a year. According to Xie, Davidson, & DaDalt (2013) an indirect relationship exists
between the number of committee meetings and the levels of earnings management. Salawu,
Okpanachi, Yahaya, & Dikki (2017) found a positive and insignificant relationship between audit
committee meetings and audit quality. However, Bedard, Chtourou, & Courteau (2014) did not find
any positive association between frequency of audit committee meetings and financial reporting
quality.
2.1.1.3 Audit Committee Financial Expertise
Unlike the size criteria that was specified by CAMA (2004), the expertise criteria was specified in
Nigeria by the 2011 SEC Code, 2006 Post consolidation CBN code amongst other codes. These
codes specify that at least, a member of the audit committee must possess financial management
and accounting knowledge. The US SEC also has a similar condition as it expects that firms must
have at least one person with financial expertise. Juhmani (2018) asserted that the availability of an
accounting and financial knowledge in the audit committee would enhance its efficiency and its
ability in detecting and preventing earnings management. Kibiyaa, Ahmada, & Amran (2016) also
14
buttressed in their study that the presence of a member with financial literacy or knowledgeable in
accounting, finance or financial management will enhance the quality of the financial report.
However, Dhaliwal, Naiker, & Navissi (2010) noted that the expertise criterion given is broad in
terms of definition. They claim that persons with financial expertise can mean any of the following;
i. Certified public accountant, auditor, financial officers, or controllers.
ii. Anyone that has worked in a supervisory role that involves financial statement preparation.
Thus, expertise can be technical or supervisory in nature but the contention is that which of this
nature of expertise is fundamental to audit quality? Is it technical/accounting or
supervisory/financial management? Livingston (2003) provides evidence that supervisory expertise
does not translate to effective understanding of accounting issues and may not ensure audit quality.
This is buttressed by Dhaliwal, Naiker, & Navissi (2010) who investigated various types of
expertise against audit quality and found that only accounting expertise had a significant effect on
audit quality. Aronmwan, Ashafoke, & Mgbame (2015) in their study on audit firm reputation and
audit quality, controlled for audit quality using audit committee financial expertise as captured
using the number of members with accounting expertise. They found an insignificant but positive
relationship with audit quality. Similarly, Salawu, Okpanachi, Yahaya, & Dikki (2017) and Omoye
& Aronmwan (2013) also documented an insignificant positive relationship between audit
committee expertise and audit quality. In their study, expertise was captured using proportion of
members with financial and accounting experience to the total board membership. Li, Mangena, &
Pike (2017) argued that audit committees having members with requisite financial expertise are in
a better position to have knowledge of capital market implications of decisions and disclosures in
15
financial statement. Such disclosures are expected to improve reporting quality and reduce
information asymmetry on firm’s value.
2.1.1.4 Audit Committee Effectiveness
Prior to the BRC recommendation, the issue on audit committee was about their effectiveness.
Hence, the essence of the recommendations was to strengthen and ensure audit committee
effectiveness (Lin, Li, & Yang, 2014). Dezoort & Salterio (2012) affirm that the construct of audit
committee effectiveness is multidimensional and is affected by the various audit committee
characteristics. Pucheta-Martinez & Cristina de Fuentes (2007) reported that researches on audit
committee effectiveness have mostly focused on three variables; size, nature of members and
meetings of the committee. Krishnan (2015) opined that for an audit committee to be termed
effective, then emphasis must be placed on its composition and diligence. Owolabi & Dada (2011)
the essential attributes of an effective audit committee are seen from the extent to which its members
are independent in their duties, and experienced on technical/financial matters as it may relate to
reporting. Furthermore, Habbash (2014) suggest that audit committee characteristics, such as
independence, expertise, and diligence are the very important factors that contribute to the
effectiveness of audit committees. Based on these, it is obvious that there is no general agreement
as to what attributes make up an effective audit committee but we may infer based on the BRC
report and other corporate governance code that a committee that meets all the requirements as
specified by the various regulation may be termed effective and therefore, ensure audit quality.
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2.1.2 Auditors Independence
Auditor independence according to Dictionary of International Accounting Terms (2001) infers a
state of impartiality required of auditors who should have no personal or financial involvement with
a client. Louwers, Ramsay, Sinason, & Strawser (2007) described independence as a mental attitude
and physical appearance which portrays the auditor as being uninfluenced by others in judgment
and decision. This can be sustained by avoiding financial connection that makes it appear that the
wealth of the auditor depends on the outcome of the audit and management connections that makes
the auditor appear as if he is involved in management decisions. As a key ingredients of audit
quality, Hayes & Rachel (2016) described independence as a position required in order to take an
unbiased viewpoint in the performance of audit tests, analysis of results and attestation in the audit
report.
When parties with interest in the financial statements do not influence the audit, the independence
of the auditor is not likely to be compromised. It is believed the world over that if the auditor is
independent both in mind, action and appearance, the trust reposed in him and the accounting
profession will be strong. The independence of the auditor is the fulcrum on which the public trust
in the accounting profession revolves. In the course of performing his professional duties as auditor,
the auditor is expected to do it in an atmosphere devoid of situations or relationship that may prompt
informed third party to aver the impairment of the auditor’s objectivity or is likely to be impaired.
Auditors are expected to be and be seen to be independent both in action and in deeds. Any action
of either the auditor or the management that may impair this independence should be avoided.
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It is believed that an auditor is a professional with skill, technical competence and professional
values and is expected to exhibit same in the performance of their duties. The accountancy
profession to which the auditors belong is concerned with assurance and financial reporting so that
people may make resource allocation decisions. The Institute of Chartered Accountants of Nigeria
(ICAN) in evaluating the benefits of independence of auditors stated that the need for strict
adherence to ethical rules (i.e. nine fundamental principles of independent auditing). These
fundamental principles are expected to influence positively the professionalism of the auditor and
as well boost the trust and respect of the public and other users of the audited financial statements
for him. In addition, observance of the tenet of the fundamental principles will engender moderation
on regular basis of the auditor’s conduct and assist in avoiding violation of provisions of the rules
and regulations of the professional bodies, as well as the law.
2.1.2.1 Factor Impinging on Auditor Independence
The following are among many other factors that usually negatively impact on auditor
independence and in effect reduce the expected quality of the audit.
Size of audit firm is one of the factors which are usually having considerable impact on auditor’s
independence. Conclusion drawn from the various studies reviewed by Abu Bakar & Ahmad (2014)
was that bigger audit firms are not likely to succumb to management pressures than smaller ones,
perhaps because of higher number of client base and volume of income accruing to bigger firms
and the fact they would not want to destroy their goodwill built from past years. The smaller firms
may be wary of losing the few clients they have which may wane further their meagre revenue. In
a bid to retain these clients they tend to offer more personalized services in order to develop a closer
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relationship with the client. This will in turn increase the danger of impairment of independence of
these firms.
Non-availability of enough audit clients has increased the competition in the audit service market
which may negatively affect auditor’s independence in developing economy like Nigeria. As noted
by Abu Bakar & Ahmad (2014) from various studies reviewed, competition may engender resistant
to factors that may impair independence while from other studies they discovered that competition
makes auditors less independent since the client can easily engage audit services from another
auditor. However they quoted Shockley, (1981) as concluding that one of the environmental
changes that impact negatively on auditor’s independence is competition.
The numbers of times they reappoint an audit firm, as observed by researcher, impact negatively
on auditor’s independence. In his paper, ‘The impact of auditor’s tenure on quality audit report’,
Ikharo (2015) stated that a longer tenureship of auditor may bring about increased knowledge of
client‘s business which may improve his ability to unearth fraud. This will in turn reduce managers’
tendencies towards fraud and irregularities. Auditors retained for many years tend to create closer
relationship with client and hence increase the familiarity between them. This familiarity may bring
about undue sympathy by the auditor for the client thereby affecting his duty in issuing qualified
audit report whenever the need arises. This may therefore increase the client’s fraud incentives. The
extent of impact long tenureship will have on the auditor’s independence will be dependent on his
ability and the level of independence itself.
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Tenure of auditor in office is seen as having implications for auditor’s independence. It is believed
that the longer the tenure the more familiarity builds up and the auditor and client relationship wax
stronger. The closer they become the more sympathetic to each other. Abu Bakar & Ahmad (2014)
suggested that limiting the tenure of auditor will reduce the need for closer relationship and make
irrelevant creation of any vested interest in the client.
2.1.3 Factors Affecting Audit Quality
The quality of financial reporting has to be maintained in order to ensure some measure of
credibility on the information contained in it. Some of the factors affecting audit quality include
financial literacy of audit committee members; frequency of audit committee meetings; multiple
directorship of audit committee members; independence of audit committee members; external
auditors’ quality; and interaction between independence of audit committee and external audit.
2.1.3.1 Financial Literacy of Audit Committee Members
Song & Windram (2000) a high degree of financial literacy is necessary for an audit committee to
effectively oversee a company’s financial control and reporting. The role of an audit committee in
overseeing accountability of the management covers a wide scope to include the overall process of
corporate reporting. This requires the audit committee to have accounting knowledge in order to
acquire an in-depth understanding of financial reporting and improve compliance with regulatory
requirements. The need to comprehend the overall financial and non-financial contents of corporate
reports is greater considering that listed companies are operating as conglomerates with some
having complex group structures and therefore, presenting technically advanced financial reporting
contents. Financial literacy reduced fraud in corporate financial reporting. A formal recognition of
this requirement was recently made in the U.S. with the passing of the Sarbanes-Oxley Act (2002)
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which requires each public listed company to disclose whether or not it has a financial expert in the
audit committee.
2.1.3.2 Frequency of Audit Committee Meetings
The effectiveness of audit committee depends on the extent the Committee is able to resolve issues
and problems faced by the company and to improve their monitoring function of company activities.
A more active audit committee is expected to provide an effective monitoring mechanism. The
more frequent the audit committee meets, the more opportunity it has to discuss current issues faced
by the company. Since the level of audit committee activity reflects good governance, it should
enhance the exercise of oversight function and hence, audit quality. The Code of Corporate
Governance states that the provision of an institutionalized forum encourages the external auditor
to raise potentially troublesome issues at a relatively early stage. As a best practice, audit committee
meeting should be conducted at least once a year without the presence of executive board members.
However, the total number of meetings depends on the company’s terms of reference and the
complexity of the company’s operation’s operations. At least three or four meetings should be held
in addition to other meetings held in response to circumstances that arise during the financial year
(Finance Committee on Corporate Governance, 2001). Although the number of meetings may not
provide an effective monitoring mechanism, it is noted that an audit committee without any meeting
or with small number of meetings is less likely to be a good monitor.
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2.1.3.3 Multiple Directorship of Audit Committee Members
This refers to the number of director positions held by audit committee members. Song & Windram
(2013) argue that multiple directorship may cause limitations of time and commitment for audit
committee members from performing effectively. Audit committee members who held directors’
posts of too many companies may have limited time fulfilling their responsibilities. In Malaysia,
the importance of experience of audit committee members gained through director positions in other
companies is evident in the Ruzaidah & Takiah (2015) study. They argued that multiple
directorships of audit committee members was found to have significant positive relationship with
corporate social reporting practices and corporate performance. This suggests that audit committee
with multiple directorships provides an effective monitoring mechanism.
2.1.3.4 Independence of Audit Committee
It is an essential factor for an audit committee to ensure that management is held accountable to
shareholders (BRC, 1999). The Code of Corporate Governance states that the majority of audit
committee members must be independent and the chairman should be an independent non-
executive director. It enhances the effectiveness of monitoring functions. It serves as a reinforcing
agent to the independence of internal and external auditors. It is posited that the more independent
the audit committee, the higher the degree of oversight and the more likely that members act
objectively in evaluating the propensity of the company accounting, internal control and reporting
practices. This indicates that an independent audit committee is able to help companies sustain the
continuity of business although when they are faced with financial difficulties, they are expected to
propose certain action plans to mitigate the problem.
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2.1.3.5 Audit Firm Tenure
For effective and quality financial reporting, the audit firm tenure is also considered because it is
of great influence. Audit firm tenure is the length of the audit firm client relationship as of the fiscal
year end covered by the audited financial statements. Following prior research, audit tenure is
defined as short when the same auditor has audited the financial statements of a company for two
or three years. Audit tenure is defined as long when the same auditor has audited the financial
statements of a company for nine or more years. On the basis of definition of short and long term
tenure, we define audit tenure as medium when the same auditor has audited the financial statements
for four to eight years.
2.1.4 Internal Control System
Internal control systems cannot be underestimated as it serves as the life blood for most institutions
in terms of its imperative roles that it plays in both tangible and intangible assets of an organization.
Internal controls suggest to the measures established by an organization in order to ensure that the
aims, objectives and missions of the organization is ascertain (Brennan & Soloman, 2012). They
are frame works of policies and procedures that ensure the assets of an organization, make reliable
financial reporting, promote compliance with laws and regulations and ascertain effective and
productive operations. However, in general, quality reporting process is influenced by an internal
control system. There is a general discernment that institutions and implementation of proper
internal control frameworks will dependably prompt to enhanced financial accomplishment. In the
views of Gerrit & Mohammad (2017), the likelihood of achievement is affected by limitations
inherent in all systems of internal control. Internal control actions on quality financial report state
positive goals more especially when all the parties involve adhere to their duties; thus, making the
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quality of financial reporting comparable, understandable, relevant, and reliable. Emasu (2010)
accentuates that organizations establish systems of internal control to help them improve their
performance, achieve organizational goals, prevent loss of resources, enable production of reliable
reports and ensure compliance with laws and regulations. A sound internal control system helps an
organization to prevent frauds, errors and minimize wastage. Custody of assets is strengthened; it
provides assurance to the management on the dependability of accounting data eliminates
unnecessary suspicion and helps in maintenance of adequate and reliable accounting records.
2.1.4.1 Types of Internal Control
In an investigation did by Abdi (2015) on the effect of internal control system on financial
performance in Mogadishu Private Banks, he demonstrated that the rule of internal control put
advances eight (8) sorts of internal control frame works to be specific; organizational control,
segregation of duties, physical control, personal control, supervision control, arithmetical and
accounting control, authorization and approval and management control, approval and endorsement
and administration control ought to be realistic in any organization or institutions. The Statement
of Accounting Standards (SAS) more over illuminates that internal control may be categorized as
either accounting or administration controls. Accounting control focus on the plan of the institution
and all the coordinated techniques and strategies which are realized with a point of view of
protecting assets and updating the steadfastness of financial records. Management control includes
the arrangement of the institution and all co-ordinates procedures and strategies that are concerned
about operatically effectiveness an adherence to managerial approaches and mandates. Ofori (2011)
depicted that internal controls are ordered basically into the control environment and control
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methods or exercises, Statement of Auditing Standards (SAS, 30). Be that as it may, Ibrahim (2017)
have classified internal control into five parts. They are clarified beneath:
2.1.4.2 Control Environment
The control environment is the general control consciousness of an organization influenced by
management through strategies, systems, ethical standards, and monitoring processes. This mirrors
the top managerial staff and management firm choice to internal control. The control environment
in corporates management theory found in its vision and mission for the organization. The
components of the control environment likewise incorporate the authoritative structures which
determine duty in the execution of financial and non-financial duties, management working style,
state of mind, moral esteems, the integrity, ability and fitness of faculty.
2.1.4.3 Control Activities
Control activities are the procedures and strategies that help guarantee that management of an
organization orders are passed on adequately and in a promising way (Ofori, 2011). These
incorporate control activities, for instance, execution reviews, data preparing, physical controls, and
confinement of commitments, these activities are completed by management to guarantee
accomplishment of progressive objectives and the mitigations of hazard. As indicated by Di-Napoli
(2014), the control activities are the directions, principles, systems and decisions built up over
various activities by management to foresee or reduce dangers that impact the association in
achieving its objectives.
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2.1.4.4 Risk Assessment
This is the procedure or techniques the organization goes through to distinguish and analyze the
pertinent risks which may influence the organization’s capacity to accomplish its significant targets.
Risk appraisal includes utilizing proficient judgment deliberately in distinguishing and assessing
factors which can influence the organization adversely and result in inconceivable misfortunes both
financially and non-financially. According to Ofori (2011), this segment of internal control features
the significance of management precisely recognizing and assessing factors that can block it from
accomplishing its main goal. Risk appraisal is an efficient procedure for coordinating proficient
judgment about plausible unfriendly environments and occasions and surveying the probability of
conceivable misfortunes (financial and non-financial) resulting from their event.
2.1.4.5 Information and Communication
Information and communication are the bedrock of every effective business. Organizations with an
absence of information and powerful communication will effortlessly fall in this 21st century
business environment. Effective communication within an organization empowers employees to
endorse and prescribe internal control bearing on sensible execution which is utilized as a piece of
the ordinary tasks of a business. Oberg & Walgenbach (2013) pointed out that if firm workers felt
that they had got tend efficient or are not clear about internal control approaches declared by an
organization they could may be feel generally disappointed. This implies that when imperative
information is concealed or withheld from employees, it could prompt disappointment among them
thereby diminishing trust and efficiency inside the organization. Ofori (2011) contends that for the
control system to be effective and efficient, there ought to be significant and dependable
information which ought to be recorded and imparted to management and other staff within the
26
organization. To complete the internal control and operational obligations and duties, the
information ought to be auspicious and ought to go to the individuals who require it and in the
correct frame. All work force does comprehend their roles in the control framework, how their roles
identify with others and their responsibility through the information and communication
frameworks.
2.1.4.6 Monitoring
Monitoring is the appraisal of internal control execution overtime; it is proficient by progressing
monitoring activities and by isolated assessments of assistant control, for example, self-evaluations,
peer reviews, and internal audits. There as on for monitoring is to decide if internal control is
adequately designed, appropriately executed, and successful. Internal control is sufficiently planned
and legitimately executed if each of the five internal control segments (Control Environment, Risk
Assessment, Control Activities, Information and Communication, and Monitoring) are available
and working as composed (Hayes & Baker, 2014). Periodic evaluations of internal control are made
and personnel, in carrying out the irregular duties, obtain evidence as to whether the system of
internal control continues to function. Management should implement internal control
recommendations made by internal and independent auditors, corrects known deficiencies on a
timely basis, and responds appropriately to reports and recommendations regulators.
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2.1.5 Internal Audit
Internal audit is an independent management function, which involves a continuous and critical
appraisal of the functioning of an entity with a view to suggest improvements thereto and add value
to and strengthen the overall governance mechanism of the entity, including the entity's strategic
risk management and internal control systems (Soh & Martinov, 2011). Effective audit practices in
the public sector is very crucial as it protects the interests of the citizens, strengthens governance
by significantly enhancing the citizens’ ability to hold their public officers accountable. Auditors’
duties are very important especially in the aspect of promoting credibility, equity, and appropriate
behavior of public sector officials, while reducing the risk of public corruption. Audit practices
