Professional Independence And Quality Control In Audit Practice Of Selected Accounting Firms

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Professional Independence And Quality Control In Audit Practice Of Selected Accounting Firms


Abstract


The main objective of this study is to evaluate the level of independence and the benefit of quality control in an audit. This study employs both the survey and comparative research designs. The primary source of data used for the study was the questionnaire and the secondary sources were textbooks and journal gotten from the internet. The study was conducted in two auditing firms in Uyo metropolis. The questionnaires were administered using the random sampling method. The results of the study revealed that the independence of auditors in the audit practice is tempered with. The existence of an audit committee can be a powerful tool that can ensure auditors independence. Through investigation of prospective clients, establishing and maintaining high standards of quality both the quality of the audit and usefulness of that function to company audited. The effectiveness of the remedial measures discussed in this study will be of benefits in addressing the challenges of the independence on the external auditors.


Chapter One


Introduction

1.1 Background of the Study

In recent years, the independence of an auditor has come under criticism. This is because the essence of auditing was to authenticate the true and fairness of the financial statement, and to give a true picture of the financial statement of the reporting entity, and to give credibility to it. This however has not been achieved, as the public has been mislead by “window dressed” financial statement which the auditor has audited and gives an unqualified opinion; and thus mislead the users of this financial statement who relied on it credibility.

Many critics have observed that the public accounting profession has done little to police its own members. Due to the fact that most companies which had been wound up had it financial statement audited within the year and a high margin of profit reported , and yet nothing is done to the auditors who authenticate and attest to it credibility.

This and so many other cases put forward by Taylor and Glezen (1994) has brought to light some dismal performance of some auditing firms. Among the prominent case of criminal action against auditors is certified professional midwives (CPMs) in United States VsNatali (1975) where two auditors where convicted of criminal liability under the 1934 act for certifying financial statement of national student marketing corporation that contain inadequate disclosures pertaining to account receivable. The fraud was so extensive and the audit work so poor that the court concluded that the auditors must have been aware of the fraud and where guilty of complacency.

However, Azubuike (2005) state that auditing is derived from the Latin word AUDIRS which means to hear. Auditing profession emanate as a result of the development in the business organization over the years from sole proprietorship to partnership and then to corporate entities, ownership continue to be separated from the control (management) of the business.

Ikechukwu and Bridget (2004) Opine that today providers of capital that is business owners or share holders engage managers (steward) to run the business organization on their behalf. They managers are accountable to the owners then the question arises: How true or correct are the presentation of the managers to the owners of the business on the day-to-day running of the business.

An intermediary (Auditor) comes into play to mediate between to owners and the management.

Ikechukwu and Bridget (2004) define audit as the independence examination if an expression of opinion on the financial statement of an enterprise by appointed auditor in pursuance of that appointment and in compliance by any relevant statutory obligation.

Okezie (1995) see An audit in a process carried out by a suitable, qualified accountants or auditors whereby the accounts of business entities including charities, trust and professional firms are subjected to scrutiny in such a details as to enable the auditor to form an opinion as to the accuracy, truth and fairness. This opinion is then embodies in an “audit report” (attestation) address to interested parties who commission the audit or to whom the auditors are responsible. For this audit report to be of high quality there is need for professional independence.

Professional independence in the context of this work means the independence of the external auditor which entails independence from parties which way have an interest in the business being audited. Independence requires integrity and objective approach to the audit work or process. The concept requires the auditor to carry-out his or her work freely and in an objective manner.

Aderibigbe (2005) opines that professional independence however is a concept fundamental to the accountancy profession. Baker (2005) stated that professional independence refers to the independence of the auditor from parties, that have an interest in the financial statement of an entity. It is essentially an attitude of mind characterized by integrity and an objective approach to the audit process. This concept requires the auditor to carry out his work freely and in an objective manner.

There are two important aspect of independence which must be distinguished from each other these are:

  1. The real independence (in fact)
  2. Independence in operation

However, both are important in achieving the goal of independence.

Real independence is concern with state of mind an auditor is in and how the auditors acts or deal with a specific situation. An auditor who is independence “in fact” has the ability to make independence decisions even if there is a perceived lack of independence present, or if he is place on a compromising position by companies directors while independence in appearance has to do with the auditors mental attitude and personal integrity, since it is difficult to measure his appearance (Taylor and Glezen 1994). There is no independence without quality control being achieved.

