Accounting Project Topics

Auditor Size and Audit Quality Evidence From Nigeria

Auditor Size and Audit Quality Evidence From Nigeria

Auditor Size and Audit Quality Evidence From Nigeria


Objectives of the study

Main objective

The main objective of the study is to examine auditor size and audit quality evidence from Nigeria.

Specific objectives

Therefore the following specific objectives are set out below:

  1. Determine if there is any relationship between firm’s size and auditor’s quality.
  2. Ascertain to what extent industry type of a company impact on auditor’s quality.
  3. Determine the relationship between return on total assets and auditors quality?
  4. Ascertain to what extent size of audit firm impact on auditing of a firm.
  5. Ascertain to what extent does Board of Directors gender mix composition influence auditor’s quality.




This chapter is concerned with the review of related literature on the factors affecting the quality of auditors in Nigeria. The literature review which is in line with the purpose of the study will be discussed on the following subheadings: 1. Conceptual Framework, 2. Literature review on Variables; Auditor’s quality, The effects of auditor’s firm size in the audit fees, Board Ethics and Auditor quality, 3. Review of previous studies, 4. Theoretical Framework.

Conceptual Framework

The following concept was discussed in line with the study as shown below:

Concept of Auditing

Auditing is a systematic and scientific examination of the books of accounts and records of business to enable the auditor to satisfy himself that the profit and loss account and the balance sheet are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period. Auditing is an on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements. An audit can apply to an entire organization or might be specific to a function, process, or production step, ( quality/auditing/).

Russell (2013) defined audit is a “systematic, independent and documented process for obtaining audit evidence (records, statements of fact or other information which are

relevant and verifiable) and evaluating it objectively to determine the extent to which the audit criteria (set of policies, procedures or requirements) are fulfilled.” An audit is aimed at checking the financial statement of a firm to ascertain the true and fair view of the firms account. An audit may also be classified as internal or external, depending on the interrelationships among participants. Internal audits are performed by employees of your organization. External audits are performed by an outside agent. Internal audits are often referred to as first-party audits, while external audits can be either second-party, or third- party.

Audit involves performing procedures to obtain evidence about amounts and disclosures in the financial statements so as to evaluate the appropriateness of accounting estimates made by management (KPMG, 2008). Earlier studies in the US have documented that the ‘Big Four’ auditors provide higher quality than non-Big Four’ audit firms. There is now a great deal of evidence that large audit firms provide higher quality audits and offer greater credibility to clients’ financial statements than small audit firms. The stock market reacts more favourably when a company switches to a large auditor rather than to a small auditor (Nichols & Smith, 1983); large audit firms give more accurate signals of financial distress in their audit opinions (Lennox, 1999). The audit quality, therefore, is a basic ingredient in enhancing the credibility of financial statements to users of accounting information. DeAngelo (1981) sees audit quality as the probability that an auditor will both discover and truthfully report material errors, misrepresentation and omission detected in a client accounting systems.




Research Design

To analyze the Auditor size and audit quality evidence from Nigeria, the study adopted the use of the content analysis. The content analysis method was used in this research because it allows financial statement reporting to be systematically classified and compared; which is useful for determining trends and extent of auditor’s quality. Content analysis of annual reports is a common research technique used when researching auditor’s financial statement reporting (Dutta & Bose, 2008; Fodio & Oba, 2012). In line with previous studies, this study made use of analysis of firms’ annual reports.

In using content analysis to study and analyze financial statement reporting in annual reports different studies have adopted different unit of analysis. These have included the number of words (Deegan & Gordon, 1996), number of pages (Cowen, Ferari & Parker,1987), number of sentences (Hackston & Milne, 1996).

In line with similar studies conducted by Uwalomwa & Egbeide (2012) where regression analysis was employed to find out the relationship between profitability, ownership, firm size and auditor’s quality; this research adapted a similar model in analyzing the relationship between the financial performance, firms size, and audit size of firms as they relate to auditors quality and financial statement reporting.

However, while the results from the pearson moment correlation analysis ascertain the extent to which the financial performance and the size of firms influence the level of auditors quality and financial statement reporting among listed firms; the t-test was utilized to assess whether the means of the two groups that is, financial and manufacturing companies are statistically different from each other.




This chapter discusses the presentation and analyses of data collected in the course of this research study.

Source of Data Collection

Auditor’s annual reports and financial statements are the source of data for this study. According to Enahoro (2009), annual reports of companies serve as the most important documents for a company’s construction of its own social image for internal and external users.

The researcher obtained these annual reports by visiting the library of the Nigeria Stock Exchange and downloading of auditor’s annual reports and financial statements online. Auditor’s reporting data were gathered from the annual reports based on the model adopted for this study. Appendix B shows the Auditors quality scores.




This chapter provides a summary of the research in terms of the work done, empirical findings, conclusion and recommendations.

Summary of Findings

Findings from the descriptive statistics results on the Auditors quality  revealed that content category theme Auditors quality in terms of products, services and customers, employee health & safety and community involvement had a very significant percentage proportion on the auditor’s disclosure in firms’ corporate annual report.

On the other hand, findings on the level of industry type on auditor’s quality between financial and other non-financial companies from the t-test statistics result indicates clearly that the level of auditor’s quality between the two industries investigated are not significantly different. This implies that the financial companies are putting in efforts as the other companies in the non-financial sectors of the economy in as regard the appointment of quality auditors.

The study further discovered that the extent of auditors quality in the context of mere indicative content or descriptive content increase status or quantitative monetary content which is most qualitative.

More so, findings from the examination of the auditors annual reports of the surveyed firms further revealed that majority of auditors information disclosed was accommodated in firms’ chairman’s statements of their annual report. Only a few companies devoted time and space to talk about auditor’s report issues in a separate section of the annual report.