entail but not limited to assurance and advisory services (ranging from financial attestation to
performance and operational efficiency). Widened scope of the public sector audit practice’s
directives would influence the public entity’s overall activities. Although the audit practices tend
to differ across countries but generally, public sector audit activities entails: organizational
independence, a formal mandate, unrestricted access, sufficient funding, competent leadership,
objective staff, competent staff, stakeholder support and Professional audit standards (IIA, 2012).
According to MacRae & Gils (2014) internal audit practices or activities comprise of internal
auditors' competence, roles and responsibilities, independence and objectivity in carrying out their
work and report effectively.
2.1.6 Internal Audit Effectiveness
There are two basic reasons why it is important to examine Internal Audit (IA) effectiveness. One
is that it is an indication of the quality of performance and can describe whether or not the IA
function is performing in a satisfactory manner. The second is that the examination can serve as a
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motivator for an individual or an organization to improve their performance. Mizrahi and Ness-
Weisma (2015) maintain that, in general, there are two important tools for achieving managerial
accountability in the policy-making process, namely, evaluation and auditing. Nonetheless, as
explained earlier, to date very few academic studies have been conducted on IA effectiveness, and
despite the general undercurrent in relation to an IA paradigm shift, research has provided mixed
findings on IA effectiveness and has assessed IA effectiveness differently.
For example, Al-Twaijry, Brierley, & Gwilliam, (2009) studied the development of IA in the Saudi
Arabian corporate sector by using an institutional theory perspective, and taking a sample of 135
companies listed on the Saudi Stock Exchange. Therefore, they used questionnaires and interviews
to assess the extent of compliance of IA practices with ISPPIA in terms of quality of IA staff;
quality of IA work; an appropriate corporate environment; and support of top management to
examine IA effectiveness. The results of this study show that IA in the Saudi Arabian corporate
sector is ineffective and it is not a value adding service to organizations.
Goodwin (2012) made a comparison between the role of IA in the public and private sectors in
Australia and New Zealand. The author highlights that while there is no requirement for private
sectors in Australia and New Zealand to establish an internal audit department, the Australian Stock
Exchange (ASX) encourages large companies to do so. However, the requirement to establish an
IA function in the Australian public sector is not straightforward because of differing State
legislation. On the other hand, within the public sector in New Zealand there is no requirement for
IA function. The results suggest that internal auditors in the public sector are less likely to report to
the chief of financial affairs than those in the private sector.
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Cohen & Sayag (2010) study explored the determinants of IA effectiveness by developing a model
of its determinants. The model consists of six potential factors which may impact on IA
effectiveness, namely, the sector of the organization; professional proficiency of internal auditors;
quality of audit work; organizational independence; career and advancement; and top management
support. They state that IA effectiveness is an important concept rarely examined in the academic
literature. In the few studies dealing with IA effectiveness, mostly there was a concentration on the
external auditor and whether the external auditor utilizes the work of the internal auditor. The results
of Cohen & Sayag (2010) study suggest that there are very high correlations between perceptions
of top management support and IA effectiveness.
2.1.7 Internal Audit Performance
The performance of the IA function should be monitored to ensure it provides value to the
organization and carries out its role economically, efficiently and in accordance with best
professional practice. In general, work performance involves internal auditors planning their audits,
developing working programs, preparing time budgets for audit tasks, documenting all audit
procedures in working papers and preparing internal audit reports. IA effectiveness is understood
as the performance or efficiency of the tasks within the IA function. Performance is considered to
be the most appropriate component in evaluating IA effectiveness as it significantly influences the
information and communication aspects of the internal control system. In line with various other
researchers standards of the IIA require the auditor to plan and perform the work such that he or
she would be able to arrive at useful audit findings and forward recommendations for improvement
(IIA, 2012). According to the definition of internal auditing (IIA, 2012), IA is expected to add value
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to organizations by effectively managing IA activity; reviewing operations and programs to
ascertain the extent to which results are consistent with the organization‘s goals; establishing audit
plans, reports and programs to achieve audit objectives; and determining appropriate and sufficient
timeframes to achieve objectives.
2.1.8 Internal Control System Viewed As an Aid to Effective Audit
Management has recognized internal control as a valuable tool in effectively carrying out its
responsibility and auditors have pressed for improvement in internal control in their effort to be of
assistance to their clients, as well as to permit reduction in audit work made possible by the
accounting records. The effect of auditing therefore is to reduce the need for routine mechanical
verification of book-keeping accuracy. It permits substitution of a less time consuming approach
that involves seasoned judgment and stresses such activities as reviews, analysis, evaluation and
statistical samplings. Most of the information needed by management about finances and the
progress of operations come from the accounting records. For the information to be of value, it must
be reliable, complete and available as quickly as possible and at the same time adhering to policies
and directives. Management is far removed from the scene of operation in a typical large business
organization and so personal supervision of employees is an impossible task. As a substitute,
management must rely on various control techniques to implement its decision and goals, and to
regulate the activities for which management has ultimate responsibility.
Internal control system is therefore a key factor in the effective management of public sector setup.
For achieving a good and effective internal control, the following must apply-segregation of
functional responsibilities, system of authorization, sound practice in the performance of duties and
31
functions of each of the organizational departments. Any breakdown or weakness in internal control
noted by the independent auditor in the course of examination will be of considerable interest to
management for remedying the conditions observed.
2.1.9 The Importance of Audit
The certification of accounts and balance sheets are regarded as the primary objective of an audit.
Apart from improved financial management, audit helps to give the generally required management
control over assets. Employee frauds are minimized and discipline and accountability inculcated in
them. Investors are assured that their interest are being properly protected and managed, the internal
revenue board gets the assurance that the profit figure on which tax is not manipulated, and at the
end the auditor records proscribes measures for improved and efficient future performance.
In fact, management is spurred to action after an auditor issues each report. In the area of credit
worthiness, money can easily be borrowed from banks on the basis of property auditor accounts.
Generally, audit is used especially in cases where the business in managed by some agent or
representatives of its owners. Other benefits include;
i. The audited accounts of previous years are helpful in the settlement of claim by the
insurance company in the case of firms
ii. The purchaser of a business can easily calculate the amount of purchase consideration on
the basis of its audited accounts.
iii. The audited accounts of business can prejudice on support of a legal case before the court;
it forms a basis to determine action in bankrupt and insolvency cases. The auditor’s support
is sometimes referred to as the auditor’s opinion or the auditor’s certification. The later term
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came from the days when the auditor’s report often stated, “we certify that in our opinion
the accompanying financial statements are correct, regardless of the name by which it
identified”. This report is an extremely important document. It is the sole outward evidence
of the major activity of the public accounting profession, and it is heavily relied upon the
financial statement, it is also the focal point of all independent auditing procedures.
Therefore, the independent auditor must never lose sight of the fact that auditing procedures are
directed towards enabling the formation and reporting of an opinion concerning a set of financial
statements, thereby attesting to the fairness and reliability of the statement. The report is normally
addressed to the person or group responsible for engaging the auditor. In the case of corporation,
the auditor is most frequently selected by the board of directors sometimes subject to the review
and endorsement of the stockholders, with the payment of the auditor’s fees being made from
corporate funds. The report will be used however, by the person other than the ones to whom it is
addressed and who pay the auditor’s fees. This fact is responsible for the peculiar relationship
between auditor and client. Even though the auditors are paid by the client, complete independence
must be maintained in all matters and decision relating to the audit examination.
2.1.10 Audit Challenges and Financial Reporting In Nigeria
Financial statements cannot be useful if they are based on unreliable and accurate recordings of
transactions. There is no greater example of the garbage in, garbage out principle than financial
statement preparation. The two main sources of financial statement inaccuracy and deliberate
dishonesty and incompetence. There are two principles ways to combat these problems. The first
method is to regularly hire an outside accounting firm to audit the financial statements. In an audit,
33
the outside accountant tests reported account balances for accuracy. As importantly, the auditor
tests to see that the accounting principles used in recording transactions are in conformity with
GAAP and applied on a consistent basis. Despite some notorious recent audit failures process, in
most cases provides a reasonable safeguard against fraudulent and inaccurate financial reporting.
The second method used to prevent fraudulent and inaccurate financial reporting is the adoption of
adequate internal controls. Internal controls are the policies and procedures that a business can take
to safeguard its assets, insure accuracy of financial reporting, and prevent frauds. These methods
are not mutually exclusive in the best of the best of all worlds, firms would have both good internal
control and regular audits
2.2 CONCEPTUAL FRAMEWORK OF CORPORATE FINANCIAL REPORTING
2.2.1 Corporate Financial Reporting
The main objective of corporate financial reporting is to provide high quality financial information
about economic entities that is useful for economic decision making. According to International
Accounting Standard Board (IASB), high quality financial reporting is critical to investors and other
stakeholders in making investment, credit and similar decision. Corporate financial reporting
involves recording financial information according to relevant accounting standards. Vargiya
(2015) financial reporting includes the exposure of related financial information to the different
stakeholders about an organization over a predefined timeframe. These stake holders include;
investors, lenders, suppliers, and government organizations. Financial reporting is considered as
the final result of accounting. It comprises of various important statement which include;
i. Financial related explanations from statement of financial position
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ii. Statement of comprehensive income
iii. Statement of cash flow
iv. Statement of changes in equity
v. Notes to financial related explanations,
vi. Quarterly and Annual reports (if there should be an occurrence of quoted organizations)
vii. Prospectus (if there should be an occurrence of organizations going for Initial Public Offers)
Management Discussion and Analysis (if there should be an occurrence of open
organizations).
2.2.1.1 Statement of Comprehensive Income
Comprehensive income statement is a company performance measure concept connected with
viewing profit as an increase in the health of the company’s owners.” Comprehensive income is a
change in equity that took place during the period as a result of transactions and other events, other
than those changes resulting from transactions with owners in their capacity as shareholders.
Comprehensive income includes all components of the income statement (profit and loss account)
and other comprehensive income. It is therefore the sum of the traditional net income and the capital
income (associated with the capital gains and losses) recognized in equity, bypassing the profit and
loss account.
2.2.1.2 Statement of Cash Flow
Cash Flow Statement deals with flow of cash which includes cash equivalents as well as cash. This
statement is an additional information to the users of Financial Statements. The statement shows
the incoming and outgoing of cash. The statement assesses the capability of the enterprise to
35
generate cash and utilize it. Thus a Cash-Flow statement may be defined as a summary of receipts
and disbursements of cash for a particular period of time. It also explains reasons for the changes
in cash position of the firm. Cash flows are cash inflows and outflows. Transactions which increase
the cash position of the entity are called as inflows of cash and those which decrease the cash
position as outflows of cash. Cash flow Statement traces the various sources which bring in cash
such as cash from operating activities, sale of current and fixed assets, issue of share capital and
debentures etc. and applications which cause outflow of cash such as loss from operations, purchase
of current and fixed assets, redemption of debentures, preference shares and other long-term debt
for cash. In short, a cash flow statement shows the cash receipts and disbursements during a certain
period. The statement of cash flow serves a number of objectives which are as follows:
i. Cash flow statement aims at highlighting the cash generated from operating activities.
ii. Cash flow statement helps in planning the repayment of loan schedule and replacement
of fixed assets, etc.
iii. Cash is the centre of all financial decisions. It is used as the basis for the projection of
future investing and financing plans of the enterprise.
iv. Cash flow statement helps to ascertain the liquid position of the firm in a better manner.
Banks and financial institutions mostly prefer cash flow statement to analyse liquidity
of the borrowing firm.
v. Cash flow Statement helps in efficient and effective management of cash.
vi. The management generally looks into cash flow statements to understand the internally
generated cash which is best utilized for payment of dividends.
vii. It is very useful in the evaluation of cash position of a firm.
36
2.2.1.3 Statement of Change in Equity
The statement of changes in equity is a reconciliation of the beginning and ending balances in a
company’s equity during a reporting period. It is not considered an essential part of the monthly
financial statements, and so is the most likely of all the financial statements not to be issued.
However, it is a common part of the annual financial statements. The statement starts with the
beginning equity balance, and then adds or subtracts such items as profits and dividend payments
to arrive at the ending balance. The statement explains the changes in a company's Share Capital,
accumulated reserves and retained earnings over the reporting period. It breaks down changes in
the owners' interest in the organization, and in the application of retained profit or surplus from one
accounting period to the next. Line items typically include profits or losses from operations,
dividends paid, issue or redemption of shares, revaluation reserve and any other items charged or
credited to accumulate other comprehensive income. It also includes the Non-Controlling Interest
attributable to other individuals and organizations.
2.2.2 Corporate Financial Reporting Legal Framework
Accounting and financial reporting prerequisites of organizations in Nigeria are directed by a
variety of laws and bodies (World Bank, 2004). These include Companies and Allied Matters Act
CAP. 20 L.F.N. 2004, Securities and Exchange Commission Rules and Regulations (1999),
Investments and Securities Act CAP.124 L.F.N. 2004, Nigerian Stock Transactions Act (1961),
Banks and Other Financial Institutions Act (1991), Nigerian Insurance Act (2003), Nigerian
Accounting Standards Board Act (2003), Institute of Chartered Accountants of Nigeria Act (1965)
and Organization of National Accountants of Nigeria Act (1993). The principle legitimate system
for corporate accounting hones in Nigeria is the Companies and Allied Matters Act CAP. 20 L.F.N.
37
2004. The SEC controls securities showcase members under the Investments and Securities Act
CAP.124 L.F.N. 2004 and the Securities and Exchange Commission Rules and Regulations (1999).
The Nigerian Stock Exchange, set up by the Nigerian Stock Exchange Act of 1961, backings the
Securities and Exchange Commission to oversee the securities advertises operations, and directs
the capital market. Inside the capital market there is the essential and optional market. The essential
market issues new securities and the optional market manages existing securities. The Central Bank
of Nigeria is the primary statutory controller of banks and nonbanking financial foundations under
the arrangements of the Banks and Other Financial Institutions Act (1991).
The Banks and Other Financial Institutions Act (1991) contain arrangement on financial related
reporting by banks notwithstanding CAMA necessities. The National Insurance Commission
controls financial communication practices of insurance agencies under the Nigerian Insurance Act
of 2003. CAMA 2004 as changed requires financial articulations of organizations in Nigeria to
conform to the accounting norms as set down now and again by the Nigerian Accounting Standard
Board as constituted.
2.2.3 Goals and Objectives of Corporate Financial Reporting
According to International Accounting Standard Board (IASB), the goal of corporate financial
reporting is "to give information about the financial position, performance and changes in financial
position of an undertaking that is helpful to an extensive variety of users of accounting information.
The reasons for corporate financial reporting involves, providing information to management of an
organization which is utilized with the end goal of planning, examination, benchmarking and basic
leadership, making information available to investors, promoters, obligation supplier and leasers
38
which is utilized to empower them to male sane and reasonable choices with respect to business,
credit and so forth, communicating information to shareholders about the nature of activities in an
organization, Providing information about the financial assets of an organization, events to those
assets (liabilities and proprietor's value) and how these assets and events have experienced change
over a timeframe, Providing information with respect to how an organization is securing and
utilizing different assets. Providing information to different Stakeholders with respect to
performance of management of an organization in the matter of how tirelessly and morally they are
releasing their fiduciary obligations and duties. It includes providing information to the statutory
reviewers which thus encourage review. It also enhances social welfare by investigating the
enthusiasm of workers, exchange union and Government.
2.2.4 Importance of Corporate Financial Reporting
As indicated by Vargiya (2015) the significance of corporate financial reporting cannot be over
emphasized. It is required by every last partner for numerous reasons and purposes. The following
focuses highlights why financial communication system is essential, because it causes an
organization to conform to different statues and administrative necessities. The organizations are
required to submit financial related proclamations to Government Agencies. In the event of quoted
organizations, quarterly and also yearly outcomes are required to be documented to stock trades
and distributed, encourages statutory review; the Statutory reviewers are often required to review
the financial proclamations of an organization to express their assessment. Financial reports also
shape financial planning, examination, and basic leadership. Corporate financial reporting also
helps organizations to raise capital both locally and internationally.
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2.3 AUDITING PRACTICE AND CORPORATE FINANCIAL REPORTING
Auditing practices are procedures established by auditors to ensure that corporate financial reports
communicate relevant and reliable information to members of an organization and the public. These
practices vary from one audit organization to the other depending on their sizes, nature of activities
and applicable legislations. Auditing is therefore defined by price water house coopers (2010) as
the examination of the corporate financial reports of an organization as presented in the annual
report, by someone independent of that organization. The financial reports in the context of auditing
includes a statement of financial position, an income statement, a statement of changes in equity, a
cash flow statement, and notes comprising a summary of significant accounting policies and other
explanatory notes. According to the Institute of Chartered Accountants of Nigeria (2010), an audit
refers to a systematic process of objectively obtaining and evaluating evidence in respect of certain
assertion about economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and reporting the results to interested parties over a
particular period of time. On the other hand, the Institute defined an auditor as a person or audit
firm with final responsibility for the audit. IAASB (2013), an auditor is used to refer to the person
or persons conducting the audit, usually the engagement partner or other members of the
engagement team, or, as applicable, the firm. External auditor in this regard refers to independent
auditor who is not subject to management control and linked him to independent audit, which refers
to the provision of reasonable assurance that published audited financial statements are free from
material misstatements and are in accordance with legislation and relevant accounting standards
(ICAN, 2010). Auditors as intermediaries between the management of an entity and external parties
having interests in the entity. Auditors have a duty to form and express an opinion as to whether or
40
not the financial statements prepared by the management show a true and fair view of the entity’s
financial position and performance.
2.3.1 Internal Control and Corporate Financial Reporting
Effective internal control system over corporate financial reporting ought to give sensible
affirmation with respect to the unwavering quality of financial reporting and plan of financial
explanations for external purposes. This activity gives sensible confirmation, both to management
and investors, about the financial status of the organization. Sovereign governments additionally
distribute their financial statements and these have far suggestions. The financial statements of
sovereign governments affect their universal quality and are very significant in the present set of
global business. Poor internal control is viewed as the essential motivation behind why extortion
happens. Internal control and financial reporting have gotten expanded consideration particularly
since the Tread way commission (1987) distinguished the tone set by senior management as the
most critical factor adding to the honesty of financial reporting procedure (Jones, 2008) .
Internal control systems including internal audits are intended primarily to enhance the reliability
of corporate financial reporting, either directly or indirectly by increasing accountability among
information providers in an organization. Internal control therefore has a much broader purpose
such that the organization level of control problems associated with lower revenues, which explore
links between disclosure of material weakness and fraud, earnings management or restatements
internal controls provide an independent appraisal of the quality of managerial performance in
carrying out assigned responsibilities for better revenue generation (Amudo & Inanga, 2012).
41
2.3.2 Audit Committee and Corporate Financial Reporting
In spite of the vital responsibilities of audit committee, poor corporate financial reporting is still in
a high prevalent rate in virtually all corporations in Nigeria. This has been traced to the failure of
an audit committee to ‘question management’s selection of accounting approaches.’ Also, an audit
