PROJECT PROPOSAL

AUDIT REPORT AND ITS IMPACT ON THE ACTIVITIES OF BUSINESS

ORGANIZATION IN NIGERIA

INTRODUCTION

1.1 Background to the Study

The auditor’s report is considered an essential tool when reporting financial information

to users. Since many third-party users require financial information to be certified by

independent external auditors, many audio tapes rely on auditor reports to certify their

information in order to attract investors, obtain loans, and improve public appearance.

Some stated that financial information without an auditors’ report is "essentially

worthless" for investing purposes (Fundamental Analysis, 2007).

The reason behind audit is to enhance the credibility of the financial statements by giving

reasonable assurance from an independent source that they present a true and fair view of

the state of the company and its affairs in conformity with accounting standard. Thus,

investors satisfy themselves that their finances are being employed properly and for their

interest. Audit reports, by providing information on the auditor’s opinion serve as a

communication link between the auditor and the users of financial statements. The

investors in emerging markets are demanding more comprehensive audit report to

enhance their decision making process. Indeed, there is a call for more detailed and

certified information from an external auditor (Okere, Ogundana, Adetula, Adesanmi &

Lawal, 2017)

Auditors’ report is a written letter from the auditor containing the opinion of whether a
company's financial statements comply with generally accepted accounting principles

(GAAP). The independent and external audit report is typically published with the

company's annual report. The auditors’ report is important because banks and creditors

require it before lending to companies. Investment decisions made by shareholders and

investment managers depend on audit report in several areas such as market qualities and

risk portfolios. Investors are rational beings who apply financial techniques and plan their

investments on risk-return basis (Okere, Ogundana, Adetula, Adesanmi & Lawal, 2017).

Companies go to great extents to have their accounts audited so that the auditors give

their own opinion as to the “true and fair view” of the financial position of the

organization. The auditors’ report is the hallmark to third parties at the time of decision

making.

1.2 Statement of Problem

In recent times there has been reported cases of failure in business activities as a result of

misinformation and misrepresenting of financial statement report prepared by the auditor,

this has made many investors to loss much of their investment because they had to rely

on the auditor’s reports.

There is the problem of not enough attention being paid to auditor’s reports and the duties

and responsibilities of both the internal and external auditors in Organizations.

There is also the question of how reliable are the auditor’s reports and how its impact the

activities of businesses. Some users of auditor’s report have even stated that financial

information without an auditor’s report is “essentially worthless” for investing purposes.

There is also the problem of “going concern” in auditing firms. Going concern means that

a certain firm will continue to operate in the near future and has enough resources to

operate. If the auditee is not a going concern, it means that it will soon be either

dissolved, bankrupt, or shutdown, etc. if this statement is not included in the auditor’s

reports, it may leads to inconsistency on the part of the auditor.

1.3 Objectives of the Study

The aim of this study is to investigate audit report and its impact on the activities of

business organization in Nigeria. Specific objectives of the study are to:

i. investigate the relevance of auditor’s report and its impacts on the management of

business organization.

ii. observe the relationship between auditors’ report and investment decision making.

iii. examine auditors reports as an essential tool in reporting financial information to

users.

iv. assess the relevance and functions of auditor’s report to the business firm in relation

to decision making.

1.4 Research Questions

i. Does auditor’s report have any impact on the management of business organization?

ii. Is there any insignificant relationship between auditor’s report and investment

decision making?

iii. Are auditor’s reports essential tools in reporting financial information to users?

iv. Does auditor’s report have any relevant function to the business firm in relation to

decision making?
1.5 Research Hypotheses

Ho: Auditor’s report has no impact on the management of business organization.

Hi: Auditor’s report has impacts on the management of business organization.

1.6 Significance of the Study

This research also reveals the exact roles played by auditors. The research will show that

auditors also examine, on a test basis, underlying transactions and records supporting

financial statement balances and disclosures. It is anticipated that the study will be of

immense help to different categories of people both the internal and external auditors,

managements and managers, students in various disciplines, the government, employees

in different organizations and employers at large. It will also go further to remove the

ambiguity that exists in the mind of individuals relating to the impact of auditor’s report

on business.