Empirical findings from the regression analysis results revealed that firms’ financial performance provide by returns on total assets (ROTA) provided a significant positive relationship with the level of auditor’s quality of the firm. This implies that the more profit companies tend to generate, the more likely they are willing to strategically invest in quality audit activities through improved professional audit firms to promote their investment base and expose any short coming through quality auditing. Furthermore, it means that firms with solid financial base are more likely to have more resources available to invest and improved quality of their product and build a better company image. This implies that, firms’ financial performance (ROTA) plays a very significant role in the extent to which the company can appoint their auditors for the firm.

With respect the relationship between size of firm and auditors quality, the regression analysis result revealed that firms’ size plays a very important role in the extent of audit quality since large firms emphasize on their financial investment and use audit reporting as a tool for gaining or maintaining their social status and reputation of the firm to investors; thus indicating a significant positive relationship between the size of a firm and the extent of auditor’s quality. This implies that larger firms are more likely to display better audit control performance because they are more prone to be the subject of increased public scrutiny and so would need to respond more openly to stakeholder demands. Thus larger companies are more susceptible to inquiry from stakeholder groups since they are highly visible to external groups and are more vulnerable to adverse reactions among them. In essence, it is more likely that larger, more visible companies will consider quality auditing and reporting for sustainability to enhance the firm’s financial investment. Larger companies become more visible and accountable to the shareholders and, therefore, more accountable with respect to auditors responsibility. Consequently, a larger company will disclose more of its financial report to increase its financial status and assets base to the general public and shareholders.

Small companies may not have the necessary resources to gather huge amount of information which could be costly to collect and disseminate to public. In large companies these information may already have been collected for internal reporting and decision making. Hence they can easily communicate it to external stakeholders by publishing it in their reports. Moreover the actions of large companies are under the constant watch of public and government authorities’. Large companies have more shareholders which includes both individuals and institutional investors.

The study also shows that a significant positive association does exist between the size of audit firm and auditors quality of a firm. This result invariably implies that firms audited by big and prominent auditing firms tend to disclose more of the firm’s financial position to stakeholders, and the general public and to other uses of the financial statement. That is, firms audited by big auditing firms such as the KPMG, the PricewaterhouseCoopers and the Akintola Williams Deloitte tend to devote more time to quality audit reporting than others that are audited by small local audit firms. This result could be due to the fact that these audit firms follow internal procedures and control that are required by international auditing standards. The results explain that bigger companies are able to engage the services of the big audit firms who in turn devote time and space in disclosing a higher volume of the firm’s investment position in terms of their strength and weakness and also will report any irregularity since their firm’s image is at stake.

The results from the regression analysis also indicate that a negative relationship exists between board gender mix and auditors quality. This in essence, implies that the auditor’s quality does not depend on whether there is a female member in the composition of the board of directors of the company. To buttress this, table 4.3.5 indicates that there are more companies with high degree of auditor’s quality reporting with non-gender mix in the board composition.


There have been several empirical studies on the issues of auditor’s size and the examination of the relationship between auditors quality and firms’ financial performance. Nevertheless, using empirical methods, this study examined the relationship between firms’ financial performance, size, board gender mix, industry type, size of audit firm and the extent of auditor’s quality of firms.

Findings from this study revealed that a significant positive relationship exists between firms’ financial performance, size of firm, size of audit firm and the extent of auditors quality reporting. On the other hand, the study observed that negative relationship was observed between the board gender mix and the extent of auditor’s quality among firms surveyed. The study also revealed that there is no significant difference in the industry type and auditors quality between financial and non-financial companies investigated.

Therefore from the above analysis, the study concludes that auditor’s quality practice in Nigeria is still moderate, self-laudatory and voluntary in nature. This is partly due to the fact that no firm is compelled to engage the big 4 audit firms or small audit firms in the country.

The study therefore concludes that companies with better financial performance and strong asset base have more resources at their disposal to invest and should engage in appointing a quality firm that can help in improving the financial capability of their firms through quality audit reporting.


Based on the findings of this study, the following recommendations have been outlined which may be useful to the stakeholders, such as accountants, auditors, company management, investors, financial analyst, lobby groups, community members and the regulatory bodies responsible for setting standards:

  1. based on the present status of voluntary auditor qualitypractice, it appears that without some form of regulatory intervention; reliance on voluntary disclosure alone is unlikely to result in a high quality of disclosure or sufficient level of disclosure. In line with this, the study calls for firms to take proper cognizance of the kind of audit firm to engage in their companies since the audit disclosure can bring about improvement in the financial base of the firms.
  2. more so, adequate steps/efforts should be put in place to encourage companies to imbibe the culture of engaging quality audit firms. This process systematically assesses how well a company’s responsibility to the government is met through the payment of taxes to the government as the audit reports will disclosure the financial position of the firms in their annual report.
  3. also, the study calls for more concerted effort to be taken on the part of government to encourage managers on the need to embrace quality auditing to keep their firms afloat as strong financial base in the firm will make the firm expand their business thereby creating employment for the citizens and reducing the boarding of unemployment in the society from the government.
  4. this paper, suggest that firms that engage independent auditors with high repute are like to have a better work output as the auditor in their report will give detail information about the section of the firm that is productive and suggest ways to improving the area were the firms is not productive.
  5. finally, the paper recommends that since companies are social creations whose survival, success or continued existence is dependent upon the willingness of the shareholders to support them, concerted efforts should be put in place by management in order to gain the continuous support of the shareholders of the firm. To this end, managers of organisations are therefore advised in line with the propositions of the stakeholder theory on the need to embark on quality auditing activities and the reporting in order to gain the continuous support from the firm’s shareholders.


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