committee is “neither intended nor equipped to guarantee to the board of directors and shareholders
the accuracy and quality of a firm’s financial statements and accounting practices.” Additional, the
committee “has no time to watch for the details in financial reporting, nor to design and device a
strong internal control system to prevent poor reporting.” In addition, an audit committee has
“neither the time nor the technical knowhow to examine ‘appropriate’ accounting principles.” “The
members also have no power to oversee senior executives’ teams or to argue with them; they often
have close associations with corporate executives; they populate each other’s boards and tend not
to criticize each other. Because of these features, using audit committees as a tool for corporate
governance has not been proven effective.”
Improving corporate governance therefore requires someone to be responsible, to be ethical, and to
work for the benefit of stakeholders. For proper discharge of duties, however, section 359 (4) of
CAMA 2004 (as amended) provides that, the audit committee shall consist of an equal number of
directors and representative of shareholders to a maximum number of six members, also, all
members of the audit committee are subject to re-election annually. In addition, “all members of
the audit committee should be financial literate and have understanding of the industry in which the
firm operates and at least one member has financial expertise and professional qualification of a
recognized professional accounting bodies”(Akinsulire (Mikol & Standish, 1998), 2010). The Blue
Ribbon Committee (1999) proposed for auditors to discuss with the audit committee the quality and
42
not just the suitability of the financial reporting alternatives. Nevertheless, the responsibilities of
audit committee in corporation have been described by accounting literature as that of a watchdog,
and that of external auditor as a corporate watchdog. As an outcome, to safeguard the integrity of
the external audit practice and guarantee the independence of mind of the external auditors SEC
(2011) contends that, firms should rotate both the audit firms and audit partners from time to time.
According to SEC (2011), “Audit personnel should be regularly charged without conceding
continuity of the external audit process.” It has also been recommended that external audit firms
should be disengaged after continuous service to a company for a period not exceeding more than
ten years from the date of appointment, but may be reappointed seven years after their
disengagement.
2.3.3 Auditors Independence and Corporate Financial Reporting
The quality of the content of financial statement will be enhanced if it is audited and opinion is
expressed by a competent auditor as to its truth and fair presentation. The quality of the audit will
as well be enhanced if the auditor is independent both in mind and in appearance, that is, breaches,
if any are discovered and reported by the auditor. A financial statement accompanied by an audit
report will be viewed as more qualitative than that without any. However it will be so viewed if the
financial statement presented an impartial, unbiased and true and fair view of the results of the
company’s financial activities for each accounting period. In order to bring about this, the auditors’
independence must not have been compromised and to enable enhancement of the expected audit
quality by interest groups to the financial statement in general. Apart from business owners there
are several other interest group with varied reasons for using the content of the financial report of
firms. Outcome of their decision will go a long way to project the success or otherwise of any entity
43
whose financial statement destroys the aspiration of those that premise their decision on information
so provided. According to International Ethics Standard Board for Accountants (IESBA) (2014)
before an auditor can be said to be independent, he should be independent both in mind and
appearance. They stated further that being independent in mind entails the ability to freely express
a conclusion without being influenced by any factor that will make him compromise professional
judgment. Inability to do this will debar the auditor from acting with integrity and objectivity there
resulting in professional skepticism. IESBA (2014) stated that being independence in appearance
arises when the auditor avoid some significant facts and circumstances which will make any
informed third party to conclude that the integrity and objectivity of the auditor has been
compromised. An auditor’s independence will strengthen his objectivity and give credence to audit
evidence evaluated by him indicating that performance of his professional duties is devoid of
conflict of interest. However, influences that can impact negatively on the independence of the
auditor abound, despite the various rules and regulation being issued from time to time by the
government and regulatory authority. The quality of audit engagement will evolve from the
standard of the independence of auditor since the detection of breaches of material issues in the
financial statement depend on him. The multifarious circumstances surrounding quality of audit
affect it differently and affect the perspective of interest group to financial statement differently as
well. The perspectives of stakeholders of audit quality vary and therefore no one dominant factor
can be seen as impinging on the audit quality. (Okolie 2017).
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2.4 THEORETICAL FRAMEWORK
The corporate financial report audit is a monitoring mechanism that helps reduce information
asymmetry and protect the interests of the principals, specifically, stockholders and potential
stockholders, by providing reasonable assurance that management’s corporate financial statements
are free from material misstatements (Watts & Zimmerman, 2009). Based on this, the economic
theory of firm is usually the framework of economic analysis of auditor independence (Antle,
Griffin, Teece, & Williamson, 2011). According to the theory, firms are designed to maximize the
owners’ wealth, and the auditors’ independence is a function of auditors’ interests which is never
compromised in the best interest of the auditors. Thus, different factors which include personal and
institutional affect auditors’ independence and audit quality in general, these factors include fees
and familiarity and audit firm size. These according to Johnstone, Sutton, & Warfield (2013) affect
independence and auditors‟ judgment-based decisions, and the overall audit quality which has a
significant effect on the corporate financial report.
However, the performance quality of this monitoring function may vary; audit quality which relate
to the attributes of audit firm describes how well an audit detects and reports material misstatements
of financial statements, reduces information asymmetry between management and stockholders and
therefore helps protect the interests of stockholders (Dang 2004). In this regard, high audit quality
should be associated with high information quality of financial statements because financial
statements audited by high quality auditors should be less likely to contain material misstatements.
Therefore, among the theories that explain corporate financial reporting and auditing practice is
economic bonding theory from agency perspective. According to agency theory, audit is a
monitoring mechanism that provides reasonable assurance that financial statements prepared by
managers are free of material misstatement and therefore protects the interest of stakeholders.
45
Furthermore, in cases where interests of management conflicts with the interests of stockholders
and the fact that management compensation often is based on reported earnings and in order to
maximize their wealth, managers have incentives to manage reported earnings and they often have
the ability to do so (Dang, 2004). This agency problem between stockholders and managers gives
rise to the hiring of an auditor who provides independent assurance to corporate stakeholders. Thus,
auditing plays a significant role in enforcing and protecting stakeholders‟ right by detecting
misstatements and expropriation by managements. For auditors to successfully discharge this
responsibility, they need to be independent that is the state of being objective and just. Therefore,
the higher the audit quality, the more they detect management’s manipulations in the financial
statements.
On the other hand, economic bonding theory argues that the strength of the auditor’s monetary
dependence on the client or the economic bond consciously or unconsciously affects the auditor’s
independence or the willingness to resist client-induced biases in the financial statements. This is
also supported by the psychological belief that auditors are rational wealth maximizers who would
be intentionally biased towards compromising audit quality (independence) in order to generate
wealth for themselves. Therefore, economic bonding theory maintains that auditors are more likely
to comply to client pressures, including pressure to allow earnings management, when the provision
of non-audit services or abnormal fees generate economic rents to auditor (Frankel, Johnson, &
Nelson, 2014).
In another effort, Watts and Zimmerman (2009) relate auditor independence to capital market
theory, that is, the capital market is an incentive to whether to compromise independence by fees.
46
They first regarded independence as the ability of auditor to report any breach and irregularities.
Thus, this argument underlies stakeholders’ reliance on auditor probity to disclose irregularities in
audited corporate financial reports. In similar vein, DeAngelo (1981) state that, for the capital
market to value the auditors’ opinion, auditors need to appear independent to the users of corporate
financial reports. He further stressed that, auditor independence may be impaired when auditor earn
client-specific fees, which provide an incentive not to report the discovered breach to retain the
client. Therefore, client specific-fee for services leads to the practice of setting audit fees below the
market on initial audit engagement to retain the client. From capital market perspective, Antle
(1982) sees auditor as an economic agent, as the audit enhances the market value of the client
reports and statements. In this regard, clients have incentives to misrepresent the financial
statements of the company, and with the absence of some form of control, the auditor is not in a
position to seek out and report any breach and irregularities in financial statements. Moreover, the
theory of inspired confidence addresses both the demand and the supply for audit services. Since
the demand for audit services is the direct consequence of the participation of third parties
(interested parties of a company) in the company. These parties demand accountability from the
management, in return for their investments in the company. Accountability is realized through the
issuance of periodic financial reports. However, since this information provided by the management
may be biased, and outside parties have no direct means of monitoring, an audit is required to assure
the reliability of this information. Based on the framework of the above theories, this study attempt
to understand and identify the significance of corporate financial reporting and auditing practice in
Nigeria. As such, the study is underpinned by agency theory from the perspective of inspired
confidence, and economic bonding.
47
48
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
This chapter presents the research methodology describing how the study was conducted. It focuses
on the area of study, research designs, study population, sample technique and sample size, methods
and instrument of data collection, validity and reliability of research instruments, procedure for data
administration, collection and data analysis. It also includes the assumption and value that serve a
rationale for the research and the standards or criteria the researcher used for collecting and
interpreting data and reaching at conclusions.
3.2 RESEARCH DESIGN
This study employs qualitative research design. The qualitative research design is the most flexible
of the various experimental techniques, encompassing a variety of accepted methods and structures.
Using the qualitative research design, the study seeks to examine the impact of corporate financial
reporting and auditing practice in Nigeria.
3.3 AREA OF STUDY
The case study for this project is First Bank of Nigeria. Questionnaires are administer to five (5)
branches of First Bank of Nigeria located at the axis of Sapele and Uviwe Local Government Area
of Delta State. The branches are highlighted below;
First Bank of Nigeria, Boyo Road, Sapele.
First Bank of Nigeria, Airport Road Junction, Effurun.
First Bank of Nigeria, Airport Road, Effurun.
49
First Bank of Nigeria, PTI Road, Effurun.
First Bank of Nigeria, Ekpan Warri.
3.4 POPULATION OF THE STUDY
The population for this study consist of 264 persons which is made up of all employees of the area
of study which are the selected branches of First Bank of Nigeria the questionnaires were
administered. The population analysis is highlighted below. The population is used to investigate
the impact of auditing practice in Nigeria and corporate financial reporting.
Table 3.1: Population analysis of the study
Branch Number of Staff
First Bank of Nigeria, Boyo Road, Sapele. 48
First Bank of Nigeria, Airport Road Junction, Effurun. 63
First Bank of Nigeria, Airport Road, Effurun. 54
First Bank of Nigeria, PTI Road, Effurun. 57
First Bank of Nigeria, Ekpan Warri. 42
Total 264
3.5 SAMPLE AND SAMPLING TECHNIQUES
The sample size of this study is 50 gotten from the entire population of employees of the area of
study which are the five branches of First Bank of Nigeria the questionnaires were administered.
50
3.6 PILOT TESTING
Firstly, the questionnaires will be given to the supervisor to go through to validate the level and
standard of the questions. Also one (1) employee of each of the branches which formed part of the
sample population of the study will be required to vet the questions. Modifications will be made to
the questionnaires at this stage to improve the flow of the questions by sorting out any discovered
ambiguous elements not seen correlating with the context as well as to ensure compatibility of data
so that the result could be considered in the same general context.
3.6.1 Procedure of Data Administration
After the pilot testing and all necessary modification, the questionnaires will be administered
directly to the sample for the study. The employees of the different branches will be examined
separately with the same questionnaire. Ten (10) copies of the questionnaire will be administered
to 10 employees of the branches respectively and a total of fifty (50) copies of the questionnaire
will be shared across the five branches.
3.6.2 Rating and Measure of Scales
The researcher adopted a ‘five point Likert scale with ‘5’ considered the highest rating and ‘1’ the
lowest respectively. The questionnaire for the study addressed the research objectives which are to:
i. Ascertain if there is a relationship between internal control system and corporate
ii. Examine if there is a significant relationship between audit committee and corporate
51
iii. Examine the relationship between auditor’s independence and corporate financial
reporting.
The questionnaire also adopted different styles of questions that focused on corporate financial
reporting using both closed and opened ended questions.
3.7 INSTRUMENT OF DATA COLLECTION
The questionnaires administered is the instrument used for gathering information for the study
survey. The questionnaire is a systematically prepared document with a set of questions deliberately
designed to elicit response from respondents for the purpose of collecting data and information.
The type of questionnaire used for this study is a structured questionnaire which some control or
guidance is given for the answer. The questionnaire is a closed form because the questions are
basically short, requiring the respondent to check an item out of a list of given response which are
of multiple choice options in which the respondents selects the answer closer to their own opinion.
3.8 METHOD OF DATA ANALYSIS
Data collected from the respondent through the administration of questionnaires will be represented
in the frequency distributed table, analyzed and interpreted using simple percentage, while the
hypothesis of the research work is tested using chi-square testing statistical method of data analysis.
This method of data analysis or hypothesis testing is usually to find the nature of the relationship
between two or more independent variables. Based on the introduction of chi-square techniques,
the hypothesis to be tested is stated a null hypothesis (Ho) and an alternative hypothesis (Hi).
(𝑂−𝐸)2
The formula for Chi-square (𝑥 2 ) = 𝐸
Where:
52
O = Observed Data
E = Expected or theoretical frequency of an even under the null hypothesis
𝑅𝑜𝑤 × Colum
The formula is 𝐺𝑟𝑎𝑛𝑑 𝑇𝑜𝑡𝑎𝑙
O–E = The difference between the frequency or deviation
(𝑂−𝐸)2
= The deviation square and weighted
𝐸
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 INTRODUCTION
This chapter presents analysis and findings of the study as set out in the research objective and
research methodology. This is followed by drawing relevant inferences from the analysis as well as
the test of hypotheses formulated for the study. The simple percentage method is used to analyze
the data, thereafter the chi-square method of data analysis is employed in testing of the hypothesis.
4.2 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This section has a close look at the questions asked by the researcher which are applicable to
employees of the studied area.
Table 4.1: Distribution of Questionnaires to Employees
Numbers Percentage (%)
53
Total number of questionnaires distributed to 50 100
the employees
Total returned 50 100
Variance - -
Source: field survey, 2019
Narration: Table 4.1 shows 50 questionnaires were distributed. 50 (100%) respondents returned
and all administered questionnaires was successfully retrieved. This figure can however be said to
be representative because all of the respondents returned their questionnaire for evaluation.
Data and Analysis to questions of Section B
Table 4.2: Sex of the Respondents
Variables Numbers Percentage (%)
Male 17 34
Female 33 66
Total 50 100
Narration: Table 4.2 shows 17 (34%) of the respondents are males while 33 (66%) of the
respondents are females. This implies that there are more female to male employees at First Bank
of Nigeria from this analysis.
Table 4.3: Age of Respondent
20-25 9 18
54
26-35 23 46
36-45 12 24
45 and above 6 12
Total 50 100
Narration: Table 4.3 above shows that 9 (18%) of the respondents are between the age range of
20-25 years, 23 (46%) of the respondent are between the age range of 26-35 years, 12 (24%) are
between the ages of 36-45 years, while 6 (12%) are 45 and above. It could be observed that the
employees between the ages of 26-35 are more thereby making First Bank of Nigeria a New
Generation bank.
Table 4.4: Martial Status of Respondents
Single 16 32
Married 31 62
Separated 3 6
Divorced - -
Widowed - -
Total 50 100
Narration: Table 4.4 shows 16 (32%) of the respondents are single, 31 (62%) of the respondent
are married, 3 (6%) of the respondent are separated while none of the respondent are separated or
55
widowed. This implies that majority of the employees are married as they have 62% of the total
population of the study.
Table 4.5: Educational level: which one is your highest qualification?
National Diploma 7 14
HND 11 22
B.Sc. 24 48
Others 8 16
Total 50 100
Narration: Table 4.5 shows 7 (14%) of the respondents have National Diploma qualification, 11
(22%) of the respondent have HND (Higher National Diploma) qualification, 24 (48%) of the
respondent have B.Sc. (Bachelor Degree) qualification while 8 (16%) of the respondent specified
having other higher qualification such as MSc and PhD. From the analysis above, it could be
observed that the employees with Bachelor Degree are more as they hold 48% of the total
population. This implies that the bank employees are qualified to implement its function and
maintain an average payment.
Table 4.6: Years of Experience: How long have you been working in to implement its function?
1-2 4 8
3-5 7 14
56
6-9 11 22
10 above 28 56
Total 50 100
Narration: Table 4.6 shows 4 (22%) of the respondents have 1-2 years’ experience, 7 (14%) of the
respondents have 3-5 years’ experience, 11 (22%) of the respondents have 6-9 years’ experience
while 28 (56%) of the respondent have 10 or more years’ experience. From the analysis above, it
could be observed that the employees working at the banks have a good number of experience
thereby implement its function efficiently and effectively.
4.2.1 Ascertain if there is a Relationship between Internal Control System and Corporate
Financial Reporting Via First Bank Nigeria Plc
The following four tables (4.7 – 4.10) presents the information obtained from Section C (section
three) questionnaire statement and measures.
Table 4.7: Maintenance of weak Internal Control System by Management Affect the Quality of
Financial Reporting.
Strongly Agree 43 86
Agree 7 16
Neutral - -
Disagree - -
57
Strongly Disagree - -
Total 50 100
Narration: Table 4.7 shows 43 (86%) of the respondents strongly agree, and 7 (16%) of the
respondents agree about the maintenance of weak internal control system by management affect
the quality of financial reporting This implies that the employees are well acquainted with internal
control measures and its effect on corporate financial reporting.
Table 4.8: Do Improper Review of the Effectiveness of your Company’s System of Accounting
and Internal Control Affect the Quality of Financial Reporting?
Agree 4 8
Neutral - -
Disagree - -
Total 50 100
Narration: Table 4.8 shows 46 (92%) of the respondents strongly agree and 4 (8%) of the
respondents agree that improper review of the effectiveness of the company’s system of accounting
and internal control affect the quality of financial reporting. This implies that the employees are
58
knowledgeable on accounting standards, internal control measure and its positive and negative
impact on corporate financial reporting.
Table 4.9: Lack of good Internal Control Policies Affects the Quality of Corporate Financial Report
and makes the Report less Reliable.
Agree 27 54
Neutral 5 10
Disagree 4 8
Total 50 100
Narration: Table 4.9 shows 13 (28%) of the respondents strongly agree, 27 (54%) of the
respondents agree, 5 (10%) of the respondents are neutral while 4 (8%) of the respondents disagree
that lack of good internal control policies affects the quality of corporate financial report and makes
the report less reliable. From the above analysis, it shows some of the employees are knowledgeable
about internal control polices and this knowledge comes with experience. Therefore, 82% of the
employees are of the opinion that internal control policies affects the quality of corporate financial
report and makes the report less reliable.
Table 4.10: Most Companies do not have strong Internal Control and Accounting System because
of less Qualified and Inexperienced Staffs, hence the Low Quality of Financial Report.
59
Strongly Agree 4 8
Agree 19 38
Neutral 14 28
Disagree 11 22
Strongly Disagree 2 4
Total 50 100
Narration: Table 4.10 shows 4 (8%) of the respondents strongly agree, 19 (38%) of the respondents
agree, 14 (28%) of the respondents are neutral, 11 (22%) of the respondents disagree while 2 (4%)
of the respondents strongly disagree that most companies do not have strong internal control and
accounting system because of less qualified and inexperienced staffs, hence the low quality of
financial report.
4.2.2 Examine if there is a Significant Relationship between Audit Committee and
Corporate Financial Reporting
The following four tables (4.11 – 4.14) presents the information obtained from Section D (section
four) questionnaire statement and measures.
Table 4.11: Audit Committee Characteristics Affect Different Aspect of Corporate Financial
Reporting.
60
Strongly Agree 8 16
Agree 25 50
Neutral 11 22
Disagree 7 14
Total 50 100
agree, 11 (22%) of the respondents are neutral while 7 (14%) of the respondents disagree that audit
committee characteristics affect different aspect of corporate financial reporting. From the above
analysis, it shows the employees have an average understanding about audit committee
characteristics and its effect on corporate financial reporting.
Table 4.12: Audit Reports has gained more Confidence as a Result of Reports from Audit
Committee thereby making Financial Reporting Reliable.
Strongly Agree 4 8
Agree 31 62
Neutral 12 24
Disagree 3 6
Total 50 100
61
agree, 12 (24%) of the respondents are neutral while 3 (6%) of the respondents disagree that audit
reports has gained more confidence as a result of reports from audit committee thereby making
financial reporting reliable. From the above analysis, it shows 70% of the employees are of the
opinion that an audit committee have a significant input on audit report and this have positive or
negative impact on financial reports.
Table 4.13: The Appointment of the External Auditor is influenced by the Audit Committee and
this have a positive impact on Financial Reporting.
Agree 28 56
Neutral 6 12
Disagree - -
Total 50 100
respondents agree while 6 (12%) of the respondents are neutral that the appointment of the external
auditor is influenced by the audit committee and this have a positive impact on financial reporting.
From the above analysis, it shows 88% of the employees are of the opinion that the appointment of
external auditor have a significant impact on financial report.