Myring and Bloom (2006) defines quality control as consisting all measure and procedures carried out within the audit process to guarantee the quality of audit work and of the resulting report. Quality control is paramount in audit practice because complete independence may never be achieved but quality control can reduce the percentage of interference to a minimum.

Thus it is imperative to the business and the auditing profession that a high quality controlled independent audit be attained to ensure that the suspicion of owners and investors are reduced to the barest minimum. The task is not as easy as it is said but requires extra commitment.


1.2 Statement of Problem

Independence in auditing of companies financial statements is a major problem in the field of auditing because in practice there are circumstances which empower the directors to appoint the auditor and also fixed their remunerations. This act undermines and question the independence of an auditors and where directors who are responsible for the preparation of the financial statements to be audited are in position to hire and pay those who are to audit them- put the auditors, in a difficult position and threatens his independence.


1.3 Objectives of the Study

The main objective of the study is to evaluate the level of independence and the benefit of quality control in an audit. This study however specifically seeks to;

  1. To ascertain the challenges to auditors independence in an audit
  2. To ascertain the methods and techniques adopted in ensuring independence
  3. Evaluate the benefit quality control measures in the audit process
  4. Explore avenues of ensuring auditors independence.

1.4 Research Question

In other to achieve the objective of the study and proffering solution to problem of study, the following research question were formulated:

  1. What are the challenges to auditors independence in an audit?
  2. What method and techniques can be adopted to ensure independence?
  3. How has the quality control measures assisted in the audit process?
  4. What avenues could be used in enhancing auditors independence?

1.5 Significance of the Study

It is conceived that at the completion of the study its findings would be beneficial to.

  1. The management of business entities who are contributors to the subject in consideration.
  2. The accounting profession and auditors in their different engagements and assist them to project a good image of accounting profession
  3. Research students who may want to use the study as a source of reference in their academic pursuit.
  4. The entire public (Investors and potential investors) who rely on the external auditor for economic decision making.

1.6 Scope and Limitation of the Study

This study covers auditors independence and quality control in audit practice of the following selected audit firm in Uyo metropolis:

  1. Thomas Gamble and Co (chartered accountant).
  2. Jimmy Akpan and Co (Chartered accountant).

However these research have some constraints to its scope and coverage, these include:

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher have to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.


1.7 Definition of Terms

a) Auditor:

An auditor is a person who examines the books, account and vouchers of an organization in such a way as would enable him to express an opinion as to whether the account show a true and fair state of affairs of the organization in a particular period. (Omeje 1990)

b) External Auditor:

Akpakpan (2006) defines external auditor as an independent public accountant who is an outside auditor and who is not employed by the organization engaging him in the audit work.

c) Client:

The company or business organization audited by the external auditor

d) Financial Statement:

Akakpan (2002) defines financial statement as the financial data or reports concerning an organization. Financial statement or report is a formal record of the financial activities of a business, person or other entity. It consist of statement of financial position, statement of comprehensive income, income statement, value added statement, statement of source and application of find.

e) Working Papers:

Audit working papers contain information from accounting and statistical records, personal observation, they result interview and enquires and other available sources. Working papers according to meigsetal (1982) includes all the written records, of the work performed by the auditors, the methods and procedures that followed and the conclusion they developed. The information contained there constitutes the principal evidence of the auditors work and their resulting conclusion.

f) Generally Accepted Accounting Principle

An accounting term that encompasses the conventions rules and procedures necessary to define accepted accounting practice at a particular time. GAAP as used in reports include accounting principles and practice as well as the methods of applying them.

g) Professional Ethics

These are rules of conduct imposed by professional Accounting bodies on their members as a guideline on audit work.

h) Peer View:

Taylor and Glezen (1994) define peer view as review of an audit firms systems and procedures, approaches and audit standards generally conducted by another audit firm of comparable size and reputation

i) Quality Control Standards:

Ginaker (1965) state that quality control standard are standards for establishing quality control policies and procedures that provide reasonable assurance that all of a certified public accountants firms audit are conducted in accordance with professional standards.

j) Policies:

These are ground rules and criteria to be applied when talking decisions relating to a particular function or activity. policies established boundaries that restrict the scope and nature of decisions concerning specific issues.

k) Hot Review:

This is a review carried out by a special manager appointed to review on the completion of each audit (Millichamp 2002).

l) Quality Control:

Millichamp (2002) Opine that quality control is the means by which a firms obtains reasonable assurance that it expression of audit opinion always reflect observance of approved audit standards and statutory of contractual requirement and any professional standards set by the firm itself. This is to say that it is generally concerned with the maintenance of standards within a professional office.