1.7 Scope of the Study

The study is focused on audit report and its impact on the activities of business

organization in Nigeria. The study will be limited to selected firms listed on Nigeria

Stock Exchange between 2020-2022

1.8 Definition of Terms

Auditing – An official examination of business and financial records to see that they are

true and correct.

Auditor – Professional expert in the checking of books of account or record.

Audit Reports: An auditor’s report is a formal opinion, or disclaimer thereof, issued by

either an internal or external auditor as a result of an audit or evaluation performed on a

company’s financial statements.

Business organization: is an entity formed for the purpose of carrying out commercial

activities. It involves the combination of people, resources, and systems to achieve

specific business goals.

Management – The act of running and controlling a business or seminar Organization.

1.9 REVIEW OF RELATED LITERATURE

Concept of Auditors’ report

The concept of auditors’ report has for a long time attracted attention from scholars, the

business community and financial analysts. Both theoretical and empirical literatures

exist showing researchers’ interest in this area. Studies focused on the utility of audit

report in prediction of corporate failure, their impact on stock prices of new and old

issues as well as the impact on lending decisions of financial organizations. The auditors’

report is a document containing auditors’ opinion of whether a company’s financial

statements comply with GAAP.

The Audit report is a medium of communication between auditor and users of financial

statement; it shows the most important part of auditors' activity and expresses the result

of financial statements' assessment to users (Salehi & Abedini, 2008). It is important

because banks, creditors, and regulators require an audit of a company's financial

statements.
According to Harold (2019), auditors’ report is a written opinion of an independent

certified public accountant that a company's financial statements are a fair representation

of the company's financial performance and financial position. The auditors’ report is

required for each corporation whose stock is publicly-traded. An auditors’ report is

considered an essential tool when reporting, financial information to users, particularly in

business. Some have even stated that financial information without an auditors’ report is

"essentially worthless" for investing purposes.

Types of Audit report

Different types of audit report contain different audit opinions and the main cause is from

the different of misstatements found in the financial statements. Different types of audit

reports represent a different level of assurance. There are four types of audit reports

issued by auditors on financial statements. Each type of report contains different

meanings and messages from auditors to users of financial statements. Those audit

reports included the nqualified Audit Report (Clean Audit Report), Qualified Audit

Report, Disclaimer Audit Report, and Adverse Audit Report. The following are the detail

of audit reports. Unqualified Audit Report (Clean Audit Report) is the most frequent type

of report which is referred to as the "Unqualified Opinion", and is regarded by many as

the equivalent of a "clean bill of health" to a patient, and has led many to call it the

"Clean Opinion". In reality it is not a clean bill of health, because the Auditor can only

provide reasonable assurance regarding the Financial Statements, not the health of the

company itself, or the integrity of company records not part of the foundation of the

Financial Statements (Marshall, McManus &Viele, 2008). Unqualified Audit Report is

issued by auditors on financial statements in which they found no material misstatements.

This report contains the unqualified opinion from an independent auditor showing that

the entity’s financial statements as prepared, present true and fair view and complied with

accounting framework being used.

An unqualified audit report is a good sign for all kinds of stakeholders willing to use the

financial statements might find the audit report is clean or not from the opinion

paragraph. The unqualified audit report not only apparently shows to the shareholders

that financial statements are a true and fair presentation, and free from all material

misstatements, but also imply that the management team has high integrity. However,

before putting your trust in the audit report, make sure that the auditors who issued the

reports are from independent audit firms. Big four audit firms are the firm that most of

the shareholders put their trust in.

The qualified Audit report is the report issued by auditors to the financial statements that

found material misstatements on them. But those material misstatements are not

pervasive. For example, the opening balance of the entity contains a large number of

inventories that could not be verified. In this case, the auditor issued a qualified audit

opinion on the qualified audit report. The opinion of a Certified Public Accountant that a

firm's financial statements deviate in some respect from a clean opinion according to

generally accepted accounting principles (David, 2003). In these kinds of reports, only

inventories that is mentioned matters, other information in the financial statements is true

and fair. In terms of seriousness, the qualified audit report is more serious than
unqualified due to material misstatements of the mentioned items or accounts in the

financial statements.

