THE IMPACT OF LEGAL AUDIT REQUIREMENTS ON THE AUDITORS PERFORMANCE IN NIGERIA

By

OGBU EMENIKE, GERALD

Presented To

Department of Accountancy

ABSTRACT

This study is intended to find out the impact of legal audit requirements on the auditors performance in Nigeria context specifically. The literature review describes the various audit requirements in conjunction with the professional standards, and how they are applied to secure the auditor's competence and independence that are vital to the auditors if they are to effectively execute their responsibilities to their clients.

The arrangement of the topic discussed in reviewing the literature was designed to support the hypothesis which from the basis of the study.

TABLE OF CONTENT

Title page II

Approval page III

Dedication IV

Abstract V

Table of content VI

CHAPTER ONE

1.0 INTRODUCTION 1

1.1 statement of the problem 4

1.2 Purpose of the problem 6

1.3 Significance of the study 7

1.4 Statement of Hypothesis 9

1.5 Scope of the study 11

1.6 Limitation of the study 11

1.7 Definition of terms 13

CHAPTER TWO

2.0 LITERATURE REVIEW 17

2.1 The concept of Auditing and the auditor's environment20

2.2 Classification of auditing 22

CHAPTER THREE

3.0 RESEARCH DESIGN AND METHODOLOGY 79

3.1 Research design 79

3.2 Survey of existing document 79

3.3 Questionnaires 80

3.4 Oral interviews 80

3.5 Sample design 81

3.6 Sources of data 81

3.6.1 Primary data 81

3.6.1 Secondary data 82

3.7 Statistical techniques 82

3.8 Chi-square test 83

3.9 Rank correlation 84

3.10 Sign test 86

3.11 Reliability of data 87

CHAPTER FOUR

4.0 DATA PRESENTATION AND ANALYSIS

4.1 Tabulation and interpretation of data from -

Questionnaire 89

CHAPTER FIVE

5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Findings 118

5.2 Conclusion 122

5.3 Recommendations 124

Bibliography 127

Appendix (questionnaire) 130

CHAPTER ONE

INTRODUCTION

10 INTRODUCTION

" Business without auditing stifles public confidence and auditing without law is a force"

(Emile Wolf)

Auditing occupies a very critical position in the business life of any society both industrialized and non industrialized countries like Nigeria and other West Africa countries This implies that auditing plays a critical and important role in the economic development of any nation

This is more importance as business, which is the mainstay/ bedrock of the economy, is fast growing It has grown beyond what may be described as "purely personal management that were common in the olden days Such business establishments are small in size, personally owned, financed and managed by the owners

However, there is a changed situation in this modern time The hallmark of most business is no longer owner's management The owner and financers are separate person (shareholders and investors) and controlled by outsiders (director and managers), because of the increase in size and comparity of business activities This practice is known as "stewardship" the stewardship position of business management entails, as its fundamental features, that shareholders and other parties to the business will like to know how their resources entrusted in the care of management are being used to achieve the corporate aim This is therefore done by employing the services of person's who are professionally qualified, and referred to as independent public auditors to attest on the effective utilization or otherwise, of the financial resources, after examining the accounts prepared by the management It was this motive that gave rise to the birth of this profession auditing with vital role and heavy responsibilities

It would be right to stress that the dawn of auditing era is the wake into consciousness and disciplines in business operations, the quest to maintain sanctity in the conduct of business

But to have auditing profession void of legal backing is a despicable attempt to accord the practice a persuasive influence but not authoritative status

Auditing without the law is a farce, a contradiction in terms To this extent, the law becomes a fundamental aspect of the profession and practically speaking too, bears conspicuous implications For example, in performing the attest functions, problems and hardships may arise and both the law and the professional body are not silent on these effect

It is therefore the legal prescriptions and their consequences on auditing that constitute the terms of reference of this research work The legal framework presently applicable to auditing in Nigeria is the companies and Allied matters Act (CAMA) 1990 This is normal reviewed in the light of the regulatory codes issued by the authorities in auditing profession both within and outside Nigeria