1.8 Organization of Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  2. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

1.9 Historical Background of the Firms Under Study

In the study, the researcher chooses a select audit firm for they research and they include:

Thomas Gamble and Co (Chartered Accountants): Thomas Gamble and Co is a well developed and experienced professional accounting firm registered with the corporate affairs commission with registration No 25612 of 10th September 1984. The firm was established with a view to providing a first class service delivery as auditors, project administrators, financial consultants advisors and other auxiliary services.

They firm has three (3) offices:-Uyo, Calabar and kaduna. The partners of the firm include:

– Obong I.J Gamble-principal partner- Uyo office Mr. MkpanamAkpata- Partner Calabar Office Mr. Ephraim Thomas partner Kaduna office.

Personnel of the Firm

The firm most valuable resourced have been their committed experience and highly skilled staff supported by an integrated team of consultants. These have been their competitive advantage. This therefore is what propels them to provide solution to variety of problems and services: The firm renders the following services.

  1. Auditing: This is the firm largest single activity and it covers limited liability companies’ public corporations statutory bodies and individual business of all type. Their system ensures close supervision review and also personal services of the partners with a view to satisfying enabling laws as well as standards laid down by the accounting profession. The firm maintains a strict code of conduct as regards confidentiality, integrity and independence
  2. Project Administration: The firm Co-ordinate project executions monitoring the work done by the main and sub contractors, ensuring that contractors are duly paid for only Job done. They also liaise with relevant regulatory authorities to ensure that the project is executed without any hindrance
  3. Investigation: The firm conducts investigations in special circumstances including financial investigation in the event of acquisition mergers and sales of business or fraud.
  4. Tax Consultancy: They firm helps to prepare tax returns and liaise with the inland or internal revenue on behalf of clients for the purpose of determining and advising them in their tax liability.
  5. Accounting: The give advice and assistance on accountancy matters and this include;
    1. Preparation and presentation of financial statement
    2. General accounting and book keeping Accounting system design and installation, internal control and their evaluation
    3. Store accounting control
    4. Accounting policies etc

2 Jimmy Akpan and Co (chartered accountant): jimmy akpan and co is a chartered accounting firm that provides, Accounting, auditing and related services to different client both in public and private sector. The firm was registered with the corporate affairs commission (CAC) in year 2000 and commenced operation in the same year. The firm is also registered with the Institute of Chartered Accountant of Nigeria (ICAN) security and exchange commission (SEC) and office of the auditor general of the federation.

Management Address of the Firm

The firm is managed by a group of qualified and experienced personnel headed by the principal partner Mr. J. J. Akpan FCA, a retired former auditor general of AkwaIbom State.

The firm currently is situated at No 93 Udoumana Street, Uyo. AkwaIbom State.

The firm renders the following services.

  1. Accounting: For those organizations which cannot employ qualified accountants on full time basis or which have full time account but require additional service of consultants the firm would collaborate the effort of the accounting personnel to facilitate the preparation of financial statement.
  2. Auditing: The firm conduct audit of account in the public and private sector as required by the companies and allied matters act (CAMA) 1990, The public enterprise regulation commission act and with various regulatory and professional bodies on matters relating to audit, whether in the public or private sector.
  3. Development of Procedural Manual: The firm prepares procedural manual which set the minimum standards of work required of the operators in the areas of accounting store inventory management and internal audit.
  4. Capital Market Consultancy: The firms is a recognized and registered member of the security and exchange commission as capital market consultant in the field of accounting and auditing. They are sufficiently exposed to the capital market to give client leads in their area of interest.
  5. Special investigation: The firm is in position to conduct special investigation for organization including cost analysis and value for money audit.
  6. Inventory Management: The firm assist management in areas of inventory management by opening an inventory register that would serve as dual purpose; which are record of all inventory and an asset register for accounting purpose. They assist in the identification of these assets and advice on their protection.
  7. Manpower Development: The firm conducts accounting manpower development by way of workshops and on the job training. Thus making their staff to be professionally independent.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to find out the challenges to auditor’s independence and quality control measures in Audit practice.