Theoretical Review

Agency Theory

The agency theory propounded by Jensen and Meckling (1976) had to do with the

relationship between the principal (shareholders) and the agents (company’s manager). It

is the cost that arises because of expenses incurred between the principal(s)

(shareholders) and the agent(s) (management). The agency relationship is seen as a

contract under which one or more persons (the principal (s)) engage another person (s)

(the agent) to perform some services on their behalf. This involves delegating some of

their authority to the agent in order to make some decision for the principal (owner of the

business). If the agent fails to act on the direction of the principal in making his decisions,

the principal can decide to limit divergences from his interest by establishing an

appropriate incentive for the agent and by incurring monitoring costs designed to limit

the aberrant activities of the agent (Aliyu, Musa & Zachariah, 2018).

Lawal, Edwin, Monica and Adisa (2018) pointed that agency problem associated with

free cash flow problem can be somehow controlled by increasing the stake of managers

in the business or by increasing debts in the capital structure, which will help in reducing

the amount of available cash inflow to managers. The debt can also be adopted as control

mechanism in which lenders and shareholders become the principal parties in the

structure of corporate governance in the organization.

Estitemi and Omwenga (2019) opine that since the principals do not have access to all the

available information as at the time the agent makes his decision, the principals are

unable to determine whether the decision made by the agent is favorable or unfavorable

for the interest of the firm. In order to avoid the moral hazard, the principals decide to

establish a monitoring process such as auditing to control the action of the agent (s) in

making some decisions for the firm. They describe auditing as a bonding cost paid by

agent (s) to a third party to satisfy the principals’ demand for accountability. Any other

cost incurred in running the business is borne by principals to protect their economic

interests.

Hassan and Farouk (2018) believe that auditing is a bonding cost paid by agents to a third

party to satisfy the principals’ demand for accountability. This is the cost the Principals

bear to protect their business. In the separation of power, ownership and control are very

important because the more diffused the ownership of a company is, the higher the

divergence in preferences of the owners and managers, and the higher the observability

and control of an agent’s actions by the principals. The audits serve as a basic purpose in

promoting confidence and reinforcing trust in financial information by the users and

general public. The principal – agent relationship as depicted in agency theory is

important to understand the role of an auditor in the development of high quality report in

the business. This is because the principals place their trust in their agents to act in the

best interest of principals but the results of information asymmetries between principals

and agents have different motives. Principals may lack trust in their agents and need to

put in place some measures or mechanisms, such as the audit, to reinforce the trust. The
agency theory is a useful economic theory of accountability which helps to explain the

development of audit quality in general.

Stakeholder Theory

According to Blume (2019), stakeholder theory explains the relationship between

organizations and their external environment. A stakeholder is defined as a human

agency that can have an impact or affect organizations Stakeholders represent the big

umbrella for all individuals and parties that may have a direct or indirect interest in an

organization. Direct stakeholders are shareholders, employees, investors, customers, and

suppliers whose interests are aligned with the company. An example of an indirect

stakeholder is the government, competitors which are indirectly affected by the

company's function (Kiel & Nicholson, 2003).

Due to this role of stockholders, organizations are not only accountable to shareholders

only but also to stakeholders. As a result of this accountable relationship, many factors

and conditions exist to maintain and manage the stakeholder-organizations relationship.

Stakeholder theory is an extension of the agency view, which is believed to better equip

managers to articulate the shared purposes of their firm and board of directors to look

after the interests of shareholders. However, this narrow focus on shareholders has been

expanded to take into account the interests of many different stakeholder groups,

including interest groups related to social, environmental, and ethical considerations

(Donaldson & Preston, 2021).

The linkage between stakeholder theory and earnings management is explained by Hodge

(2019), who document that management may manipulate earnings to improve their
private interests at the expense of shareholders and additionally the rest of stakeholders.

Stakeholders' theory views external audits as effective monitoring systems that could

protect all stakeholders' interests. Moreover, in terms of audit quality, Baker & Owsen

(2019), suggest that the role of external auditors as monitoring mechanisms is not only

directed for shareholders' benefit but also the interests of all stakeholders.

