Accounting Project Topics

Impact of Audit Firm Rotation on Audit Quality Evidence From Nigerian Bank

Impact of Audit Firm Rotation on Audit Quality Evidence From Nigerian Bank

Impact of Audit Firm Rotation on Audit Quality Evidence From Nigerian Bank

Chapter One


The broad objective of this study is to examine the impact of audit firm rotation on audit quality. The specific objectives of the study are to:

  1. Examine the extent audit firm rotation significantly affects audit quality;
  2. Determine the relationship between company size and audit quality;
  3. Investigate how audit fees affect audit quality; and
  4. Evaluate the relationship between board independence and audit quality.




The definition of audit quality has been addressed and stated by several different scholars over the past decades. In order to provide a clear overview of how the concept of audit quality has been reviewed over the past decades, an overview of the most important papers that discuss audit quality will be reviewed. The most well-known definition of audit quality, which has been broadly accepted by scholars in the field of scientific research into the topic is the definition by DeAngelo (1981a). This definition of audit quality by DeAngelo (1981a, p. 186) is stated as following: “The quality of audit services is defined to be the market-assessed joint probability that a given auditor will both (a) discover a breach in the client’s accounting system, and (b) report the breach.”. This definition broadly means that audit quality depends on the probability that the auditor discovers a misstatement in a financial statement and actually reports the misstatement. DeAngelo (1981a) added to this definition that the probability of discovering such a breach depends on aspects such as the technological capabilities of the auditor and the employed procedures of the specific audit. She also argues that the probability that the auditor actually reports the discovered misstatement is a measure of the auditor’s independence from the specific client. Thus, an auditor is perceived as independent when the auditor is able to withstand the client’s pressure to not report the discovered misstatement (DeAngelo, 1981b). If auditors are not independent, they will be less likely to report misstatements, which negatively influences audit quality. As a result, it can be argued that the lower the degree of independence of the auditor is, the lower the quality of audit services will be. Palmrose (1988, p.56) defines audit quality as “the level of assurances – the probability financial statements contain no material omissions or misstatements” and argues that a higher level of assurances corresponds to a higher quality of audit services. Being an important implication of her definition, she adds that audit failure, being a financial statement with omissions and/or misstatements, is less likely to occur when audit services are of higher quality. High quality auditors with a substantial reputation for detecting and reporting irregularities have great incentives to reduce the likelihood of audit failure in order to retain their reputation. In a situation of a litigation of an auditor, auditors therefore often try to settle the matter out of court in order to avoid damage to their reputation. She argues that audit quality is inversely related to, although seldom seen, a litigation against an auditor. Thus, when using the litigation rate as a measure for audit quality, auditors with relatively low litigation rates provide a higher quality of audit services (Palmrose, 1988). Francis (2004, p.346) describes audit quality as “a theoretical continuum ranging from very low to very high audit quality”. In addition to the definition, he argues that audit failures occur on the lower end of the quality continuum. According to Francis (2004), audit failures can occur as a result of two different reasons, either when the General Accepted Accounting Principles were not applied by the auditor, or when the auditor fails to issue a qualified audit report in circumstances that require such a report. Regardless of the reason for the audit failure, in both situations, the audited financial statements will potentially mislead the users of the statements. Francis (2004) argues that the degree to which audits meet the minimal legal and professional requirements can be used as an approximation of audit quality and that audit quality is inversely related to audit failures. Thus, the higher the audit failure rate, the lower the audit quality.


