Accounting Project Topics

Audit Independence and Credibility of Financial Reporting in the Nigerian Banking Sector

Audit Independence and Credibility of Financial Reporting in the Nigerian Banking Sector

Audit Independence and Credibility of Financial Reporting in the Nigerian Banking Sector

Chapter One

Objectives of the Study

The main objective of the study is to determine the impact of auditors’ independence on credibility of financial reporting in the Nigerian Banking Sector. There are specific objectives of the study which were to:

  1. Determine the impact of audit independence on the understandability of financial statement in the Nigerian Banking Sector.
  2. Evaluate the effects of audit independence on relevance of financial statement in the Nigerian Banking Sector.
  3. Determine the effects of audit independence on the faithful representation of financial statement in the Nigerian Banking Sector.




Our focus in this chapter is to critically examine relevant literatures that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.

Precisely, the chapter will be considered in three sub-headings:

  • Conceptual Framework
  • Theoretical Framework
  • Empirical Review and
  • Summary Gap


Here, the focus is to study the concepts on which this topic is based. Such would be done by defining, listing and explaining roles, features, characteristics and functions of the concepts to be reviewed. As such the following concepts are reviewed:


To audit is to fine-tune, to examine, to make clearer. The Merriam Webster Dictionary defines auditing variedly as a “complete and careful examination of the financial records of a business or a person; a careful check or review of something; a formal examination of an organization‟s or individuals accounts or financial situation; a methodical examination and review” (Merriam Webster Dictionary). The choice of words such as “examination, methodical, careful” in the above definitions connotes that auditing is process, it is usually carried out on a financial records, it is usually carried out to determine a financial situation, capacity or proceeds.

The international audit and assurance Standard Board (IAASB) understands this factors and process when it defines auditing as “independent process of examining financial statements, and expressing opinion on the same financial statements relating to a company/firm; usually carried out by an independently appointed auditor in accordance with certain terms of appointment and in compliance with relevant statutory and performance requirement”.

Zayol, Kukeng and Iortule (2017) quote Mautz (1964) who viewed auditing as “concerned with the process of verifying accounting data, determining the level of accuracy and level of reliability of accounting statements and reports.”

Particularly, auditing of financial any statements is about conducting an objective and accurate evaluation of financial statements of a firm by an independently appointed auditor (s). For example, Limited Liability Companies (LLC) are required by law to audit their annual accounts much as to ensure that the financial statements to be published presents a holistic, true and unbiased, balance and accurate financial situation of the firm to the shareholders, prospective investors and general public (European Commission, 2010).

If shareholders and investors must rely on the auditor‟s opinion about the finances of the company, it is crucial that the auditor maintains a level of independence of the company, executive directors, management and all other influencers. Bahram (200) posits that carrying out an audit that fulfils reasonable expectations of stakeholders demands that such work is performed with due regard for audit integrity and credibility. The auditor must not in any way compromise job quality for some self-financial gratifications.

 Audit Quality and Credibility

Researchers such as Myers, Myers and Omer (2003) made efforts to explain factors and variables for the state of audit quality with focus on the relationship between company specific and audit firm specific factors that could mediate audit quality. Today, efforts have not seized from all concerned areas on what makes audit quality and what does not make an audit to be quality. Auditing in the language of a layman is a complete and careful examination of the financial records of a business. Merriam Webster Dictionary defines

“quality” as a high level of value or excellence. In essence, audit quality can be ordinarily described as the excellent and valued way of examining financial records of a business.  Basically, audit quality explains the procedures in ensuring that a financial report is relevant and reliable to members of a firm and the public.

There are variations in definitions as to what audit quality means. Judging from the long time established knowledge, De Angelo (1981) sees audit quality as the probability that an auditor will discover a breach in the client‟s accounting system and as well report the breach. Similar to the view of De Angelo, Davidson and Neu (1993) describe audit quality as detection and elimination of material misstatements and manipulations in recorded net income. Palmrose (1988) cited in Zayol, et al, (2017) reason that audit quality is the assurance that financial reports contain no material misstatements.

Nwanyanwu (2017) defines audit quality as established procedures which ensure that financial report is relevant, reliable and communicative to organization members and the general public. There are various documents as there are scholars presenting various benchmarks regarding what audit quality should mean/be. Saleh and Azary (2008) assess audit quality as determining how effectively auditing was able to detect and material misstatements, and effectively reduce information asymmetry between the management and shareholders, with the goal of protecting the interest of the shareholders.

One thing is common to all the definitions, they all point to:

  1. Detection of financial inconsistencies
  2. Reporting of the inconsistencies
  3. Reducing information imbalance between management and shareholders
  4. Protecting the interest of the shareholders

Al -Khaddash, et al. (2013) note that all the definitions despite their divergence, emphasize that audit should be compliant with relevant audit procedures and standards. This is because stakeholders are in expectation of accurate, reliable and informative report that is instrumental for decision making.

Truly, the process of determining and realizing audit quality is complex in nature, and more complex is the difficulty in identifying actual audit quality (IAASB, 2011). From the perspective of Chadegani (2011), measuring audit quality entails direct measures such as:

“compliance of financial reporting with acceptable reporting standard, quality control review, bankruptcy, desk review and SEC performance”; while the indirect measures include “audit size, auditor tenure, industry expertise, audit fees, economic dependence, reputation and cost of capital”.