The investigation with expose any difficulties in the legal environment of auditing which the law can solve and suggest ways of improving the deficiencies

11 STATEMENT OF THE PROBLEM

in this system, we shall examine the situation which exist in the Nigeria auditing scene as the basis for the problem which has been chosen for investigation These problems are summarized below:

i) Auditors have been found to negate the spirit of the legal requirements for various reasons which revolve around maintaining a cordial relationship with the directors/ management who they are specifically appointed to check

ii) Comments made by some Auditors made the researchrers believe that the legal audit requirements, especially on the areas of appointment and removal of Auditors to more to stifle rather than enhance their independence

iii) Auditors sometimes change their negative opinion so as to retain their appointments as Auditors This situation apart from its implications to the profession will mean that company's financial position could be worse as there would be no pressure from uniformed shareholders and the general public to apply the corrective measures

iv) There seems to be lack of appreciation of the Auditors roles in companies management, hence, the staff of companies generally see auditing work as a disturbance to the normal running of the business which make them give only minimal co-operation to Auditors

v) For companies registered under the companies Act there is more pressure to issue an unqualified and positive opinion on the truth and fairness of the financial statements

vi) In the course of audit, the Auditors may not feel secured to face-up-to the unpleasant facts relating to the company

vii) Emotions could be aroused and objectively clouded by sentiments, just to avoid stepping on the sore toes of the management

In the view of these foregoing vitiating factors in the Nigeria auditing context, the following questions are contemplated or framed

i Do the legal audit requirements apply to the practical situation of companies in Nigeria?

ii Do Auditors comply with the legal audit requirements in performing their duties in Nigeria?

iii To what extent do the legal audit requirements provisions influence the Auditors opinion in Nigeria

iv Do Auditors who comply with the legal audit prescription perform better than those who do not?

These problems will be the basis for the research questions

12 PURPOSE OF THE STUDY

i The principles purpose of this research work is to critically examine the legal audit requirements that are currently applied to the practice of auditing in Nigeria, so as to ascertain the extent to which these requirements influence the Auditors in the performance of their duties

ii Some of the problems plaguing the practice of the profession have been identified in the proceeding section This study attempts to find the causes of these problems and to proffer measures that will remedy the ailing situations

iii Although, the research exercise is basically academic, but its findings are expected to be applied by both the Auditors and lawmakers

13 SIGNIFICANCE OF THE STUDY

The Nigerian auditing practice is fraught with risks and problems We are not unaware of the increasing case of fraud and misappropriations on the part of Directors and staff of companies Cases of supporting and abetting crimes as well as professional negligence arising from pressures on auditors to issue unqualified report These circumstance led to an erosion of confidence, the public at large consequent delay of the professional standards

The significance of this study stems from the need to ameliorate or avert this worsening situation especially as there are many interested parties in the report of auditors

Paramount among these interested parties is the auditor that issues the report This research work recognizes that and for the auditors to find ways of protecting themselves from the large and for the auditors to find ways of protecting themeives from the large wave of current ligitiation arising from numerous and often-acute liabilities placed on them by the shareholders or third parties Measures will be prescribed to guide against these problems

Shareholders and the investing public are in some occasion disgruntled with the auditors certification as emotions and sentiments interfere with objectivity and sound judgment as to the truth and fairness of the financial statements which the auditors are appointed to examine The shareholders and third parties who rely on the technical advice of the auditors will be benefited by the findings of this study

Government agencies that have interest in the audited accounts of various companies for various reasons including taxation and lawmakers whose interest is in the area of legal audit prescription will also have relevance to this research project

The significance of this investigation into the impact of legal audit requirements on the auditors performances is inexhaustible and the researcher, in doubtful, believe that with all findings, the stature of the auditing profession will be improved

14 STATEMENT OF HYPOTHESIS

the aim of hypothesis is to provide a logical ground for developing the research work The hypothesis serves or provides as possible answers to the chosen problems and further research will provide imperial basis of the acceptance or otherwise, the reception of the hypothesis

