CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Amid the global wave of failing businesses, external auditors face challenges, including

explaining reasons for the failure of a business. This is mainly because in some of the instances,

the external auditors give an unqualified audit report (Adams, 2004). External audit is important

in today’s corporate world because of the separation of ownership from management as a result of

increasing number of stakeholders in companies. They are perceived as independent and unbiased

persons; hence people are able to rely on their judgment for different purposes (Nagy, 2001). Their

role is carried out to add credibility to the financial information released after the end of a

company’s financial year. However, the credibility of external audit has over decades been called

to question as major firms collapsed shortly after an unqualified (in other words “clean”) audit

report had been issued (Lee, Gloeck and Palaniappan, 2007).

The issuance of an unqualified audit opinion means that the auditor believes that the

financial statements give a true and fair view in accordance with the applicable financial reporting

framework (International Federation of Accountants, 2008). Research demonstrates that financial

statements users (such as managers, investors and analysts) often associate an absolute level of

assurance when they read such messages, potentially resulting in often naïve or unreasonable

expectations (Epstein & Geiger, 2004). However, in reality, the auditor provides only a reasonable

level of assurance, as inherent audit limitations prevent the achievement of absolute assurance

(Gay, Schelluch & Baines, 2008). Furthermore, financial statements users (henceforth called

‘users’) often assume audits to have a broader scope than they actually have. For example, users

frequently associate audits with an approval of management adequacy, a guarantee for absence of

1
fraud, and a recommendation to invest in the respective firm (Frank, Lowe, & Smith, 2011). In

reality, the unqualified opinion is wrongly seen as a certification that the firm or enterprise is

solvent, liquid and has the capacity to adapt to the dynamics of the environment. Any subsequent

failure of business resulting from management misjudgment, fraudulent practice, economic

instability and inconsistency in micro and macroeconomic policies is viewed as a failure of auditor

(Adeniji, 2004). Several researchers have found that users attribute disproportionate responsibility

toward auditors, whereas in reality, management, rather than the auditor, is largely responsible for

the adequacy of the financial statements (Owen, 2005).

Best (2001) claim that society’s trust is the ‘heartbeat of a profession’. Hence, if such trust

disappears or is eroded in any way, the outcome is likely to involve skepticism and the depletion

of value attributed to such profession. It can therefore be said that the auditing profession, which

was once highly regarded and whose members were among the most credible professionals, has

now become shrouded by mistrust and skepticism (Salehi, 2007). Apparently, public

misperceptions are a major cause of the legal liability crisis facing the accounting profession

(Godsell, 2002).

It is noteworthy that these and other differences between what users expect from the auditor

and what the auditor actually provides is often called the ‘Audit Expectation Gap’ (Frank, Lowe,

& Smith, 2011). Ajayi (2007) observed that public expectation of the duties and responsibilities

of external auditors is different from the statutory duties and responsibilities of these auditors. The

gap between these two is referred to as expectation gap. Owen (2005) defined audit expectation

gap as the gap between the roles of an auditor, as perceived by the auditor and the expectations of

the users of financial statements. According to the American Institute of Certified Public

Accountant (1993), the 'audit expectation crevice' alludes to the distinction between what the

2
general population and financial statement users trust the duties of evaluators to be; and what

auditors trust their obligations are. Porter (1993) did an empirical study of the audit expectation-

performance gap. He defines the expectation gap as the gap between society’s expectations of

auditors and auditors’ performance, as perceived by society. It is seen to comprise two

components: reasonableness gap (that is, the gap between what society expects auditors to achieve

and what the auditors can reasonably be expected to accomplish); performance gap (that is, the

gap between what society can reasonably expect auditors to accomplish and what auditors are

perceived to achieve).

These differences in the expectations of the audits has been affecting auditors for many

years, it has being responsible for an environment of criticism and legal dispute made by courts,

politicians, media, society and in general, the users against auditors regarding their professionalism

and performance (Porter, 1993). The general opinion amongst the financial information users is

that any person with a particular interest in a business should be able to trust the audited accounts,

as a guaranty of solvency and viability of the business. Therefore, when it becomes public

knowledge, without previous warning, that a business is in serious financial difficulties, the

tendency is to blame someone for the situation and that someone is the auditor (Riley, 2010).

In addition, these differences in expectations are related with the uncertainty associated

with the objective, the value, nature and effect of the audit. Studies on this issue show that these

differences exists and persists, however they do not show which factor or factors mostly contribute

to its existence. In fact, the expectations of the users of the financial statements are greater, but the

credibility and the prestige of the auditors are under threat if it does not meet the requirements

(Best, 2001). According to Boyd (2001), a consensus has not been reached regarding the causes of

the differences of expectations; its persistence proves the incapacity or reluctance of the auditors

3
to reduce it. The approach of the auditors to this issue could be defined as defensive or constructive.

The defensive approach emphasizes the need to educate and reassure the public regarding the

excessive criticism whenever an enterprise goes into the process of insolvency and the attempt to

control the debate about the differences and expectations, repeatedly explaining the ideas of the

auditors. The constructive approach foresees the expansion of the scope and function of the audit

(Boyd, 2001).

However, Humphrey (2007) report that audit expectation gap exists mainly because of the

subjective nature of terms and concepts in auditing such as the true and fair view, reasonable,

materiality, adequacy, reliability and relevance which are not defined precisely in the Accounting

and Auditing Standards but are left for the auditors‟ judgment. Lee and Ali (2008) add that it is

also influenced by the dynamic objective of auditing and role of auditors, where contextual factors

such as socio-economic environments, critical historical events, courts or even technological

developments play an important role.

Despite the importance of the audit expectation gap to the auditing profession, there is

paucity of research on how to address this issue in Nigeria. Therefore, this study seeks to examine

the audit expectation gap and its impact on users’ (management, investors, creditors, government

agencies and the general public) behaviours of financial statement in Nigeria.

1.2 Statement of the Problem

External auditor reports add credibility to the financial reporting by ensuring that

accounting statements follow the generally accepted guidelines and are accurate, but when the

auditor’s performance is below public expectations then his signature together with his brief

opinion will no longer be useful to decision makers. For instance, if the auditing profession has

4
issued a standard that says that auditors should observe the client company’s stock-taking

procedures but the auditor fails to do so then his performance would be said to be deficient because

he has not behaved in a manner consistent with professional auditing standards.

For decades, the accounting profession has been troubled with the issue of the audit

expectation gap which may be due to the complicated nature of the audit function, auditor’s

conflicting roles, retrospective and subjective evaluation of auditor‘s performance, time-lag in the

accounting profession responding to change and expectations of users and the self-regulation

process of the auditing profession, this without doubt has brought the credibility and work of the

external auditors into increased questioning in many countries among the world, especially in

Nigeria (Agyei, 2013). This is evidenced by the widespread criticisms and high levels of litigations

which have become more pronounced following various corporation failures and collapses all over

the world that has been traced to the audit expectation gap (Lee and Ali 2008).

Generally, researches in this area reveal that the existence of audit expectation gap is like

“cancer that is metastazing” (Raiborn and Schorg, 2004). According to Fadzly and Ahmed (2004),

the audit expectation gap is a critical issue in auditing because of the damage it has brought, and

continues to bring to the existence of the auditing profession. Best (2001) claims that public

confidence in a group of professionals is the “living heart” of that profession. Hence, if such

confidence is betrayed, the professional function too is destroyed, since it becomes useless (Simon

and Hatherly, 2005). Lee and Ali (2008) says that the audit expectation gap is detrimental to the

auditing profession as it has negative influences on the value of auditing and the reputation of the

profession in modern society among the users of the financial statements.

Aljaaidi (2009) added that the issue of audit expectation gap is an area of evergreen concern

in that auditors and the public grasp different beliefs about the auditors’ duties and responsibilities

5
 and the messages they pass across in the audit reports. It is against this backdrop that this present

study is necessitated on the need to examine audit expectation gap and its impact on users’

behaviour of financial statements in Nigeria.

1.3 Objectives of the Study

The main objective of the study is to examine audit expectation gap and its impact on users’

behaviour of financial statements in Nigeria. Specifically, the study is designed to achieve the

following objectives:

i. To examine the perception of user groups on the existing duties and responsibilities of auditors.

ii. To identify the expectations of the users from the auditors.

iii. To identify factors responsible for the nature of reports.

1.4 Research Questions

The following research questions were developed to guide the researcher:

i. What are the perceptions of users groups on the existing duties and responsibilities of auditors?

ii. What are the expectations of the users from the auditors?

iii. What factors are responsible for the nature of reports?

1.5 Research Hypotheses

For the purpose of this study, the following hypotheses were formulated in the null form:

HO2: There is no significant difference between the perception of user groups on the existing

duties and responsibilities of auditors.

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HO2: There is no significant difference between users’ expectation and what the auditors provide

from the financial statements.

1.6 Significance of the Study

First and foremost, the study will be of help to internal and external auditors at both federal

and state government parastatals in Nigeria. It will help to urge them (the auditors) of the better

way to render their professional duties in a way that the public expects of them despite the

challenges they might be facing in carrying their basic auditing functions.

Secondly, the study will be useful to the accounting profession who as a result of the

dynamic business environment may have to re-examine the role of external auditors. It will also

be useful to the auditing profession as it will contribute in gaining investors’ confidence since it is

also aimed towards narrowing the expectation gap.

Thirdly, the study will be of immense importance to the users of financial statements, that

is, the shareholders, managers, lenders, customers, suppliers, employees, financial analyst, etc, as

it will help them understand the statutory/legal roles of auditors (internal and external). This will

go a long way in narrowing the audit expectation gap.

Fourthly, the study will be of apt importance to government agencies. Government agencies

that are responsible for overseeing the activities of public or government institutions can make use

of the findings of this study for policy formulation purposes.

Fifthly, the study will also be of significance to Non-Governmental Organizations (NGOs)

and Pressure Groups. Non Governmental Organization (NGOs) as well as Pressure Groups like

Nigerian Labour Congress (NLC) are not exempted from benefiting from the findings of this type

of study. The NGOs may find the outcome of the study useful for their researches on national

development while the pressure groups (particularly those government workers at the parastatals
7
 studied) on the other hand can be brought to the light of the statutory duties of different types of

auditors so that their expectations will not continue to be misconstrued with auditors’ mere

declaration of the true and fair view of the parastatals’ financial statements.

Finally, researchers will benefit from the outcome of this study especially those authors

whose studies shall be improved upon as well as those in academic who may wish to carry out

similar study in the future.