62
Table 4.14: The Presence of a Financial Expert in the Audit Committee helps to strengthen the
Effectiveness and Efficiency of the Committee and this have a Positive Impact on Financial
Reporting.
Agree 19 38
Neutral - -
Disagree - -
Total 50 100
respondents agree that the presence of a financial expert in the audit committee helps to strengthen
the effectiveness and efficiency of the committee and this have a positive impact on financial
reporting. From the above analysis, it shows all of the employees are of the opinion that the presence
of a financial expert in the audit committee helps to strengthen the effectiveness and efficiency of
the committee and this have a positive impact on financial reporting.
4.2.3 Examine the Relationship between Auditor’s Independence and Corporate Financial
Reporting
The following four tables (4.15 – 4.18) presents the information obtained from Section E (section
five) questionnaire statement and measures.
63
Table 4.15: Undue Influence by Boards of Directors and Management on External Auditors Affects
the Quality of Financial Reporting.
Agree 26 52
Neutral 3 6
Disagree - -
Total 50 100
respondents agree while 3 (6%) of the respondents are neutral that undue influence by boards of
directors and management on external auditors affects the quality of financial reporting. From the
above analysis, it shows 94% of the employees are of the opinion that undue influence by boards
of directors and management on external auditors affects the quality of financial reporting.
Table 4.16: Non-Provision of Independent Guidance in the Auditing Profession for External
Auditors Affects the Quality of Financial Reporting.
Agree 20 40
Neutral 1 2
Disagree - -
64
Total 50 100
respondents agree while 1 (2%) of the respondents are neutral that non-provision of independent
guidance in the auditing profession for external auditors affects the quality of financial reporting.
From the above analysis, it shows 98% of the employees are of the opinion that non-provision of
independent guidance in the auditing profession for external auditors affects the quality of financial
reporting.
Table 4.17: Compromise by Auditors Affect the Quality of Corporate Financial Reporting
Negatively.
Agree 16 32
Neutral - -
Disagree - -
Total 50 100
Narration: Table 4.17 shows 34 (68%) of the respondents strongly agree while 16 (32%) of the
respondents agree that compromise by auditors affect the quality of corporate financial reporting
65
negatively. From the above analysis, it shows all of the employees are aware of the effects of
compromise by an auditor on financial reporting.
Table 4.18: Lack of Experience by Auditors and Inappropriate Timing in Reporting Financial
Statement makes Corporate Financial Reporting Irrelevant.
Agree 30 60
Neutral 3 6
Disagree - -
Total 50 100
respondents agree while 3 (6%) of the respondents are neutral that lack of experience by auditors
and inappropriate timing in reporting financial statement makes corporate financial reporting
irrelevant. From the above analysis, it shows 94% of the employees are of the opinion that lack of
experience by auditors and inappropriate timing in reporting financial statement makes corporate
financial reporting irrelevant.
66
4.3 TESTING OF HYPOTHESIS
The hypothesis was tested using the chi-square method of data analysis and conclusions was drawn
using the decision rule which states that “if the calculated value is greater than the critical/table
value we reject the null hypothesis otherwise we accept the alternative and vice versa”. In testing
for the hypothesis, the average of the data gotten from each section was used to calculate the chi-
square value.
(𝑂−𝐸)2
The formula for Chi-square (𝑥 2 ) = 𝐸
Where:
O = Observed Data
E = Expected or theoretical frequency of an even under the null hypothesis
𝑅𝑜𝑤 × Colum
The formula is 𝐺𝑟𝑎𝑛𝑑 𝑇𝑜𝑡𝑎𝑙
O–E = The difference between the frequency or deviation
(𝑂−𝐸)2
= The deviation square and weighted
𝐸
Σ(𝑂−𝐸)2
= Sum of all the deviation square and weighted
𝐸
In determining the tabulated chi-square, the degree of freedom and the level of significance are
imperative. The degree of freedom (DF) refers to vary randomly and independently one the border
total has been specified. The degree of freedom = n-1 = 5-1 = 4.
67
4.3.1 Hypothesis One: Relationship between Internal Control System and Corporate
Financial Reporting
Alternate Hypothesis (Hi): There is a significant relationship between internal control system
and corporate financial reporting.
Null hypothesis (Ho): There is no significant relationship between internal control system and
corporate financial reporting
Calculating the average value for each of the liked type data gotten from Section C of the
questionnaire
Table 4.19: Average value table Hypothesis One
Test level Q1 Q2 Q3 Q4 Sum Avg = Sum/4
SA 43 46 14 4 107 26.75
A 7 4 27 19 57 14.25
N - - 5 14 19 4.75
D - - 4 11 15 3.75
SD - - - 2 2 0.5
SA= Strongly Agree, A= Agree, N= Neutral, D= Disagree, SD= Strongly Disagree
Table 4.20: Calculating Chi-square Value Hypothesis One
Test level O E O-E (O – E)2 (𝑶 − 𝑬)𝟐