For the purpose of this stuffy, the hypothesis shall be stated under two categories:-

The sub-hypothesis and the main hypothesis, and each category shall comprise the null -hypothesis (HO) and the alternative hypothesis (HAIR)

SUB HYPOTHESIS

HO: There is no relationship between practical effectiveness and theoretical correctness as regards the efficiency of legal and it requirements in Nigeria

HI: There is a relationship between practical effectiveness and theoretical correctness as regards the efficiency of legal audit requirement in Nigeria

HO: Auditors have not been complying with the legal audit requirements in material aspects

HI: Auditors have been complying with the legal audit requirements in material aspects

MAIN HYPOTHESIS

The legal audit requirements in Nigeria have negative effect on the auditor's performance

The legal audit requirements in Nigeria have positives effect on the auditor's performance

15 SCOPE OF THE STUDY

This research study is confined to auditors in Nigeria

The legal provision considered are those given by the companies and Allied Matters ACT (CAMA) 1990 Questions will therefore be directed towards findings out how the auditors carryout their normal audit work as required for companies registered under the co-operate affairs commission (CAC)

16 LIMITATION OF THE STUDY

Few auditors have been selected, as it is not possible to review all the auditors in Nigeria Besides, in pursuing the research on this scope, other limiting problems emerge A good amount of material abound in the literature, but, there is the need for further research in order to match them with the increasing importance of the role of auditors in business It should be stressed that as a practical field many writers based their articles and texts on experience So many explanation and interpretations of auditing legal requirement and their implication emerge and the researcher was put on position research for the legal provisions and state of professional bodies There arose the problems of merging the statements by the authorities and what the writers views The consideration of time and money compelled the researcher to weight and choose between alternatives For instance, photocopying a large quantity of materials entails much cost

The researcher also met some constraints in the area of co-operation not only from the respondent's side but from the Liberians who regulate free access to literary facilities This problem was compounded by the existing inadequate research materials in the country

17 DEFINITION OF TERMS

This provides the contractual meaning of certain terms used in the study

IMPACT: This means the effect of or influence

LEGAL: This means in accordance with or authorities by the law

AUDIT: independent examination and expression of opinion on the validity and dependability of financial statements prepared by management

LEGAL AUDIT REQUIREMENTS: The provisions of the law that guide the conduct of audit

AUDITOR: The accountant who performs the audit work/professional accountant (ICAN holder)

SHARE HOLDER: The investing public who own shares in a company

CLIENT: A customer to the auditor, the business entity which employed the services of the auditors

THIRD PARTY: A person or an institution who has financial interest in but no contractual relationship with the business

CONTRACT: An agreement between two or more person which has legal backing and connotations

FINANCIAL STATEMENT AND ACCOUNT: All the financial accounting records used by a business entity

LIMITED COMPANY: A business entity with legal personality and separate existence

AUDIT COMMITTEE: A body establishment by law in public companies composed of non executive directors and auditors for then purpose of reviewing the financial statements and audit findings, recommendations and appointment and remuneration of auditors and performing other possible related functions

NEGLIGENCE: A commission or omission in the performance of an act, arising out of carelessness, which a reasonable and prudent man in the circumstance would have avoided

COMPLIANCE TEST: Those tests, which seek to provide audit evidence that the internal control procedures are being applied as prescribed

SUBSTANTIVE TESTS: Those tests of transactions and balance, and other procedures such as analytical review which seeks to provide audit evidence as to the completeness, accuracy and validity of the information contained in the accounting records or in the financial statement

AUDIT RISK: This is the chance of causing damage to an audit firm as a result of giving a wrong opinion under a circumstance

TORT: An act which causes harm to a determinate person It is a breach of duty arising out of a personal relation or contact and which is either contrary to the law or an omission of a specific legal duty or violation of an absolute right

INTERNAL CHECK: The allocation of authority and work in such a manner as to afford checks on the routine transactions of to-day work by means of the work of one person being proved independently by another of the work of a person being complementary to that of another

AMELIORATE: To lessen the effect of something