1.7 Scope of the Study

In the light of broad coverage, the study is centered on audit expectation gap and its impact

on users’ behaviour of financial statement in Nigeria. However, the data for this study will be

collected from the user groups in Akwa Ibom State, Nigeria.

1.8 Limitations of the Study

The major limitations encountered when undergoing this research are:

i. Inability to retrieve some copies of questionnaire administered to some respondent groups due

to their busy schedule and nature of engagement.

ii. Distance and its attendant cost of travel in order to obtain information for this study was a

major limitation.

iii. Short time factor which did not give time for thorough research work, hence gathering adequate

information becomes very difficult.

iv. Being a student research, finance was also a major limitation encountered when undertaken

this study.

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1.9 Definition of Terms

To avoid ambiguity, the following keywords are defined:

Accounting: This is defined as the process of collecting, recording, identifying, measuring,

presenting, analyzing and interpreting financial information for the users of financial statements

to informed judgments and decisions.

Accountant: This is one who has undergone a formal or professional training in the process of

accounting and at least belongs to one of the recognized Accountancy bodies such as the Institute

of Chartered Accountants of Nigeria (ICAN) and an Association of National Accountants of

Nigeria (ANAN).

Audit: In this study 'audit' refers to statutory audit carried out by external auditors. It is an

independent examination of the financial statements of a company.

Auditors: This is an accountant who examines the accounts and underlying financial records and

expresses an opinion on the truthfulness and fairness or otherwise of the accounts.

Internal Auditors: This is an auditor who is appointed by management to examine report and

give an unqualified, otherwise called clean opinion of the financial statements of the organization.

External Auditors: This is an auditor appointed by the shareholders to report on the financial

statements prepared by management as part of their statutory duties.

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Expectation: This word refers to the purpose of audit as perceived by the users of financial

statements.

Gap: literally, a gap is a space between two people or things or a hole or space where something

is missing. In this paper however, it is the inability of auditors to meet the expectation of the users.

The gap is a result of misunderstanding of the auditor's role and responsibilities, inadequate

understanding of the message passed by the audit report and expectations about auditor's

independence.

Audit Report: This is a formal opinion, or disclaimer thereof, issued by either an internal auditor

or an independent external auditor as a result of an internal or external audit or evaluation

performed on a legal entity or subdivision thereof (called an "auditee"). The report is subsequently

provided to a "user" (such as an individual, a group of persons, a company, a government, or even

the general public, among others) as an assurance service in order for the user to make decisions

based on the results of the audit. An auditor's report is considered an essential tool when reporting

financial information to users, particularly in business.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

This chapter is a review of related literatures. The essence of this chapter is to review the

existing literature relating to the role of internal auditors in fraud prevention and control. The

literature available will provide critical analysis and help improve the methodology to be used. The

chapter is divided into three subject areas to deal with conceptual issues relating to the study, the

theoretical framework of the study as well as a review of diverse literatures about the study.

2.1. Conceptual Framework

This section discusses the various concepts that are considered to be the bedrock of the

study. Some of these fundamental terms are auditing, audit report, audit expectation gap, and

auditors’ duties and responsibilities.

2.1.1 Auditing

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 Traces of the precursors of audit can be dated back to Antiquity, to ancient Babylon and

Egypt, where archaeological findings have proven the existence of some justifying documents of

commercial transactions that allowed for a rudimentary form of verification and accounting

(Bogdan, 2005). And once the commercial trades blossomed during a period or another, the need

to keep a record of transaction also emerged albeit at a primitive level. But with economic prosperity

came also the temptation to deceit and manipulate others for self-profit. Control mechanisms were,

therefore, developed by state institutions in order to verify and supervise the use of funds and the

circuit of transactions, as was the case for example in ancient Rome, where the Roman officials

concerned chiefly with financial administration where elected by the people for this role (Bogdan,

2005).

During the Middle Ages, however, the interest to control financial documents and accounts

and to verify the use or misuse of funds increased in Western Europe. The main objective was to

discover those who eluded payment, appropriated funds, or misused money and property, and to

defer them to justice. The three institutions that introduced as early as the 13th-14th centuries the

idea of verifying accounts and hold the wrongdoers accountable were the state (represented by the

reigning monarch), the Catholic Church, and the universities (especially those from Northern Italy),

and employed functionaries or monks to keep the accounting of their respective structure (Le Goff,

1977). It is not a coincidence that the bases of accounting are found within the financial and

administrative apparatus of the Catholic Church, which was extremely interested in having detailed

and correct records of its accounts, responsible transactions, and detection of possible frauds. A

complex hierarchy of the fiscal apparatus was, therefore, created, presided by a Minister of Finances

within the Catholic Church, that included a category of specialists called ‘scriptores registri’ who

we can deduce that were the accountants responsible with registering and examining the financial

entries (Rapp, 1995).

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 The founder of accounting, Luca Paciolo created in the late 15th century, the double entry

accounting precisely to avoid thefts and misrepresentations in financial documents, at first within

the Church and then the state (Epuran, Baba, Imbrescu, 2013). Another interesting aspect in the

development of accounting is that, unlike the image of merchants, traders, or usurer, the men

responsible with this work were not perceived in a negative manner in society or marginalized (Le

Goff, 1997), because they were associated with the good management of the state and the church,

having both an economic and a judicial role (since they prevented or discovered the commission of

a financial crime and therefore helped protecting state or church patrimony).

From the Modern Era, the state was the main institution interesting in implementing and

supervising the accounting system in order to prevent, detect, and punish any fraud committed, both

in its structures and in the public sector. And as the economic organizations became more complex

and powerful in society, they also started to employ the services of specialist functionaries or

accountants with the aim of maximizing their profit and avoid losses or thefts by means of distorted

or erroneous financial entries. The industrial revolution brought a quick economic development,

but also an increased interest in the systems of capital, investment, and control of transactions

(Lesourd and Gerard, 1986). But with the economic boom grew also people’s desire to make money

quickly by malicious or deceitful means, and therefore the public opinion became more aware from

the 18th century about the existence of financial fraud and other fraudulent schemes meant to

acquire trust, property, goods, or political power (Stratmann, 2012).

Although big scandals related to financial fraud existed in Western Europe in the late Middle

Ages and early Modern period. It was during the 19th and 20th centuries that more emphasis was

put on coherent accounting and financial investigations. The aim was that fraud, deceit, and

misrepresentation could be discovered, punished, and eventually corrected in order to avoid future

fraudulent situations like the ones that had occurred (Sarna, 2010).
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 From the mid-19th century, the professional category of accountants and auditors emerged

as a specialized group of people involved in preventing and detecting real or possible frauds and

errors in the financial situations within the state or an economic entity. Their role was not only to

investigate, but also to assess possible risks and to guarantee the responsibility of internal control

mechanisms. At the end of the 20th century and the beginning of the 21st century, auditors have

become a necessity for the good-functioning and efficiency of an economic entity’s management

that can prevent and deter possible scenarios of trickery, funds embezzlement, or theft.

2.1.2 Concept of Audit and Auditing

The concept ‘audit’ has been defined by several authors. Tandon and Sundharabahu (2006)

opines audit to mean a critical and intelligent examination of facts-financial and otherwise, to give

in the form of certificate or report an attestation, an expert opinion or an expert advice. This

definition views audit beyond the examination of financial statements only but also includes non-

financial events of an organization and goes further to portray explicitly that the exercise is carried

out by one who is a professional as in terms of being a certified accountant. In another definition,

the concept is viewed as a systematic process of objectively obtaining and evaluating evidence

regarding assertions about economic actions and events to ascertain the degree of correspondence

between those assertions and established criteria and communicating the results to interested users

(American Accounting Association (AAA) (1973). This shows that audit is both an investigative

and reporting process.

Similarly, Beatline (1992) states audit as an examination by an independent expert–the

auditor (who can be either an individual or a professional firm) of a set of financial statements and

of the underlying books and records, which results in the auditor providing an opinion on the

financial statements. In another vain, Kantudu (2004) defined audit as an exercise that involves
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evaluation of the relevance, reliability and adequacy of evidence in support of verifiable

information. The International Standards on Auditing (ISA) 200 defines auditing as an examination of

accounting records undertaken with a view to establish whether they correctly and completely reflect

the transactions to which they relate. It states that the objective of an audit of financial statements is to

enable the auditor to express an opinion whether the financial statements are prepared, in all material

respects, in accordance with an identified financial reporting framework. The phrases used to express

an auditor’s opinion are “give a true and fair view” or “present fairly, in all material respects”, which

are equivalent terms.

However, the most widely accepted definition of audit is that provided by the International

Auditing Guidelines (IAGs) issued by the International Federation of Accountants Committee

(IFAC) cited in Dandago (2002). Audit according to the guidelines is an independent examination

of, and the expression of an opinion, on the financial statements of an enterprise, by an appointed

auditor, in accordance with his terms of engagement and the observance of statutory regulation and

professional requirements. The general definition of an audit is an evaluation of a person,

organization, system, process, enterprise, project or product.

2.1.3 Audit Report

The International Auditing Guidelines (IAGs) issued by the International Federation of

Accountants Committee (IFAC) cited in Dandago (2002), an audit report is a formal opinion, or

disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result

of an internal or external audit or evaluation performed on a legal entity or subdivision thereof

(called an "auditee"). The report is subsequently provided to a "user" (such as an individual, a group

of persons, a company, a government, or even the general public, among others) as an assurance

service in order for the user to make decisions based on the results of the audit. An auditor's report

15
is considered an essential tool when reporting financial information to users, particularly in

business. Since many third-party users prefer, or even require financial information to be certified

by an independent external auditor, many auditees rely on auditor reports to certify their information

in order to attract investors, obtain loans, and improve public appearance. Some have even stated

that financial information without an auditor's report is "essentially worthless" for investing

purposes.

The auditors’ report shall state the matters set out in the Sixth Schedule to CAMA as

follows:

(i) Basis of preparation of the entity’s financial statements (that is, the financial statements have

been prepared on the basis of the entity’s accounting policies);

(ii) Respective responsibilities of the directors and the auditors;

(iii) Basis of the auditors‟ opinion;

(iv) Whether proper books of account have been kept; (v) Compliance with the provisions of the

Companies and Allied Matters Act, Cap. C20 LFN 2004;

(vi) Compliance with the statements of accounting standards issued by the Nigerian Accounting

Standards Board (NASB).