Empirical Review

Mstoi (2020) examined the relationship between audit quality, audit firm size and

financial performance. Secondary data collected from the annual reports of audit firms in

Taiwan were used. The samples used in the study were pooled data, which combined

both cross-sectional and time series data. The correlation analysis was adopted. The

results showed a positive association between audit firm size and audit quality; and

positive relationship between audit quality and financial performance.

Sim, Daw and Abu (2019) studied the effect of financial reporting and audit qualities on

firm performance for 56 firms listed on the Malaysian stock market, selected from the

construction sector for the period of 2010 to 2013. Data were collected from the

published annual reports and their notes to the financial statements of the sampled firms.

To assess the level of compliance with the provisions of the Financial Reporting Standard

(FRS) in Malaysia, content analysis was carried out. The firm's engagement with

established audit firms was used as a proxy for audit quality, and return on assets was

used as a measure of firm performance.

Panel data analysis was employed in analyzing the data and testing the stated hypotheses.

The use of panel data reveals that practices of FRS by firms significantly and positively
related to their financial performance. The results also indicate that audit quality has a

significant positive impact on business financial success. The study, therefore,

recommends that the management of listed construction firms improve their practices of

FRS and employ the service of established audit firms in support of financial success.

Anil (2016) studied the effect of audit quality on corporate governance in industrial

companies in Borsa Istanbul from 2011 to 2015. For this purpose, data of 41 industrial

companies traded in Borsa Istanbul in 2015 were obtained from the companies’ annual

reports, financial statements and their institutional web sites. The study used free float,

company age, independent board members and institutional investors as independent

variables and audit firm size, firm size, financial leverage and CEO duality as dependent

variables. The study employed multiple regression to analyse the data. The study revealed

that firm size, the rate of institutional ownership, duration of trading time in stock

exchange market, and company history variables were found statistically positive on

audit quality. The study recommended that the independent auditing should have a

quality process.

METHODOLOGY

Research Design

The research design adopted for this study is the ex post facto design being a suitable

technique for time order assessment of variables, which in this case measures the effect

of independent variables (financial performance) on a given dependent variable (quality

audit) of 8 quoted manufacturing firms over a period of 3 years (2020 – 2022).

Population of Study

The population of the study comprised all the listed manufacturing firms on Nigerian

Stock Exchange (NSE). In Nigerian Stock Exchange (NSE), the total sectors of

manufacturing firms is ten (10) namely Automobile and Tyre Sector, Breweries Sector,

Building Materials Sector, Chemical & Paints Sector, Food, Beverages &Tobacco Sector,

Health Care Sector, Oil & Gas Sector and Textiles Sector.

Sampling technique and sample size

The Sampling technique employed for this study will be simple random sampling

technique. The simple random sampling technique was used in order to select the

manufacturing firms on Nigerian Stock Exchange (NSE) with the required audited

financial statement in order to make inference to the total population.

Instrument for Data Collection

Secondary data will be sourced from the annual reports and accounts of listed

manufacturing firms in Nigeria from 2020 to 2022.

Method of Data Analysis

The study will used Ordinary Least Square (OLS) method of estimation to analyse pool

panel data generated for the period of 3 years

Model Specification:

The panel data regression analysis models for fixed effect and random effects models

are hereby functionally specified as below.

Model Specification

The following models were employed in the study:

Model one: 𝑅𝑂𝐴𝑖𝑗 = (𝐴𝑈𝐷𝐼𝑁𝐷𝑖𝑗, 𝐿𝐸𝑉𝑖𝑗, 𝐹𝑆𝐼𝑍𝐸𝑖𝑗, ) … … … … … … …

… … … … … … … … … … … … . . (1)

𝑅𝑂𝐴𝑖𝑗 = 𝛽0 + 𝛽1𝐴𝑈𝐷𝐼𝑁𝐷𝑖𝑗 + 𝛽2𝐿𝐸𝑉𝑖𝑗 + 𝛽3𝐹𝑆𝐼𝑍𝐸𝑖𝑗 + 𝛽4𝐶𝐹𝑂𝑖𝑗 + 𝑈𝑡

… … . … … … … … . . (2)
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