𝚺
𝑬
68
SA 26.75 10 16.75 280.56 28.056
A 14.25 10 4.25 18.06 1.806
N 4.75 10 -5.25 27.56 2.656
D 3.75 10 -6.25 39.06 3.906
SD 0.5 10 -9.5 90.25 9.025
Total X2 45.449
Expected Value = Total Population Evaluated / Test Level

50
E= = 10
5
Chi-square Value X2= 45.449
Degree of freedom = n-1 = 5-1 = 4
Level of significance = 0.010
Calculated chi-square value = 45.449
Table value is obtained from 4 degree of freedom at 0.010 significant level
Table/ Critical value = 13.277
Decision rule:
Since the calculated value 45.449 is higher than the table value 13.277 we accept the alternate
hypothesis (Hi) which states there is a significant relationship between internal control system and
corporate financial reporting and reject the null hypothesis (Ho) which states that there is no
significant relationship between internal control system and corporate financial reporting.
69
Therefore, this implies that the statements used to validate internal control system is valid and
corporate financial reporting is truly affected by such factor.
4.3.2 Hypothesis Two: Relationship between Audit Committee and Corporate Financial
Reporting
Alternate Hypothesis (Hi): There is a significant impact of audit committee on corporate financial
reporting.
Null hypothesis (Ho): There is no significant impact of audit committee on corporate financial
reporting.
Calculating the average value for each of the liked type data gotten from Section D of the
questionnaire
Table 4.21: Average value table Hypothesis Two
SA 8 4 16 31 59 14.75
A 25 31 28 19 103 25.75
N 11 12 6 - 29 7.25
D 7 3 - - 10 2.5
SD - - - - 0 0
70
Table 4.22: Calculating Chi-square Value Hypothesis Two