2.1.3(a) Basic Elements of an Audit Report

Accountants use audit reports to publish the data they collect during their fieldwork of a

company organization. A widely used report template is the standard audit report, which must

include seven elements to be complete. According to (International Statement of Auditing (ISA)

700 and Latham, (1999), an auditor’s report includes the following basic elements:

a. Report Title
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 b. Introductory Paragraph

c. Scope Paragraph

d. Executive Summary

e. Opinion Paragraph

f. Auditor’s Name

g. Auditor’s Signature

h. Addressee

a. Report Title

The report title must include date of the audit and the addressee of the report. The date of

the report is usually the accountant’s last day of fieldwork, and the addressee is usually the board

of directors or stockholders of the organization. It is also important to include the work independent

in the title to set it apart from internal audits within an organization.

b. Introductory Paragraph

This is usually a boilerplate text that states an audit has been carried out, identifies the

financial documents used to perform the audit and places the important caveat that the company’s

management team is responsible for the accuracy of the financial statements. It also determines

what time frame is covered by the audit.

c. Scope Paragraph

This paragraph says the audit followed the rules and methods set by the Generally Accepted

Audit Standards and was designed to provide reasonable assurances that the claims made by the

17
financial statements are accurate. It also indicated the test methods used by the auditors to test the

accounting methods used by the company.

d. Executive Summary

This section includes a summary of the audit’s findings. The content of this summary is

determined by what the auditor considers to be important for the executive echelons of the

company. Unlike the next section, the executive summary does not provide much opinion but

focuses instead on expressing clearly the findings of the audit.

e. Opinion Paragraph

The opinion paragraph is used to report on the financial situation of the company or

individual audited and the methods and procedures used to reach a conclusion. It then offers the

auditor’s opinion on the financial health of the organization and its conformity or nonconformity

with the Generally Accepted Accounting Principles.

f. Auditor’s Name

The auditor must identify himself as the author of the audit by printing his name at the end

of the audit. If the auditor works for a specific firm, he must also include the name of the company

or certified accountant he works for.

g. Auditor’s Signature

The auditor is held accountable for the results of his audit up to the date stated in the audit’s

title. This accountability is acknowledged by the signature of the auditor below his name.

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2.1.3(b) Types of Audit Reports

The Opinion expressed in the auditor’s report may be one of four types: Unqualified,

Qualified, Adverse or disclaimer of opinion.

1. Standard Unqualified Opinion Auditor’s Report

The Auditor’s unqualified report should be expressed when the auditor concludes that the

financial statements give a ‘true and fair’ view (or present fairly, in all material aspects) in

accordance with the identified financial reporting framework. An auditor’s report containing an

unqualified opinion also indicates implicitly that any changes in accounting principles or in the

method of their application, and their effects, have been properly determined and disclosed in the

financial statements.

Requirements for Unqualified opinion

In an auditor’s report on financial statements, an unqualified opinion is issued in a clear and

affirmative manner when the auditor is satisfied in all material aspects (Hopwood Leiner and

Young, 2012) that:

 The financial information has been prepared using acceptable accounting policies, which

have been consistently applied.

 The financial information complies with relevant regulations and statutory requirements.

 The view presented by the financial information as a whole is consistent with the auditor’s

knowledge of the business of entity.

 There is adequate disclosure of all material matters relevant to the proper presentation of

the financial information.

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2. Qualified (unclean) opinion

An auditor’s report containing a qualified opinion is issued when the auditor concludes that

an unqualified opinion cannot be expressed but that the effect of any disagreement with

management, or limitation in scope, is not so material as to require an adverse opinion or a

disclaimer of opinion. A qualified opinion should be expressed as fairly presenting the financial

statements “except for” the effects of the matter to which the qualifications relates (Hopwood,

Leiner, and Young, 2012).

An auditor may not be able to express an unqualified opinion when either of the following

circumstances exists and, in the auditor’s judgment, they are material to the financial statements

(Hopwood, Leiner and Young, 2012).

a) There is a limitation on the scope of the auditor’s work; or

b) There is a disagreement with management regarding the acceptability of the accounting policies

selected, the method of their application or the adequacy of financial statement disclosures.

3. Auditor’s Report containing an Adverse Opinion.

An adverse opinion is issued when the effect of a disagreement is so material and pervasive

to the financial statements that the auditor concludes that a qualification of his report is not adequate

to disclose the misleading or incomplete nature of the financial statements (Okezie, 2004). It is

important to note that the adverse opinion report has a third paragraph, before the opinion

paragraph, which is the paragraph discussing the disagreement. For example, if the auditor has a

disagreement with management as to an allowance for nonperforming loans. It will be obvious from

reading the opinion paragraph that an adverse opinion report is likely to have a very negative effect

on the readers of the report and the related financial statements; therefore, such reports are issued

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only after all attempts to persuade the client to adjust the financial statements have failed. The only

other option available to the auditor in this situation is withdrawal from the engagement.

4. Auditor’s Report Containing a Disclaimer of Opinion

An auditor’s report containing a disclaimer of opinion should be expressed when the

possible effect of a limitation on scope is so material an pervasive that the auditor has not been able

to obtain sufficient appropriate audit evidence and therefore is unable to express an opinion on the

financial statements. Whenever the auditor issues a report that is other than unqualified, he should

include a clear description of all the substantive reasons that should be included in the report and a

qualification of the possible effect(s) on the financial statements. This information should be set out

in a separate paragraph, preceding the opinion or disclaimer of opinion and may include a reference

to a more extensive discussion, if any, in a note to the financial statements.

2.1.3(c) Factors Responsible for the Nature of Audit Report

The major factors responsible for the nature of audit reports are grouped into reliability

independency and materiality factors. They are discussed below:

Reliability Factor

The main purpose of audited financial statements is to ensure that information provided to

investors is accurate (Colley, Doyle, Logan and Stettinius, 2003). Also, the opinion given by an

auditor is expected to be constant throughout (Adeniji, 2004). However, this may not hold given

some circumstances surrounding the issuance of an audit opinion. These communication

assumptions may make the user more expectant than is needed. Some of these assumptions are an

unqualified audit opinion is a clean bill of health, auditors guarantee the continuing existence of

21
firms, auditors issue financial statements after the audit exercise and all fraud should be discovered

by statutory audit (Adeniji, 2004).

Moreover, financial statements are used by a variety of persons for different purposes

which are share valuation and acquisition, divestment, mergers, dividend policy, diversification of

portfolios, assessment of the worth of the firm, credit worthiness, etc. However, there is need for

detailed analysis of any data provided in financial statements before they are relied upon. Audit is

carried out to examine the financial books of a company and establish that they conform to

Generally Accepted Accounting Principles (GAAP), present a true and fair view of the company's

financial position, ensure that the financial statements are free from material misstatements and

conform to statutory regulations. This infers that the audit report is not a financial analysis upon

which investment decisions should be predicated, (Asein, 2009).

Independence Factor

Recent corporate scandals and presumed audit failures have brought auditor independence,

and consequently, audit quality, into the forefront (Brandon, 2003). Auditors are expected to be

independent of management. However, in reality auditors may not be so objective when they carry

out non-audit services and engage in audit for a long period of time in a company. Izedonmi (2000)

described independence as a state of the mind which reflects in the objectivity and integrity of the

auditor. Precisely, it means the auditor carries out his or her work without bias and undue influence.

The independence factor has been looked into by previous researchers such as in the study of audit

expectation gap. However, Brandon (2003) affirmed that no formal theory of auditor independence

currently exists. Izedonmi (2000) discussed the three types of auditor independence which are

programming, investigative and reporting independence. Programming independence has been

described as the ability of an auditor to plan his or her audit work properly and obtain all necessary
22
information during the carry out an audit exercise based on the planned audit without undue

influence either within or outside the organization. Finally, reporting independence is the ability of

an auditor to report fearlessly to shareholders without the management or any other outsider

influencing the audit opinion. Similarly, there should be no influence by the management or any

third party in all these types of independence.

In addition, Adeniji (2004) identified some of the threats to auditor independence which are

self-interest, self-review, advocacy, familiarity and intimidation threat. Due to the negative effects

these threats have on the performance of an auditor's responsibilities and by extension his report,

the Institute of Chartered Accountants of Nigeria (1CAN) and the Company and Allied Matters Act

(1990) as amended have made provisions to ensure that an auditor is independent. The CAMA

(1990) as amended specifies the process of appointing, disqualifying, remunerating, removing,

resignation and rights of an auditor. In appointing an auditor, statutorily shareholders are

responsible. However, the management may recommend and then allow shareholders to ratify. This

is to ensure that management does not appoint persons they can easily manipulate. In reality

however, it is the management that appoints auditors. Even though the selection of independent

auditors for public liability companies is at the annual general meetings, it has been argued that the

choice of which firm to promote is usually made by the board well in advance of the meeting. The

shareholder vote is almost always a purely pro forma proceeding, whereas the actual selection

responsibility lies with the board (Colley, 2003).

Gloeck (1993) in a study of the audit expectation gap in South Africa found that almost 60%

of the knowledgeable respondents were of the opinion that the auditor’s report is strongly

influenced by the management of the company which he/she audits and 70% of stockbrokers were

of the same opinion. Conversely, 42% of persons in public practice did not support this view. The

Nigerian context may be a pointer to inadequate education in the area of auditor's independence.
23
This is because some persons do not attach much importance to attending annual general meetings

of companies by shareholders. An auditor is automatically disqualified from auditing the financial

statements of a company if there is any close relationship with any director of that company.

According to CAMA (1990) as amended, the auditor is remunerated by persons who appointed him

or her. However, in practice this is a crucial aspect of breach of independence as the auditor is

remunerated by management. For anyone to remove an auditor there should be a written

representation by the auditor explaining why he or she should not be removed from office. Also,

the auditor has certain rights to ensure that the audit work is carried out without inhibitions. Where

there is too much trust of the client, the ability of auditors to protect the interest of the public may

be questioned.

Materiality Factor

A matter is judged material if knowledge of the matter is likely to influence the user of the

financial statement. Material is any-thing significant in relation to the prevailing circumstances of

each company. One of the qualities of an auditor is to keep good sense of proportion with the

primary objective to express an opinion on fair presentation of financial statement. It is quite

rational to assume that the users of financial statement will not be influenced by trifles but can be

influenced by something that is material. The auditor will have to make decision on whether some

events, items or group of items are material or not. If he considers any item as material, he will

insist on not only the disclosure of such item but also on the right disclosure and right representation

in the report. It is in the eye of an auditor to decide on what is material and what is not material and

it is expected of a competent auditor to know what material is and what is not, considering the

prevailing circumstance of each company. This is in line with the three concepts of disclosure: as

(a) adequacy, (b) fairness, (c) fullness (Howard, 2012).