Olowookere and Adebiyi (2013) Mandatory auditor rotation prevents the audit firm from developing a close relationship with the client and also provides an incentives for the audit firm to carry out its work to a high standard because they are aware that the quality of their work will be observable to some extent when a new firm of auditors take over the audit. Dopuch, King, and Schwartz (2001) said that mandatory auditor rotation leads to less biasing audit reports. Lu and Sivaramakrishnan (2009) said that mandatory auditor rotation reduces overstatements and increases understatements insinuating increased reporting conservatism. Catanach and Walker (1999) they mentioned that the said rotation would increase the quality of services provided by the auditor because the audit firm would attempt to differentiate themselves from other firms through the quality of their work.When the same client (management) is audited too frequently by a particular auditor, the auditor tends to be too familiar with the client. This over familiarity between the auditor and client is likely to restrict the value added service of the auditor. For example, the audit programme may become stale as the auditor begins to anticipate the condition of the client’s system. As such, the quality of the audit work becomes compromised. The beauty of mandatory auditor rotation is that it will limit the formulation of audit –client relationships that can most times lead to compromising independence.




Research design

The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to impact of audit firm rotation on audit quality evidence from Nigerian bank

Sources of data collection

Data were collected from two main sources namely:

(i)Primary source and

(ii)Secondary source

Primary source:

These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.

Secondary source:

These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.

Population of the study

Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information on impact of audit firm rotation on audit quality evidence from Nigerian bank. 200 staff of Nigerian Stock Exchange, Abuja state were selected randomly by the researcher as the population of the study.




Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey.  This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.


The data collected from the respondents were analyzed in tabular form with simple percentage for easy understanding.

A total of 133(one hundred and thirty three) questionnaires were distributed and 133 questionnaires were returned.





It is important to ascertain that the objective of this study was to ascertain impact of audit firm rotation on audit quality evidence from Nigerian bank. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of audit firm rotation on audit quality evidence from Nigerian bank


This study was on impact of audit firm rotation on audit quality evidence from Nigerian bank. Four objectives were raised which included: Examine the extent audit firm rotation significantly affects audit quality,  determine the relationship between company size and audit quality, investigate how audit fees affects audit quality, evaluate the relationship between board independence and audit quality. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Nigerian Stock Exchange. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made statisticians, economists, data analysts and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


After examining various literature and theoretical theories, a statistical analysis was also carried out using ordinary least square (OLS) econometric technique. The regression showed all the variables used in the research, are of great significance except for audit independence. Which therefore conclude that auditor rotation and auditor type is a major significant factor in determining the quality of audit report in Nigeria


Therefore firms should make sure that they adopt mandatory auditor rotation and also seek the partnership of one of the big four (4) auditors if they want a quality audit report.


  • Adeniyi, S. I. & Mieseigha, E. G. (2013). Audit tenure: An assessment of its effects on audit quality in Nigeria.International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(3), 275– 283.
  • Adeyemi, S. B; Okpala, O. & Dabor, E. L. (2012). Factors affecting audit quality in Nigeria.International journal of Business and Social Sciences, 3(20), 198-209.
  • American Institute of Certified Public Accountants (AICPA, 1992). Statement of Position: Regarding Mandatory Rotation of Audit Firms of Publicly Held Companies. New York: NY AICPA.
  •  Arrunada, B. & Paz-Ares, C. (1997). Mandatory rotation of company auditors: A critical examination.International Review of Law and Economics,17, 31-61
  • Azizkhani, M., Monroe, G., & Shailer, G. (2006). Auditor tenure and perceived credibility of financial reporting, Working Paper, Australian National University.
  •  Brody, R. G., & Moscove, S. A. (1998). Mandatory auditor rotation.National Public Accountant (May), 32-36.
  • Carcello, J. V. & Nagy, A. L. (2004). Audit firm tenure and fraudulent financial reporting.Working Paper.University of Tennessee.
  • Catanach Jr. A. H & Walker, P. L (1999). The international debate over mandatory auditor rotation: A conceptual research framework.Journal of International Accounting Auditing & Taxation, 8(1), 43-66.
  •  Corporate Accountability Research Group 1976. U.S. Senate Committee on Commerce, Corporate Rights and Responsibilities, Hearing, 94 Congress, 2 Sessions, June 17, 1976.
  • De Angelo, L. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.
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