𝚺
𝑬
SA 14.75 10 4.75 22.56 2.256
A 25.75 10 15.75 248.06 24.806
N 7.25 10 -2.5 6.25 0.625
D 2.5 10 -7.25 56.25 5.625
SD 0 10 -10 100 10.0
Total X2 43.312

50
E= = 10
5
Table/ Critical value = 13.277
Decision rule:
hypothesis (Hi) which states there is a significant impact of audit committee on corporate financial
71
reporting and reject the null hypothesis (Ho) which states that there is no significant impact of audit
committee on corporate financial reporting. Therefore, this implies that the statements used to
validate audit committee is valid and corporate financial reporting is truly affected by such factor.
4.3.3 Hypothesis Three: Relationship between Auditor’s Independence and Corporate
Financial Reporting
Alternate Hypothesis (Hi): There is a significant relationship between auditor’s independence and
Null hypothesis (Ho): There is no significant relationship between auditor’s independence and
Calculating the average value for each of the liked type data gotten from Section E of the
questionnaire
Table 4.23: Average value table Hypothesis Three
SA 21 29 34 17 101 25.25
A 26 20 16 30 92 23
N 3 1 - 3 7 1.75
D - - - - 0 0
SD - - - - 0 0
72
Table 4.24: Calculating Chi-square Value Hypothesis Three