24
2.1.4 Need for Audit

The need for audit results from information asymmetry between owners (shareholders) and

management. The shareholders’ interests’ conflict with those of management and that is why there

is the need for an independent third party (auditors) to review management assertions and to

communicate this to the owners in the form of an audit report. According to Salehi (2011), the

contractual arrangement between shareholders and management requires that managers issue a set

of financial information that purports to show the financial position and results of operations of the

entity. In recent years, the number and monetary value of public sector activities have increased

substantially. The increase in activities has brought with it an added demand for accountability.

Officers and employees who manage these activities need to render adequate account of their

activities to the public.

The public needs the accountability reports in order to assess the performance of those

entrusted with public sector resources. The need for public accountability has caused demands for

more information about public sector programs, projects and services in Nigeria; the law stipulated

that accountability report be produced by public officials and other persons entrusted with national

resources. The law provides that citizens are entitled to know whether government resources are

handled in compliance with exact laws and regulations. They are also entitled to know whether

public sector organizations, programs, projects and services are operating economically, efficiently

and effectively in achieving that stated objectives (Akwa Ibom state Audit Manual, 2000). Given

the foregoing, the auditors’ primary responsibility is to test compliance with policies, procedures

and criteria established by management (Udoanyang and James, 2004).

Owners (i.e. shareholders) need to gain confidence in the financial report presented by

management of their use of the resources entrusted, to them, as the report may contain errors and
25
not disclose fraud, be inadvertently or deliberately misleading or fail to disclose relevant

information. In fact, the report could consist of any combination or all of the above anomalies, such

confidence as required by the shareholders is essential to the proper functioning of the economy.

The audit can said to inspire the confidence which oils the machinery of business and solution to

the problem of credibility in the financial reports presented by management to shareholders. In

selected firms, the answer to the question of why there should be an audit tends to be simplistic

since the company Act says “you must, and provides for substantial penalties if you do not”. From

the foregoing, therefore the reasons for having an audit are categorized into:

(i) Establishing confidence on the financial statement presented by management and

(ii) Statutory.

2.1.5 Auditors’ Duties and Responsibilities in the Nigerian Environment

The Companies and Allied Matters Act (CAMA), CAP C20, LFN 2004 is the principal law

which sets the tone for the incorporation and conduct of business in Nigeria. Section 357 of the Act

requires that every company shall at each annual general meeting (AGM) appoint an auditor(s) to

audit the financial statements of the company. The Act further requires that the audit must be

performed by an approved company’s auditor as defined under Section 358 of CAMA 1990. In

respect to the audit of accounts, the auditors have the following statutory duties:

(a) Audit of the accounts of any limited liability company is provided for by the companies

Act and is therefore compulsory.

(b) Extent of examination to be carried out by the auditor cannot be limited. The auditor

examines all accounts and has access to all records. Has a right to any information he may

require from officials of the company.

26
 (c) The auditor reports to the shareholders in accordance with the provisions of the companies

Act.

(d) The auditor is normally appointed by the shareholders at the general meeting with

provisions being made in the companies Act for exceptional circumstances.

(e) The auditor is an agent of the shareholders and not of the directors, and therefore reports to

the shareholders. It is a misfeasance to report to the directors alone.

(f) The auditor must see that full disclosure of profits and losses is made according to the

provisions of the company

(g) The auditor must be a professionally qualified accountant, member of the institute of

chartered accountants of Nigeria and must hold a practicing certificate. The auditor must not

be a director or an officer of the company nor a partner of an employee of an officer of the

company.

Furthermore, it is the auditors’ statutory duty under Section 360 (4) of the CAMA 1990,

to include in their report if any of the requirements of the Act have not been complied with in the

accounts. Specifically, the Act states that it shall be the duty of the company’s auditor, in preparing

their report, to carry out such investigations as may enable them to form an opinion as to the

following matters whether: (a) proper records have been kept and adequate returns received from

branches not visited by him; and (b) the company’s statement of financial position and profit and

loss accounts are in agreement with the accounting records and returns. The auditors are required

to follow the Nigerian Approved Standards on Auditing in the conduct of their audits. The

“approved accounting standards” are those standards that are issued or approved by the Nigerian

Accounting Standards Board (NASB). The compliance with the Statements of Accounting

Standards (SAS) issued by the Board is statutorily mandated by CAMA, 1990. Furthermore, the

auditor is also to consider whether the information given in the director’s report for the year for
27
which the accounts are prepared is consistent with those accounts; and if they are of opinion that it

is not, they shall state that fact in their report.

2.1.6 Audit Expectation Gap

For the first time, the term of expectation gat was coined in the US. American Institute of

Certified Public Accountant (AICPA) established Cohen Commission (1978) to set suitable code

of auditor’s responsibilities. The mission of the commission was to determine that whether there is

a gap between public expectations from what auditors suppose to provide and or what they actually

provide. In the fall of 1975 a sub-commission under supervision of the Senate was established to

set procedures to improve auditors and public firms' responsibilities. This task continued by

International Memoranda of Understanding (MOUs) in subsequent years. Moreover, Adam’s

Commission issued its report in Canada. While the term of expectation gap was developing in North

America, the same movements were growing in the UK.

The word “audit expectation gap” was first initiated to audit literature by Liggio (1974).

The audit expectation gap has been defined as the difference between the levels of expected

performance as envisioned by both the user of a financial statement and the independent accountant

(Liggio, 1974). The Cohen Commission (1978) in the United States of America extended Liggio’s

(1974) definition by taking into account whether a gap may exist between what the public expects

or needs and what auditors can and should reasonably expect to accomplish. Audit expectation

crevice is the gap between the role of an auditor as comprehended by the Auditor and the users of

financial statements. It is a gap between what the auditor is doing and what the general public

anticipates that him will do making the feeling that the statutory target of audit is not meeting the

social needs of the masses. The capacities performed by the accounting profession are crucial to the

28
development and steadiness of the financial business sector, whether at the worldwide level or at

the neighborhood level. Egbiki (2006).

The Audit Expectation Gap is defined by several researchers: Ojo (2006) defines the

expectations gap as the difference between what the public and users of financial statements

perceive the role of an audit to be and what the audit profession claim is expected of them during

the conduct of an audit. The audit expectations gap is when external auditors’ understanding of their

role and duties is compared against the expectations of user groups and the general public (Piece &

Kilcommins, 2006). According to Guy and Sullivan (2008), there is a difference between what the

public and financial statement users believe accountants and auditors themselves believe they are

responsible for. According to AICPA (1993), the audit expectation gap refers to the difference

between what the public and financial statement users believe the responsibilities of auditors to be;

and what auditors believe their responsibilities are. Researchers believe that the audit expectations

gap is the misunderstanding between the audit profession and the general public as to the nature

and function of external audit in modern times. The audit expectation gap exists mainly because of

the subjective nature of terms and concepts in auditing such as the true and fair view,

reasonableness, materiality, adequacy, reliability and relevance which are not defined precisely in

the accounting and auditing standards but are left for the auditor’s professional judgment

(Humphrey, 1997).

Audit expectation gap is a basic issue in evaluating as a result of the harm it has brought,

and keeps on conveying to the quintessence of the auditing profession. Fadzly and Ahmed (2004);

Baker (2002) contends that open trust in a gathering of experts is the "living heart" of the profession.

Thus if such certainty is double-crossed, the expert capacity too is pulverized, since it gets to be

pointless. Porter (2005) as per Appah (2010), the across the board feedback of and prosecution

against auditors demonstrates that there is a gap between public's expectations of auditors and
29
auditors' execution as saw by the public. The greater role of exploration studies propose that the

audit expectation gap is basically because of users' sensible expectations of audits and additionally

their unreasonable impression of the audit profession's execution. In 1988, the Canadian Institute

of Chartered Accountants (CICA, 1988) reported that the gap consists of three main components,

which are: (1) unreasonable expectation by users (2) inadequate legislation, auditing and accounting

standards and; (3) inadequate performance of auditors. Gaa (1991) pointed out that the audit

expectations gap was a direct result of the ‘political game between two contending parties’ between

the public and the auditors. This view is supported by Sikka, Puxty, Willmott and Coopper (1998)

in which they argued that historical and political contexts can give indication ‘within which

expectations are formed, frustrated and transformed’. They contend that audit as a social practice

is subjected to constantly shifting meanings because the social context of auditing changes

continuously through interaction and negotiation. The conclusion from this perspective is that the

audit expectation gap will continue to exist.

Numerous individuals from the general population expect that auditors ought to

acknowledge prime duty regarding financial explanations; auditors confirm financial statements;

auditors clear conclusion ought to ensure the precision of financial proclamations; auditors ought

to perform 99% check; auditors ought to give convenient cautioning about the likelihood of

business disappointment and auditors ought to counteract and identify fraud. These open

expectations are past the genuine standard of execution by auditors. By the audit profession,

actually management is completely in charge of the substance of financial explanations; an audit

ought to just give sensible affirmation that financial statements are free from material misquote; an

audit are just required to test those exchanges. An audit does not ensure that fraud will be

recognized. It on this premise Haniffa and Hudaid (2007) watched that one of the reasons for the

execution gap in connection to the auditors' role and obligations is because to satisfy the role and
30
duties expected by the general population since they are not plainly characterized or are

incorporated into the legitimate claims.

2.1.6(a) Components of the Audit Expectation Gap

The knowledge of structure of the expectations gap components will help in reaching a

correct understanding of the nature of the gap which helps to narrow it. But as researchers and

scholars disagreed gap expectations of access to a specific concept for the gap expectations also

differed in determining the structure of the components of the expectations gap (Porter, 1993).

Adopting the title "audit expectation performance gap", she defined it as "the gap between society's

expectations of auditors and auditors' performance, as perceived by society". She proposed that the

gap comprises two major components, namely:

1. Reasonableness gap: represented a gap between what society expects auditors to achieve and

what they can reasonably be expected to accomplish "this coincides approximately with the

Cohen Commission's definition of the gap".