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 the independence on the external auditors.


5.2 Summary of the Study

The factors which hinder the independence of external auditors informed this study. After a preliminary research, it was discovered that most external auditors would have been independent, if not that their remuneration are fixed and paid by those who employ the. Therefore, keeping the audit in a tight corner and likely to jeopardize his independence.

This study sets out to achieve the following objectives:

  1. To find out the challenges to auditors independence in an audit.
  2. Find out the methods and techniques adopted in ensuring independence.
  3. Evaluate the benefit of quality control measures in the audit process.
  4. Explore avenues of enhancing auditor’s independence.

The primary source of data used for the study, was the questionnaire and the secondary sources were textbooks and journal gotten from the internet. In the analysis of data, simple percentage method was used. This was found to be the most appropriate, considering the survey methodology adopted.

Consequently, the following findings were made;

  1. Challenges to auditors independence are; undue independence on clients for loans, overdue fees, family and other personal relationships, voting on audit appointments, acceptance of goods and service as gifts or hospitality from clients, provision of other services to audit clients.
  2. Although the code of professional ethics is provided to auditors to ensure their independence, most auditors only adhere partially to the code of professional ethics.
  3. Planning, controlling and recording are all measures used in audit work to ensure effective and efficient report.
  4. Auditors derive some benefits from the quality control measures used in audit process like.
    1. The audit being done within the time requirement of the client.
    2. Giving an opinion on truth and fairness etc. of financial statements
    3. The audit will be economical from the point of view of the auditor and of the client.
  5. Auditors independence could be achieved using the following strategies:
    1. Having an independent appointment body responsibly for the appointment of auditors and determining their (auditors) fees.
    2. Audited work should be subject to peer review.
    3. Audit committee should be incorporated in a client company.
    4. Auditors should be rotated.
    5. There should be a restriction on other services provided by auditors on clients.

5.3 Conclusion

Based on the findings, the researcher concluded that although auditor’s independence is plagued by a lot of challenges in the course of their work, they are also partially responsible for their woes, but to a larger extent, their environment is.

However, with the diligent implementation of the remedial measures discussed in this study, the future looks bright and prosperous for auditors; in that, there will be a better atmosphere for auditing in companies without the independence of auditors being tempered with. This will enhance public positive perception about the auditing profession.


5.4 Recommendation

In view of all that have been discussed in this study, the following recommendations are deemed necessary;

  1. The existence of an audit committee can be a powerful tool that can ensure auditors independence. Thus the composition of members of audits committee should exclude the company’s own directors (executive on non-executive) and the committed should be headed by a qualified accountant, who should not be below the level of “Fellow” in status. Also the Institute of Chartered Accountant of Nigeria (ICAN) should place a mandate on all Accounting firms (Auditors) to submit its audit work (finished product) for review by an audit committee. Serving as a link between the directors and auditors of the company, and proving protection to investors who rely on financial statements.
  2. The professional bodies ICAN and ANAN should educate the public, specifically the employers of external auditors on the independence of auditors. And any organization which tries to jeopardize the auditors independence should be severely dealt with.
  3. The external auditor should be appointed by members in Annual General Meeting (AGM) with a recommendation form the audit committees, who by their training and composition should know the worth of an auditor. Should there be a sudden vacancy, the audit committee should have power to fill the vacancy subject to the approval of members, in AGM. The directors should have nothing to do with the appointment of the external auditor. Where there are no audit the power that choose the first directors, the audit committee, should also appoint the first external auditors. The audit committee should be in a position to fix the remuneration of auditors.
  4. The scope of auditors activity should be broaded to include. Through investigation of prospective clients, establishing and maintaining high standards of quality both the quality of the audit and usefulness of that function to company audited.

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