𝚺
𝑬
SA 25.25 10 15.25 232.56 23.256
A 23 10 13 169 16.9
N 1.75 10 -8.25 68.06 6.806
D 0 10 -10 100 10.0
SD 0 10 -10 100 10.0
Total X2 66.962

50
E= = 10
5
Table/ Critical value 13.277
Decision rule:
hypothesis (Hi) which states that there is a significant relationship between auditor’s independence
73
and corporate financial reporting and reject the null hypothesis (Ho) which states that there is no
significant relationship between auditor’s independence and corporate financial reporting.
Therefore, this implies that the statements used to validate auditor’s independence is valid and
corporate financial reporting is truly affected by such factor.
74
CHAPTER FIVE
CONCLUSION, FINDINGS AND RECOMMENDATIONS
5.1 CONCLUSION
This study was undertaken to critically assess and evaluate corporate financial reporting and
auditing practice in Nigeria using First Bank PLC as a case study. This is drawn from the fact that
corporate financial report is an important part of organization existence as it is needed by a variety
of users for different purposes. Also auditing as an aspect of the accounting practice is bedeviled
by a lot of challenges like objective, independence and truthfulness. In attempt to achieve the
aim/objectives of the study, data were generated and analyzed. These data were collected from
primary sources through the aid of questionnaires that provided answers to questions regarding
internal control, audit committee as well as auditor’s independence. In order to adequately capture
and estimate the fundamental features in this study, Chi-square test method was used in testing the
hypothesis. Findings were made with respect to the research question and research hypothesis
designed in order for the researcher to reject or accept its hypothesis thereby answering the research
questions. From the data analysis, all alternative hypothesis (Hi) were accepted and it gave answers
to the research question with respect to the parameters used in conducting the investigation.
5.2 FINDINGS
The study provides evidence on the impact of auditing practice in Nigeria and corporate financial
reporting using First Bank of Nigeria as a case study. The empirical findings from this study are as
follows:
i. There is a significant positive relationship between internal control system and corporate
financial reporting .This means that internal control system has a positive significant
effect on corporate financial reporting.