2. Performance gap: represented a gap between what society can reasonably expect auditors to

accomplish and what society perceives they achieve. This component may be further subdivided

into:

(a) The deficient standards gap: represented a gap between the responsibilities that can

reasonably be expected of auditors and auditors' existing responsibilities as defined by statute

and case law, regulations and professional promulgations; and

(b) The deficient performance gap: represented a gap between the expected standard of

performance of auditors 'existing responsibilities and auditors' performance, as expected and

perceived by society. Figure 2.1 below summarizes these components:

31
Figure 2.1: Components of Audit Expectation Gap

2.1.6(b) Reasons for the Audit Expectation Gap

In this section, we shall examine the factors that influence the persistence of the audit

expectations gap in financial reporting. A number of researchers have identified factors that

contribute significantly to the existence of the audit expectation gap. Salehi (2011) indicates that

32
misunderstanding of financial statement users in the following areas has been responsible for the

persistence of the audit expectation gap:

1. Society’s Failure to Understand the Auditor’s Duties

For nearly four decades Chandler and Edwards (1996) notes that there has been a mismatch

between society’s expectations of auditors and auditors’ performance; that is, auditors have not met

society’s expectations of them. The findings of Porter’s (1993) and Porter and Gowthorp’s (2004)

research indicate that the gap results from three main causes; (i) society having unreasonable

expectations of auditors, (ii) auditors not meeting society’s reasonable expectations of them, and

(iii) society being dissatisfied with the standard of auditor’s performance of some of the

responsibilities they are required to perform by law, regulations or professional promulgations. The

findings of these studies (Porter, 1993; Porter and Gowthorpe, 2004) also suggest that, while

society’s unreasonable expectations of auditors are increasing auditors are better meeting society’s

reasonable expectations of them and performing their responsibilities to an improved standard.

However, studies conducted in countries such as China and Saudi Arabia indicate that society’s

expectations of auditors and its perceptions of their performance (and, hence, the extent and

composition of the audit expectation gap) may be significantly affected by institutional and cultural

factors. Attempts by the auditing profession to narrow the audit expectation gap, globally or in

individual countries, will need to be cognizant of the impact of these and similar factors. Robinson

and Lyttle (1991) found Society’s Failure to understand the auditor’s role in relation to the detection

and reporting of fraud to be the most important cause of the expectations gap. Humphrey et al

(1992) noted that fraud has been an important element in the debate on audit expectations

throughout the history of the statutory audit.

33
 The credibility of auditors is being questioned in many countries, and is evidenced by

criticisms and litigations against auditors (Porter, 1993). Audit expectation gap contributes partially

to these litigations and criticisms against auditors. One major criticism was that the auditors were

unable to detect and report frauds, causing bankruptcy costs. Public misperceptions are a major

cause of the legal liability crisis facing the accounting profession. Many users misunderstand the

nature of the attest function, especially in the context of an unqualified opinion. Some users of

financial reports feel that the auditor should not only provide an audit opinion, but also interpret the

financial statements in such a manner that the user could evaluate whether to invest in the entity.

There are also users who expect auditors to perform some of the audit procedures while performing

the attest function like penetrating into company affairs, engaging in management surveillance and

detecting illegal acts and/or fraud on the part of management. It is these high expectations on the

part of users of financial statements that create a gap between auditors‟ and users‟ expectations of

the audit function.

2. Auditor Adherence to the Auditing Standards

The Oxford Dictionary of Accounting (2008) describes auditing standards as the basic

principles and essential procedures with which auditors are required to comply in the conduct of

any audit of financial statements. This is the basic principles which govern the auditors professional

responsibilities and which must be complied with whenever an audit is carried out. Auditing

standards are a number of rules accepted by the profession as guidelines to measure transactions,

event and circumstances which affect financial results and financial information supplied to

beneficiary parties (Igbinosun, 2011). In Nigeria, the International Standards on Auditing (ISA) are

mandatory for the companies quoted on the Nigeria Stock Exchange (NSE) where Nigerian

Auditing Standards do not exist. But due to the peculiarity of the Nigerian environment on July,

34
2006 nine (9) Nigerian Standards on Auditing (NSA) were issued. These claimed priority over the

ISAs in the Nigeria context. The objective of the audit of financial statements is to enable the auditor

to express an opinion on whether the financial statements were prepared, in all material respects, in

accordance with an identified financial reporting framework. The auditor’s opinion is intended to

enhance the credibility of the financial statements. To achieve these objectives there are

requirements that should be satisfied according to the ISAs and NSAs. These standards should be

related to the relevant objectives of the audit, which should be relevant and appropriate within the

social environment. Therefore, these standards should satisfy the four criteria of relevance,

acceptability, consistency and suitability.

Similarly, the Auditing Practices Committee issued a series of auditing standards between

1980 and 1991. The standards issued by its successor body, the Auditing Practices Board (APB)

are known as Statement of Auditing Standards (SAS). The APB also issues practices notes (to assist

the auditor in applying auditing standards of general application to particular circumstances and

industries) and Bulletins (designed for issue when guidance is needed on new or emerging issues).

International Auditing Practice Committee believes that the issue of such standards and statements

improve the degree of uniformity of auditing practices and related services throughout the world

(IFAC, 1997). It is however, clarified that the guidance’s do not override statutory or professional

regulations. Though the International Auditing Guidelines apply (IAG) primarily to independent

financial audits, it is recognized that they may also have application, as appropriate, to other related

activities of auditors. IAG are not automatically binding on the auditors in a particular country.

However, they provide an authoritative view of what is internationally recognized as Generally

Accepted Auditing Practices (GAAP) and thus, serve as the basis for the development of auditing

pronouncements by professional bodies.

35
3. Differences between Public and Auditor’s Perception of Auditor’s Duties

In 1988, the Canadian Institute of Chartered Accountants (CICA) established a Commission

(the Macdonald Commission) to study the public’s expectations of audits. If the Commission found

a gap existed between what the public expects or needs and what auditors can and should reasonably

expect to accomplish, it was to develop recommendations on how the disparity should be resolved

(CICA 1988). Like earlier studies, the Commission found that amongst its respondents (including

the financial community group) there was substantial misunderstanding about the role of the

auditor. In 1990, Humphrey, Moizer and Turley (1993) conducted a survey in the UK to investigate

the opinions of auditors, auditees and financial statement users about auditors and their work. Like

the earlier studies, Humphrey et al (1983) found that the opinions of the auditor group differed

markedly from those of the financial directors and financial statement users. The largest difference

related to the assertion: “Too much is expected of auditors by the investing community” (Humphrey

et al, 1993). Significant differences were also evident in respect of the assertions: “Auditors do not

understand the problems of a business” and “Auditors should report to shareholders on management

efficiency”. While the auditors and, to a lesser extent, the accountants disagreed with the statements,

the financial directors and financial statement users conveyed their agreement. However, while the

auditors disagreed with the notion that they should report on management’s efficiency, they agreed

(as did the other groups) that they should be “identifying ways to improve management efficiency.

Lin and Chen (2004) investigated the audit expectation gap in China by means of a survey of

auditors and audit beneficiaries (investors, creditors, government officials, business management

and academics). They found that the auditors and audit beneficiaries agreed that there is a need to

increase auditors‟ independence. However, the groups‟ opinions differed in respect of the

36
objectives of a financial statement audit, auditors‟ responsibility to detect fraud, third-party liability

of auditors.

4. Deficiency in Existing Standards

Auditing standards are a number of rules accepted by the profession as guidelines to

measure transactions, event and circumstances which affect financial results and financial

information supplied to beneficiary parties (Igbinosun, 2011). These standards should be related to

the relevant objectives of the audit, which should be relevant and appropriate within the social

environment. The need to address the challenges with domestic standards in terms of the

deficiencies has led to the dominance of the International Standards on Auditing (ISA) which has

been less contentious. Many countries have taken the ISAs as the foundations for national standards

and supplemented them with additional requirements, believed to be appropriate to their domestic

market. The ROSC reports points to two important areas in which most domestic standards are

contentious and this may be as a result of the deficiencies in the standards themselves. Firstly, is a

weakness in the standards resulting from undue political or lobbying influence in standard-setting

activities and lack of detailed rules. For example, many stakeholders in many countries believe that

fraud detection should be recognized as a responsibility of statutory auditors. They contend that the

scope of audits must be expanded beyond the current requirements of International Standards on

Auditing, and looking for fraud must be made an affirmative audit obligation. The international

standards on auditing are clear and detailed about what the expectation of stakeholders in terms of

fraud detection should be and also the extent to which the auditor will be liable. Second, is the

practice in most countries where a principal auditor base his or her audit opinion on the financial

statements taken as a whole solely upon the report of another auditor regarding the audit of one or

more components. This could simply lead to the persistence of audit weaknesses where it is the

37
case that the audit report to be depended on has not be done in line with best standards. However,

with the ISA the auditor bears full responsibility for the audit report

Other reasons for this expectation gap include:

a) Objectives and limitations of an audit

b) Complicated nature of an audit function;

c) Conflicting role of auditors; retrospective evaluation of auditors’ performance; time lag in

responding to changing expectations; and self-regulating process of the auditing profession (Lee

and Ali, 2008).

Shaikh and Talha (2003) (as cited in Gold et al., 2012) further identify the following as

causes of the audit expectation gap:

a) Corporate crises which lead to new expectations and accountability requirements

b) The audit profession attempting to control the direction and outcome of the expectation debate

to maintain the status quo and

c) The evolutionary development of audit responsibility.

d) The skepticism in the auditor independence.

e) Insufficiency of self-control system in the audit profession.

f) Provision of non-audit services to clients.

[

Clearly, from the discussion above, the audit expectations gap exists because of various

factors. It is reasonable to point out that the changes in the auditing environment have prompted the

expectation questions. However, the underlying reasons for the existence of the audit expectations

gap lie on its main players: the auditors and the users. On one hand, it is a direct result of the audit

profession failing to respond appropriately to new issues arising from changes in the audit

38
environment. It is however possible to substantially reduce but not to totally eliminate it

(Olowookere, 2010).

Figure 2.2: Reasons for the Audit Expectation Gap

Non- audit service practicing Lack of sufficient standards. Misunderstanding of users.

by auditors. Existing insufficient Over expectations of users to

Self-interest and economical standards regarding auditor auditor performances.

benefits of auditors. responsibilities for detection Misinterpretation of users.

Unqualified auditor. of fraud and illegal acts.

Unawareness users of audit

Dependent auditor. responsibilities and

limitations.
Miscommunication of

auditors. Users’ over expectation of

standards.