Base on this, the reliability of audit quality is measureable by its ability to detect fraudulent financial records and earnings management. In other words, audit quality is hinged on the extent it exhumes elements that are in conflict with sincerity of the quality of earnings disclosed.

In essence, though there are various views and position and counterviews on what constitutes audit quality or what elements qualifies a report, all the views however have a unified aim. The consensus is that audit quality is measurable in terms its compliance to standard financial reporting benchmark, quality control review, bankruptcy, desk review, SEC performance on the other hand, the audit quality is measured in audit size, auditor tenure, industry expertise, audit fees, economic dependence, reputation and cost of capital. Overall, audit quality is judged base on certain parameters such as:  detecting and reporting of financial fraud, reducing information asymmetry, and protecting shareholders interest.




 Research Design

Research design is a road map through which a study is planned to be achieved. A well articulated design is desirable to achieve the objectives of the study. The expos facto research design is used for the study. This kind of design is a systematic research design in which the researcher cannot control the independent variables because their manifestation have already occurred or because they cannot be manipulated, This means that the researcher reports the way the data are without manipulation. The choice of the research method is hinged on the nature of this study, which is social science.

Population of the Study

According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description.

The population of the Nigerian commercial bank is estimated at twenty one (21) thus:

Access Bank, Citibank, Diamond Bank, Ecobank, Fidelity Bank, First Bank, First City Monument Bank, Guarantee Trust Bank Heritage Bank, Key Stone Bank, Polaris Bank,

Providus Bank, Standard Chattered Bank, Sterlin  Bank, Sun Trust Bank, Union Bank United Bank for Africa, Unity Bank, Wema Bank and Zenith Bank. ( accessed on 10/12/18).



 Result: Demographic Information and Table

Table 4.1: Demographic Characteristics of the Respondents





From the results of the analysis of data in presented chapter four, the following

findings were obtained.

  1. Auditor’s independence has significance impact on understandability of financial statement in the banking sectors in Nigeria.
  2. The study also reveals that auditor’s independence has positive and significant effects on the relevance of financial statement in the Nigerian Banking sector.
  3. The correlation analysis reveals that auditor’s independence is positively related with faithful representation of financial statement.


From the discussion presented in the preceding section of this study, the following conclusions were made:

  1. It is clear that auditors‟ independence is fundamental to the credibility of the financial statement. The opinion of the auditor is what the users of financial statement use in making their decisions.  ii. For appropriate decision to be made the auditor‟s report has to be one that is void of bias or manipulation. In order to be able to do this efficiently and effectively, the auditor should be discouraged from providing non audit services.
  2.  Auditors fee are influenced by various economic determinants including the size and complexity of the audit work. For example, Kinney and Libby (2002) argue that unexpected fees are a better measure of the auditor‟s economic bond because they reflect the excess profit derived from an audit client
  3. According to the standard (IAS 24), an auditor does not have primary responsibility for the prevention of fraud, but provides an approach that an auditor should follow when conducting an audit. It state that when planning and performing an audit procedures, reporting and evaluating the procedure thereon, the auditor must consider the risk of material misstatement in the financial statement resulting from error and fraud.


This study has investigated many issues, both empirically and in literature and based on the findings, certain conclusion have been drawn. This section further extends frontiers of the study by putting up some recommendations generally intended towards improving the independence of an auditor that will enhance the credibility of the financial statement. The following specific recommendations are deemed appropriate at this juncture.

  1. For auditors to remain strictly independent, they should not be allowed to provide audit clients with any other advisory services.
  2. There should be rotation of auditors to improve the auditors‟ independence.
  3. There should be an implementation of peer assessment in order to ensure that audits are carried out with utmost professionalism and mutual respect.
  4. An audit committee should be set up by every limited liability company to evaluate the audit work done.
  5. The aspect of auditors providing consulting services to the client company should be properly examined.

It is anticipated that when all these are done it help the auditor to be independent and also be able to present a true and fair view of the financial statements.


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  • AIS 316. (2005, June 1). Consideration of Fraud in a Financial Statement. Retrieved from AICPA, New York (2005):
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  • Eko, S. (2015). Determinant Factors Affecting The Audit Quality : An Indonesian Perspective. Global Review of Accounting and Finance, 3(2), 42 – 57.
  • Enofe, A. O., Okunega, C. N., & Ediae, O. O. (2013). Audit Quality and Auditors Independence in Nigeria: An Empirical Evaluation. Research Journal of Finance and Accounting, 4(11), 22-28.
  • Gow, I., Larcler, D., & Reiss, P. (2015). Causal Inference in Accounting Research. London: Stanford University.
  • IAASB. (2018, October 3). IASSB. Retrieved from A FRAMEWORK FOR AUDIT QUALITY.IFAC (2015): ns/files/A%20Framework%20for%20Audit%20Quality.pdf.
  • Ilaboya, O. J., & Ohiokha, F. I. (2014). Audit firm characteristics and audit quality in Nigeria. International Journal of Business and Economics Research, 3(5), 187-195.
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