75
ii. There is a positive impact of audit committee on corporate financial reporting .This
means that the influence of audit committee on corporate financial reporting is positively
significant.
iii. There is a significant positive relationship between auditor’s independence and
corporate financial reporting .This means that auditor’s independence has a positive
significant effect on corporate financial reporting.
5.3 RECOMMENDATION
Based on the analysis of this research work, the following recommendations are put forward:
i. More attention should be paid to the board’s composition and qualified personnel should
be selected to be members of the board of directors so as to have implement an effective
and efficient internal control system as their true and fair judgmental decisions on
corporate financial statement is reported to the public.
ii. For the effectiveness and efficiency of the independent auditor, there should be void of
any interest in the company and unbiased report of corporate financial statement as not
to favour a particular set of persons with the company or the public.
iii. Rotation of auditors should be sustained which will help improve the quality of
76
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APPENDIX I
QUESTIONNAIRE
SECTION A
INTRODUCTION TO SURVEY DESIGN FOR ACCOUNTING: CORPORATE

FINANCIAL REPORTING AND AUDITING PRACTICE IN NIGERIA A CASE STUDY
OF FIRST BANK OF NIGERIA
Department of Accounting
College of Social and Management Science
Western Delta University
Oghara, Delta State
Dear respondent,
Survey Design for Accounting: Corporate Financial Reporting and Auditing Practice in
Nigeria a Case Study of First Bank of Nigeria
I am a final year student studying Accounting in Western Delta University, Oghara, Delta State. I
am undertaking a study on Corporate Financial Reporting and Auditing Practice in Nigeria as part
of the requirements for the award of B.Sc. (Hons) in Accounting. In this regard, your organization
has been selected as my case study. I appeal to you to assist by sparing a few minutes to complete
the attached questionnaire. You are not required to disclose your identity. You are also assured that
your answers will be treated with utmost confidentiality and used solely on the stated academic
purpose.
Yours faithfully,
Name:
Phone number:
86
SECTION B
This part is on general information about you as respondent. Please provide answers to the
following questions by ticking (√) against the most suitable alternative or giving narrative responses
in the spaces provided. Your response shall be accorded all the confidentiality it deserves and will
only be used for academic purposes.
1. Gender:
(a) Male [ ]
(b) Female [ ]
2. Age Group (Yrs):

(a) 20 - 25 [ ] (b) 26 - 35 [ ] (c) 36 - 45 [ ] (d) 45 and above [ ]
3. Marital Status:
(a) Single [ ] (b) Married [ ] (c) Separated [ ] (d) Divorced [ ]
(e) Widowed [ ]
4. Educational level: which one is your highest qualification

(a) National Diploma [ ] (b) HND [ ] (c) B.Sc. [ ]
(d) Other (Specify)…………………………………
5. Years of Experience: How long have you been working in First Bank Nigeria Plc
(a) 1-2 [ ] (b) 3-5 [ ] (c) 6-9 [ ] (d) 10 above [ ]
SECTION C
ASCERTAIN IF THERE IS A RELATIONSHIP BETWEEN INTERNAL CONTROL SYSTEM
AND CORPORATE FINANCIAL REPORTING
This part concerns the factors that influence internal control system on corporate financial reporting.
Please show the extent to which you think each factor influences corporate financial reporting. Do
this by putting a tick (√) in the appropriate box. A “1” means you strongly disagree while a “5”
means that you strongly agree. You may tick any of the number in the middle that shows how strong
your feelings are. There are no rights or wrong answers.
S/N Please indicate the extent to which you agree

Disagree
Disagree
Strongly
Strongly
Neutral
Agree
Agree
with the following statements.
CODE 5 4 3 2 1
6. Maintenance of weak internal control system
by management affect the quality of financial
reporting.
87
7. Do improper review of the effectiveness of
your company’s system of accounting and
internal control affect the quality of the
financial reporting?
8. Lack of good internal control policies affects
the quality of corporate financial report and
makes the report less reliable.
9. Most companies do not have strong internal
control and accounting system because of less
qualified and inexperienced staffs, hence the
low quality of financial report.
SECTION D
EXAMINE IF THERE IS A SIGNIFICANT RELATIONSHIP BETWEEN AUDIT COMMITTEE
AND CORPORATE FINANCIAL REPORTING
This part concerns the significant relationship between audit committee and corporate financial
reporting. Please show the extent to your expectation and perception of audit committee relationship
and corporate financial reporting. Do this by putting a tick (√) in the appropriate box. A “1” means
you strongly disagree while a “5” means that you strongly agree. You may tick any of the number
in the middle that shows how strong your feelings are. There are no rights or wrong answers.
Disagree
Disagree
Strongly
Strongly
Neutral
Agree
Agree
CODE 5 4 3 2 1
10. Audit committee characteristics affect
different aspect of corporate financial
reporting.
11. Audit reports has gained more confidence as a
result of reports from audit committee thereby
making financial reporting reliable.
12. The appointment of the external auditor is
influenced by the audit committee and this
have a positive impact on financial reporting.
13. The presence of a financial expert in the audit
committee helps to strengthen the
effectiveness and efficiency of the committee
and this have a positive impact on financial
reporting.
SECTION E
88
EXAMINE THE RELATIONSHIP BETWEEN AUDITOR’S INDEPENDENCE AND
CORPORATE FINANCIAL REPORTING
This part examines the relationship between auditor’s independence and corporate financial
reporting. Please show the extent to your expectation and perception of auditor’s independence and
corporate financial reporting. Do this by putting a tick (√) in the appropriate box. A “1” means you
strongly disagree while a “5” means that you strongly agree. You may tick any of the number in
the middle that shows how strong your feelings are. There are no rights or wrong answers.
Disagree
Disagree
Strongly
Strongly
Neutral
Agree
Agree
CODE 5 4 3 2 1
14. Undue influence by boards of directors and
management on external auditors affects the
quality of financial reporting.
15. Non-provision of independent guidance in the
auditing profession for external auditors affects
the quality of financial reporting.
16. Compromise by auditors affect the quality of
corporate financial reporting negatively.
17. Lack of experience by auditors and
inappropriate timing in reporting financial
statement makes corporate financial reporting
irrelevant.
89
APPENDIX II
90

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AUDITING PRACTICE IN NIGERIA AND CORPORATE

WESTERN DELTA UNIVERSITY

OGHARA, DELTA STATE

A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING,

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD

Western Delta University, Oghara, Delta State.

MRS. EJIRO EJUVWIKOKO DATE

MR. M. S. MAMUDU DATE

MR. A. O. GARUBA DATE

according to western delta university standard.

Delta University, Oghara, Delta State, Nigeria.

MRS. EJIRO EJUVWIKOKO DATE

Mr. A. O. GARUBA DATE

EXTERNAL EXAMINER DATE

program and on his wings only have I soared.

me through this program.

useful advice rendered to the source of this project.

through the period of this program.

1.1 BACKGROUND TO THE STUDY .................................................................................... 1

1.2 STATEMENT OF THE PROBLEM ................................................................................... 4

1.3 RESEARCH QUESTIONS .................................................................................................. 5

1.4 AIM AND OBJECTIVES OF THE STUDY ....................................................................... 5

1.5 RESEARCH HYPOTHESIS ................................................................................................ 6

1.6 SCOPE OF THE STUDY .................................................................................................... 6

1.7 SIGNIFICANCE OF THE STUDY ..................................................................................... 6

1.8 DEFINITION OF TERMS ................................................................................................... 7

2.1 AUDITING PRACTICE ...................................................................................................... 9

2.1.1.1 Audit Committee Size .................................................................................................. 12

2.1.1.2 Audit Committee Meetings .......................................................................................... 13

2.1.1.3 Audit Committee Financial Expertise .......................................................................... 14

2.1.1.4 Audit Committee Effectiveness.................................................................................... 16

2.1.2 Auditors Independence .................................................................................................... 17

2.1.2.1 Factor Impinging on Auditor Independence ................................................................ 18

2.1.3 Factors Affecting Audit Quality ...................................................................................... 20

2.1.3.1 Financial Literacy of Audit Committee Members ....................................................... 20

2.1.3.2 Frequency of Audit Committee Meetings .................................................................... 21

2.1.3.3 Multiple Directorship of Audit Committee Members .................................................. 22

2.1.3.4 Independence of Audit Committee............................................................................... 22

2.1.3.5 Audit Firm Tenure ........................................................................................................ 23

2.1.4 Internal Control System................................................................................................... 23

2.1.4.1 Types of Internal Control ............................................................................................. 24

2.1.4.2 Control Environment .................................................................................................... 25

2.1.4.3 Control Activities ......................................................................................................... 25

2.1.4.4 Risk Assessment ........................................................................................................... 26

2.1.4.5 Information and Communication ................................................................................. 26

2.1.4.6 Monitoring .................................................................................................................... 27

2.1.5 Internal Audit .................................................................................................................. 28

2.1.6 Internal Audit Effectiveness ............................................................................................ 28

2.1.7 Internal Audit Performance ............................................................................................. 30

2.1.9 The Importance of Audit ................................................................................................. 32

2.1.10 Audit Challenges and Financial Reporting In Nigeria .................................................. 33

2.2 CONCEPTUAL FRAMEWORK OF CORPORATE FINANCIAL REPORTING .......... 34

2.2.1 Corporate Financial Reporting ........................................................................................ 34

2.2.1.1 Statement of Comprehensive Income........................................................................... 35

2.2.1.2 Statement of Cash Flow ............................................................................................... 35

2.2.1.3 Statement of Change in Equity ..................................................................................... 37

2.2.2 Corporate Financial Reporting Legal Framework ........................................................... 37