AUDIT EXPECTATION
GAP

2.1.7 Expectations of Users of Financial Statement from the Auditors Duties

39
 As stated earlier, the auditors in preparing their reports according to the Companies and

Allied Matters Act (2004, as amended), are to carryout necessary investigations and ascertain

whether proper accounting records have been kept by the company; the company’s statement of

financial position and (if not consolidated) its profit and loss account are in agreement with the

accounting records and returns made as well as whether the information given in the director’s

report for the year for which the accounts are prepared is consistent with those accounts and, if they

are of opinion that it is not, that should be stated in their report. By inference, the duties of an auditor

are expected to be reflected through the adequacy of their audit reports. Any identified expected

gap however could therefore mean that the audit report prepared by the auditor may not help achieve

the intended goal for which the auditing exercise was conducted. Most users of audit services can

broadly be classified as auditees (the board of directors of the company) and third parties

(shareholders, bankers, creditors, employees, customers, and other groups). Each of these groups

has its own set of expectations with regard to an auditor’s statutory duties. Users Expectations were

found with regard to the following duties of auditors as provided in Sec. 360 (1), (2) and (5) of the

CAMA 1990:

 Giving an opinion on the ‘true and fairness’ of financial statements;

 Giving an opinion on the company’s ability to continue as a going concern;

 Giving an opinion on the company’s internal control system;

 Giving an opinion on the occurrence of fraud;

2.1.7(a) Giving an Opinion on the Fairness of Financial Statements

Giving an opinion on the ‘true and fairness’ of financial statements is generally regarded

as the auditors core business. Most national and international auditing guidelines are concerned

with this particular duty while Expectation Gap studies demonstrate that public expectations are
40
high in this respect. Basically, it seems that a large part of the financial community (users of audit

services) expects that financial statements with an ‘unqualified audit opinion’ are completely free

from error. The inherent limitations of auditing are not entirely accepted and or understood by all

groups of users. An audit report of an independent expert only assures users of audit services that

the accounts are proper and reliable. The outsiders can rely on the accounts if the auditor reports

that the accounts are true and fair. The accounts are said to be true and fair:

a. When the profit and loss shown in the profit and loss account is true and fair, and

b. Also when the value of assets and liabilities shown in the balance sheet is true and fair.

It is important to note that what usually constitutes the ‘true and fair’ is not defined under

any law. However the following general guidelines may be laid down in connection with true and

fair:

a) Conform to Accounting Principles: The books of accounts must be kept according to the

normally accepted accounting principles such as the concept of entity, continuity, periodical

matching of costs and revenue, accrual and double entry system etc.

b) No window dressing or secret reserves: The accounts must show the financial position and the

profit or loss as they are. I.e. there is neither an overstatement nor an understatement. There should

be in other words neither window dressing nor secret reserves. In window dressing the accounts are

made in such a way as to show a much better condition than the actual condition. The profit and the

net worth are overstated. The accounts are said to show ‘true and fair’ view when the accounts show

only the actual conditions as it is. I.e. the profit and the net worth are shown as they are. In order to

show a ‘true and fair’ view of an account, the auditor should ensure that:

i. The final accounts agree with the books of accounts.

ii. The provision for depreciation is proper.

41
 iii. The closing stock is physically verified and valued properly.

iv. Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue

expenses are written off properly.

v. Proper provision is made for bad and doubtful debts.

vi. Capital expenses are not treated as revenue expenses and vice versa.

vii. Capital receipts are not treated as revenue receipts.

viii. Effect of changes in rate of foreign exchange on value of assets and liabilities is recorded in

the books properly.

ix. Contingent liabilities are not treated as actual liabilities and vice versa.

x. Provision is made for all known losses and liabilities

xi. A reserve is not shown as a provision and vice versa

xii. Cut off transactions are recorded properly, so that all sales invoices are matched with goods

delivered and all purchase invoices are matched with goods received.

xiii. Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid expenses,

income accrued and advance incomes are recorded properly.

xiv. Expected or anticipated gains are not credited to the reedited to the profit and loss account.

xv. Effect of events after the balance sheet date on the value of an asset and liability is disclosed

in the accounts properly

xvi. The exceptional or non-recurring transactions are disclosed separately in the accounts.

c). Disclose all material facts: The books of accounts must disclose all material facts regarding

revenue, expenses, assets and liabilities. Material means important and essential. The disclosure of

important matters in the accounts helps the users in taking business decisions. There should neither

be suppression of vital facts nor misstatements.

42
d). Legal requirements: In case of limited company the account must disclose the matters required

to be disclosed under the Companies and Allied Matters Act (CAMA). The final accounts must be

in the format prescribed by the Act.

e). Requirements of Institute of Chartered Accountants of Nigeria: The accounts must also

be in accordance with the various guidelines prescribed by the ICAN. These guidelines are

contained in the statements, standard and guidance notes issued by the institute from time to time.

2.1.7(b). Giving an Opinion on the Company’s Ability to Continue as a Going Concern

Perhaps the most disturbing events for the public’s trust in the audit profession are cases

where an unqualified audit report is issued shortly before a company’s bankruptcy or become

distressed. It is the auditor’s duty to determine whether the audited entity is able to continue as a

going concern. If there are serious doubts about this ability, both the financial statements and the

auditor’s opinion need to express these doubts in the audit report. However, it is generally felt that

auditors face a dilemma in this regard. The bane of criticism by the public when a company fails

usually stems from the fact that an unqualified audit report was issued by external auditors shortly

before the failure occurred. It is no surprise that corporate failure is synonymous to audit failure

(Asein, 20). Until recently, it was often taken for granted that the accounts of a company could be

prepared on a going concern basis unless there were obvious indications to the contrary (Adeniji,

2004:275). Auditors are required to carry out procedures to provide them with assurance that the

going concern basis used in the preparation of the financial statements is appropriate and there are

adequate disclosures regarding that basis in the financial statements in order that they give a true

and fair view (Adeniji, 2004).

The expectation here is that users however perceive that a clean audit report is a going

concern (Manson and Zaman, 2000). In their study, the ability of a company to remain a going

43
concern is linked with the value of their investment. On the part of auditors, it seems to avoid

litigation, they are careful to explicitly disclose the going concern position of a company.

2.1.6(c) Giving an Opinion on the Company’s Internal Control System

The issue of testing and reporting on the quality of a company’s internal control system

has been recognized as one of the focal issues in auditing (Gibbins, 2006). International Standard

on Auditing (ISA) 400 requires the auditor to obtain an understanding of a company’s accounting

and internal control systems, sufficient to plan the audit and develop an effective audit approach.

However, testing the adequacy of the internal controls is not required (Singleton and Singleton,

2010). If the audit objectives can be met more efficiently by substantive testing, it is acceptable not

to examine the internal control structure (Singleton and Singleton, 2010). Most expectation gap

surveys show high public expectations of the auditor’s role in testing whether a satisfactory system

of internal control is being operated whereas these expectations clearly exceed the auditor’s

statutory duties.

2.1.7(d) Giving an Opinion on the Occurrence of Fraud

One contending area which continues to spark off debate is the issue of the detection and

prevention of fraud. The public expects the auditor to take over this responsibility. They believe

that until the auditors are duty-bound to expand their responsibility over frauds detection and

prevention, the gap will continue to exist. Nevertheless, it is doubtful if the profession will change

its defensive approach and will descend to nailing itself owing to the users’ demands. It must be

asserted that the area of fraud detection has the longest history and widest expectation gap

(Singleton and Singleton, 2010). The fact that this part of the expectation gap has attracted so much

attention is partly attributable to the nature of the concept of auditing. As discussed earlier, fraud
44
auditing is different from financial auditing likewise forensic accounting. The knowledge of these

is not fully lent out to audit services users or the public. Where a financial auditor reports that the

books of accounts of an enterprise is ‘true and fair’ and does not reveal or report occurrence of

fraud in his report, the expectation gap from the public or audit services users will emerge.

Pertinently, the role of audit in this era is to refocus on public interest, redefine the audit

relationship, and ensure the integrity of financial reports, separate non-audit functions and other

advisory services. Also, audit methods need to be focused on risk attention, fraud awareness,

objectivity and independence, increased attention to the needs of financial statement users (Lee and

Ali, 2008). Since the primary purpose of external audit is not to detect fraud, investigating fraud

requires the combined skills of a well-trained auditor and a criminal investigator. Fraud auditing is

a relatively new discipline that emerged from the criminal and regulatory statutes involving

business, financial crimes ranging from embezzlement, investment fraud, giving and accepting

bribe and computer fraud to mention a few. Auditing for fraud and statutory audit are parallel in

nature. The former is a means of identifying irregularities in accounting practices, procedures and

controls. However, the latter is a means by which auditors uncover material deviations and

variances from standards of acceptable accounting and auditing practice. Auditing for fraud

involves looking beyond the transaction figures even though a statutory auditor is likely to become

suspicious of an attempt made to disguise or cover up a transaction (Bologna and Lindquist, 2015).

There may be some cases where the auditor's work will lead to the detection of fraud. In

such a situation the auditor is responsible for considering the potential effect on the financial

information. In addition, the auditor should perform more procedures bearing in mind the type of

fraud, other irregularities or errors, risk of their occurrences and likelihood that a particular type of

fraud or error could have a material effect on the financial statements.

45
2.2 Theoretical Framework

The frame work of this study is based on some fundamental theories like the Theory of

Inspired Confidence, Agency theory, Role Conflict Theory and the Policeman Theory.

2.2.1 Theory of Inspired Confidence

This theory was developed in the late 1920s by the Dutch professor Theodore Limperg

(Hayes et al., 1999). Limperg’s theory addresses both the demand for and the supply of audit

services. According to Limperg, the demand for audit services is the direct consequence of the

participation of outside stakeholders in the company. These stakeholders demand accountability

from the management, in return for their contribution to the company. Since information provided

by management might be biased, a possible divergence between the interest of management and

outside stakeholders, an audit of this information is required (Adeyemi and Uadiale, 2011). With

regard to the level of audit assurance that auditor should provide, (the supply side), Limperg adopts

a normative approach. The auditor’s job should be executed in such a way that the expectations of

a rational outsider are not thwarted. So, given the possibilities of audit technology, the auditor

should do everything to meet reasonable public expectations. This confidence is, therefore, a

condition for the existence of that function; if the confidence is betrayed, the function, too, is

destroyed, since it becomes useless.

46
 He went on to argue that, there were two circumstances in which the confidence could

be betrayed. It could be betrayed if the expectation of society is exaggerated, that is, it exceeds what

the auditor is capable of performing. Conversely, it can be betrayed if the auditor underperforms.

He recognized that society’s needs are not static. They are dynamic and influenced by changing

perceptions and changes in the environment. The central area of Limperg’s work is related to the

social responsibility of the independent auditor and possible mechanisms for ensuring that audits

meet society’s need. Limperg’s work highlights the importance of the social significance of auditing

and the implications for how an audit should be performed. Limperg (1992) emphasizes the role of

the auditor in relationship with the users of financial statements in the sense that the independent

auditor acts as a confidential agent for society. Limperg’s framework is based on the greatest

possible level of satisfaction of users of financial statements with regard to the auditor’s work. In

achieving this objective, the auditors are to perform enough work to meet the expectations they

have aroused in society.

2.2.2 Agency Theory

Agency theory was originated in the early 1970s and the first scholars to propose agency

theory were Stephen Ross and Barry Mitnick (Mitnick, 2006). Agency theory had been highly

applied in companies in the year 1980’s because companies had managers as agents who work on

behalf of shareholders referred to as principals (Zajac & Westphal, 2004). According to the agency

theory, agency issue may occur due to separation of corporate management and ownership as the

agents have control rights in the company and they may conduct opportunistic behaviors which are

exploiting interests of principals (Mitnick, 2006). Agency Theory assumes that the interest of the

principal and agent varies and that the principal can control or reduce this by giving incentives to

47
the agent and incurring expenses from activities designed to monitor and limit the self-interest

activities of the agent (Mitnick, 2006).

Agency theory could be comprehended in a more inclusive manner which agent has

contractual relationship with the principal as shareholders do not control the company by

themselves but they will delegate responsibilities to the agent as to help them run the operation of

company. According to Meyer (2009), people are always self-interested to maximize their own

utilities. Besides, it is stated that agent would maximize their own benefits instead of the best

interests of the principal because of asymmetric information (Madi, 2014). The issues of hidden

information or action from agents may arise due to the failure of principals to monitor the agents’

actions comprehensively and thoroughly. (Meyer, 2009).

Applying this agency theory to this present study, auditors especially, the so called internal

auditors are the ‘agents’ who are expected to act independently in the best interest of members of

the public whose funds the federal parastatals are using. They are expected to constantly audit

prepared an objective and critical audit report which would show the ‘true and fairness’ of the books

of the parastatals and in return, can aid improvement in the management of finances of the

parastatals. Despite this fiduciary duty they owe the masses, government regulatory bodies and

even the masses do express concerns about the extent to which the auditors actually adhere to such

duties. It is to this extent that the audit expectation gap comes to play. For Andresson and Emander

(2005) (as cited in Salehi, 2011), a gap expectation occurs when the distribution of the responsibility

is not well defined. Therefore, the management and the shareholders have to realize that the auditor

does not have responsibility of accounting, but instead only see that the auditing is carried out

properly.

2.2.3 Role Conflict Theory

48
 Role Conflict Theory provides a theoretical explanation for the existence of an expectation

gap. The theory is developed by Rizzo, House and Lirtzman in 1970. Role Conflict Theory is based

on the following assumptions: the auditor is required to monitor the client‘s financial statements

and the public expects the auditor to faithfully carry out that role (Koo and Sim, 1999). The auditor

is in conflict because he or she must firstly serve the professional regulations and rules governing

auditor independence. Then, this must be balanced against his or her role as the as the watch dog

who should be serving the interests of the users and the client as well as looking after his or her

own self interest (Alleyne and Devonish, 2006). The role of the auditor is subject to the interactions

of the normative expectations of the various interest groups in the society having some direct or

indirect relationship to the role position (Davidson, 2015). He noted that these different groups may

hold varying expectations of the auditor and these expectations may change from time to time

depending on the specification of their own role requirements and the interaction of other forces in

the society. Hence, the auditors are placed in multi-role and multi expectation situations.

Furthermore, Koo and Sim (2009) argue that role conflict may arise because of the expectation gap

that exists between the auditors and users. Users expect auditors to serve the public and to uncover

management fraud (Mills and Bettner, 2012). There is role conflict when the auditor is unable to

satisfy all the responsibilities expected by users.

2.2.4 Policeman Theory

Until the 1940s, the policeman theory was the widely held theory on auditing (Hayes et al.,

1999). Under the theory, an auditor acts as a policeman concentrating on the arithmetical accuracy,

on prevention and detection of fraud. However, Fadzly and Ahmed (2004) note that due to its

inability to explain the shift of auditing focus to “verification of truth and fairness of the financial

statements”, the theory seems to have lost much of its explanatory power all of a sudden.
49
 It is important to note here that recent financial statements have resulted to careful

reconsideration of this theory. However, there is an ongoing public debate on the auditor’s

responsibility for detection and disclosure of fraud detects and tackles crime. This has drawn

stakeholders onto the basic public perceptions on which the theory is derived. Auditing literature

did not support this theory. The responsibility for the prevention and detection of fraud and

irregularities is that of the management of the enterprise who may obtain reasonable assurance that

this responsibility has been discharged by establishing an adequate system of internal control. It is

not part of an auditor’s duties to search for fraud unless he is required to do so by a specific term of

his engagement. However, if audit is properly carried out, the work of auditor should expose fraud

and irregularities where they exist.

It is pertinent to note that from the above theories, the role conflict theory and the theory of

inspired confidence are the theories that provide the basic theoretical foundation for the study as

they give an insight into the existence of an expectation gap.

2.3 Empirical Framework

The empirical review is concerned with the outcome or result of previous studies. Many

researchers have had keen interest on the relationship between audit expectation gap and users’

behaviours of financial statements. Their findings reveals thus:

Obiamaka (2008) did a study to highlight elements leading to the audit expectation gap in

Nigeria. She did a sample of four hundred (400) individuals made up of one hundred (100) each of

bankers, investors/ stock brokers, auditors and accountants was selected in Lagos and Ogun States.

It was discovered that there is a statistically large disparity between the opinion of auditors and

stakeholders in Nigeria with regard to the statutory role of external auditors, how reliable audit

50
reports are in making investment decisions, qualities and interpretation of audit report and

independence. Factor analysis revealed that the audit expectation gap in Nigeria is multi-faceted

but consists mainly of misunderstanding of the external auditor’s responsibilities by the users of

audited financial statements.

A study by Musyoka (2010) concluded that audit expectation gap does exist within the

Nairobi Securities Exchange. The respondents were 40 investors for quoted companies in Kenya.

The study found out that the investors expected much more from auditors with regard to their

responsibility, did not deem the audit report to be reliable, seldom used the audit report in making

their decisions and finally it was established that increased level of the audit expectation gap was a

key contributor to low levels of investor confidence.

A comprehensive research carried out by Dixon, woodhead and Sohliman (2006) in Egypt

intends to examine the existence of an audit expectation gap between auditors and financial

statement users in Egypt. This research was based on three factors which were audit responsibility,

audit reliability and usefulness of audited financial statement. The research method used a semantic

differential instrument to measure the messages communicated through audit reports. 100

questionnaires were distributed to each group’s i-e: auditors, bankers and investors. The results

initiate confirmation of a wide audit expectation gap in Egypt in the areas of auditor responsibilities

for fraud prevention, maintenance of accounting records, and auditor judgment in the selection of

audit procedures. The expectation gap is reduced and decision making of users of financial

statement will improve by adoption of long form of audit report, augmentation of auditing

framework and educating the users of financial statement.

An extensive research has been carried out by Chowdhury (Bangladesh) and Innes & Kouhy

(Scotland) in 2005. This research investigate an audit expectations gap in the public sector between

the Comptroller and Auditor General’s (CAG) auditors in Bangladesh and the users of the CAG
51
reports namely the Public Accounts. Interviews which gave qualitative evidence and second stage

based on questionnaire which gave quantitative evidence. 25 questions in the questionnaire

considered to survey the detailed aspects which are associated to CAG reporting, accountability

and six audit concepts. These questions were categorized into seven questions on CAG reporting,

two on accountability, four on auditor independence, four on auditor competence, two on audit

materiality, two on audit evidence, one on the true and fair view and three on performance auditing.

The main finding of this research paper was a significant difference in the perception of CAG

auditor’s and users of their report. This differences in perception was reduced by providing better

training for the CAG auditors into their report users’ information requirements and expectations

and better training for the members of the PAC and the representatives of the IFAs.

The study by Issahaku and Muntari (2015) examined the existence of audit expectations gap

in Ghana from the point of view of auditors, bankers and students of the Institute of Chartered

Accountants, Ghana (ICA (G)) as users of financial statements. Questionnaires were used on a

sample size of 135 respondents. The random and the convenient sampling methods were used. The

study uncovered an expectation gap which was quite wide especially in relation to; auditors

responsibility for detecting and preventing fraud and errors, the soundness of the internal control

structure of the entity, the auditor not exercising judgment in the selection of audit procedures

among others. The researchers therefore recommend that the regulators of audit profession in Ghana

must take steps necessary in educating auditors and financial statements users alike and that the

establishment of an independent government agency to oversee the implementation of audit

regulation in Ghana is eminent. The researchers further propose the extension of the auditors’

responsibility as a shared cost between audit firms and their clients.

The study by Valentine and Rachael (2012) on The Audit Expectation Gap Problem in

Nigeria: The Perception of Some Selected Stake-Holder Groups adopts a survey research design. ,
52
A sample size of two hundred (200) persons made up of fifty (50) persons each of auditors,

accountant in business, banker and investors/shareholder were selected conveniently as time

permitted from some accounting firms, bank, investment houses and companies in Lagos, Enugu

and Abuja. The research instrument used was the questionnaire. The data collected were analyzed

using cross-sectional chi-square analysis and analysis of variance (ANOVA). The findings revealed

amongst others that the audit function is crucial in providing users with assurance about the

information provided by management in the financial statements. Users expect this information to

be free from management bias and correct, true and fair with respect to the enterprise resource. The

audit expectation gap is associated with the independent audit function. Some of the causes of an

audit expectation gap may be traced to audit objectives, auditor’s obligation to detect and report

fraud, auditor independence, and the third party liability of auditors, quality of profession’s

performance, its objectives and results and that which the society expects. There is difference

between the opinion of auditors and audit beneficiaries on the statutory role of external auditors in

Nigeria. There is difference in reliability scores between auditors, bankers, investors and

accountants in Nigeria. There is difference in Nature and meaning of audit report messages scores

an unqualified statement shows the true and fair view of the state of affairs of a company between

auditors, bankers, investors and accountants in Nigeria. There is difference in independence scores

between auditors, bankers, investors and accountants in Nigeria.

This study by Abiola (2015) examines the audit expectation gap with respect to financial

statement users. Fifty five copies of questionnaires were distributed to each of the respondents’

group of auditors, stockbrokers and company‘s shareholders. A total of 154 usable questionnaires

were received and analyzed using Pearson Correlation statistics with the aid of Statistical Package

for Social Sciences version 18. The result shows, among other things, that lack of knowledge of

auditors’ responsibility, on the part of financial statement users, causes audit expectation and that a
53
compromise in auditors’ role and responsibility creates audit expectation gap. It is suggested that

in order to minimize the unreasonable expectation on the part of the public and also for the increased

role conflict of auditors to abate, there must be massive education of financial statement users on

the professional role of auditors in addition to increased supervisory roles of practicing auditors by

their professional bodies.

The study by Semiu and Olayinka (2011) investigates whether audit expectation gap exists

in Nigeria and the perception of the users’ group on its existence. Respondents view was also sought

on how the gap could be narrowed. Three hypotheses were formulated and tested using the analysis

of variance. The study reveals that an audit expectation gap exists in Nigeria, particularly on issues

concerning auditor’s responsibility. It was also observed that there are significant differences in the

perception of respondent groups on the existence of the audit expectation gap in Nigeria. Therefore,

the study suggests educating the public about the objects of an audit, auditors’ role and

responsibilities to narrow the audit expectation gap.

The study by Paul (2014) is structured to briefly establish what auditing and its expectations

gap is and the relationship audited financial statement has on capital market and to investigate if

the identified gaps have any significant effect in the volume of transactions in the Nigerian capital

market. It sought to establish the perception of the capital market operators on its existence.

Respondents view was also sought on how the gap could be narrowed. Chi-square (χ2) was used to

analyze the data obtained from the study. The data were obtained through questionnaire. Two

hundred and ninety (290) copies of the instrument were found useful out of 350 copies distributed

using purposive sampling technique. In this study, a cross-sectional survey was conducted in Lagos

and Abuja stock Exchange to capture the perceptions of key users of financial statements in

Nigerian capital market. The tests of hypothesis were done using Microsoft Excel 2010 version.

Tests were carried out at a significant level of 5% and twelve degree of freedom. The findings of
54
the study indicated that there is a wide expectation gap in the areas of auditors‟ responsibility for

fraud prevention and detection. Audit expectation gap has negative impact on the volume of

transactions in Nigerian stock exchange.

The study by Johnson Kolawole (2011) sought to establish whether or not there are

differences between users of financial statements and auditors’ perception of management

responsibility for the preparation of financial statements, its reliability and decision usefulness. Chi-

square (χ2) was used to analyze the data obtained from the study. The data were obtained through

questionnaire. Two hundred and fifty (250) copies of the instrument were distributed using

purposive sampling technique. In this study, a cross-sectional survey was conducted to capture the

perceptions of users of financial statements in Nigeria. The tests of hypothesis were done using

Statistical Package for Social Science (SPSS) version 14.0. Tests were carried out at a significant

level of 5% and four degree of freedom. The findings of this study indicated that there is a wide

expectation gap in the areas of auditors’ responsibility for fraud prevention and detection. There is

no generally accepted description of the role of the auditor. Audit scandals had negative impact on

auditor’s credibility. The users of financial statements should be enlightened more on the

responsibilities of auditors on the financial statements, the role of the auditor should be clarified

and quality control measures should be observed in audit firms.

55
 CHAPTER THREE

METHODOLOGY

This chapter provides a discussion of the research methods and procedures that were applied

in this study. Specifically, it discusses the research design especially with respect to the choice of

design. It also discusses the population of the study, sample and sampling technique(s), instrument

for data collection, method of data collection and data analysis technique(s).

3.1 Research Design

This study adopted the descriptive research design. The descriptive design was employed

in this study because the researcher would collect data from a sample of respondents and analyze,

describe and interpret their responses in relation to the audit expectation gap and its impact on users’

behaviour of financial statements in Nigeria.

3.2 Population of the Study

For the purpose of this study, the population comprised of all users of financial statements,

all auditors (external and internal) and those who have knowledge in this area (Accountants-

chartered and lecturers in accounting). The population of these users group is impossible for the

researcher to state exactly. However, the researcher would use a population of two hundred and ten

(210) respondents for this study. The population for the study is shown in Table 3.1 below:

56
Table 3.2: Population of the Study
S/NO. User Group Population (in person)
1 Managers 30
2 Investors 30
3 Financial Analyst 30
4 Bankers 30
5 Auditors 30
6 Professional Accountants 30
7 Lecturers of Accounting 30
Total 210
Source: Field Survey, 2018

3.3 Sample Size / Sample Technique

For the purpose of this study, the researcher used the simple random sampling technique to

compose the sample. The justification for adopting this technique is based on the fact that each

population in the user group has an equal chance of being selected. The researcher therefore selected

a sample size of 138 with the aid of the Taro Yamane’s scientific formula stated below:

𝑁
𝑛=
(1 + 𝑁(𝑒 2 )

Where n = Sample Size

N= Population Size

57
 e= Level of significance
210
𝑛 = (1+210(0.052 )

210
𝑛 = (1+210(0.0025)

210
𝑛 = (1+210(0.0025)

210
𝑛 = (1+0.525)

210
𝑛 = 1.525

𝑛 = 137.7

𝑛 = 138

This sample was composed as shown in figure 3.2 below:

Table 3.2: Composition of Sample

S/NO. User Group Population (in person)
1 Managers 20
2 Investors 19
3 Financial Analyst 19
4 Bankers 20
5 Auditors 20
6 Professional Accountants 20
7 Lecturers of Accounting 20
Total 138
Source: Field Survey, 2018

3.4 Sources of Data Collection

58
 The researcher used the primary and secondary sources of data, but reliance was placed on

the primary source because of its relatively factual nature.

Primary Sources: this was the first hand data collected through the administration of copies of

questionnaire. This allowed the researcher to get some amount of information used in this research.

Secondary Sources: this is the information gathered from external sources like; library, magazine,

textbook, online research etc.

3.5 Instrument for Data Collection

The instrument used for data collection in this study was a well structured questionnaire. The

questionnaire consisted of two sections, A and B. Section A deals with details of the respondents

and section B deals with the questions relating to the research topic.

Using the Likert Method of Scaling, the expected mean from the likert scales were

calculated as shown in Table 3.3 below:

Table: 3.3: 5-Point Likert Scale Questionnaire: Calculation of Mean-Cut Off

ITEM VALUE
Strongly Agree 5
Agree 4
Undecided 3
Disagree 2
Strongly Disagree 1
Total 15
Source: Researcher’s Computation, 2018

5+4+3+2+1
Expected mean = 5
=3

59
3.6 Validity and Reliability of Research Instrument

In order to ensure content and face validity of the instrument, copies were given to the

supervisor who vetted through and corrected mistakes thereof. The corrections were added to make

it valid.

Reliability is the degree to which similar outcomes are produced by a measuring instrument

when used in different situations. The questionnaire when distributed for data collection to different

respondents produced similar outcomes, thus, making it reliable as the research instrument for this

study.

3.8 Method of Data Analysis

Tables, percentage, mean statistics were employed to analyze the data and answer the

research questions; while the One Way Analysis of Variance (ANOVA) was employed to test the

hypotheses formulated in the study with the aid of the IBM Statistical Package for Social Sciences

(SPSS) Version 22.0 Software Package. The level of significance for the data analyzed is at 5%.

Decision Rule:

Item statement with X value ≥ 3.00 is accepted, otherwise; reject item statement with X

value ≤ 3.00.

Furthermore, using the One- Way Analysis of Variance (ANOVA), the null hypothesis is

rejected if the calculated F-statistic is greater than the tabulated F-critical value with k-1 numerator

and N-k numerator degrees of freedom at 0.05 level of significance. Otherwise, the null hypothesis

is accepted if the calculated F- statistic is lesser than the tabulated F-critical value.

60
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION

This chapter is concerned with the presentation, analysis of data, answers to research

questions raised in the study, test of hypotheses and the discussion of findings. The analysis was

done using data generated from questionnaire administered to the respondent groups.

4.1 Data Presentation

The data collected is presented in this section. The distribution of the questionnaire is also

shown. The questionnaires were personally distributed to the users of financial statements and the

return rate is shown in Table 4.1 below:

Table 4.1.: Distribution of Questionnaire

OPTION QUESTIONNAIRE PERCENTAGE (%)
No. of returned 100 72.46
No. of not returned 38 27.54
Total 138 100
Field Survey, 2018

Table 4.1 above shows that out of 138 (100%) questionnaires administered to the

respondent groups, 100 (72.46%) questionnaires were completed and returned. However, 38

61
(27.54%) questionnaires were not returned by the respondents. Therefore, 100 (72.46%)

questionnaires were used for the analysis.

4.2 Demographic Characteristics of Respondents

This section contains the demographic characteristics of the respondents with respect to

their gender, age, user group and highest educational qualifications.

Table 4.2: Gender of the Respondents

Frequency Percent Valid Percent Cumulative Percent

Valid Male 65 65.0 65.0 65.0
Female 35 35.0 35.0 100.0
Total 100 100.0 100.0
Source: Field Survey, 2018.

Table 4.2 above shows the responses of the respondents with respect to the gender of the

respondents. The result revealed that 65 respondents representing 65.0% are male respondents

while 35 respondents representing 35.0% are female respondents. From the analysis above, it can

be observed that majority of the user groups are males.

Table 4.3: Age Brackets of Respondents

Cumulative
Frequency Percent Valid Percent Percent
Valid 20-30 years 19 19.0 19.0 19.0
31-40 years 29 29.0 29.0 48.0
41-50 years 26 26.0 26.0 74.0

62
 Above 50 years 26 26.0 26.0 100.0
Total 100 100.0 100.0
Source: Field Survey, 2018.

Table 4.3 above shows the responses of the respondents with respect to the age brackets of

the respondents. The result revealed that 19 respondents representing 19.0% are within 20-30

years; 29 respondents representing 29.0% of respondents are within ages 31-40; 26 respondents

representing 26% are within ages 41-50 while 26 respondents are above 50 years. From the

analysis above, it can be observed that majority of the user group are within the age bracket of 31-

40 years (29.0%).

Table 4.4: User Group

Cumulative
Frequency Percent Valid Percent Percent
Valid Manager 12 12.0 12.0 12.0
Investor 10 10.0 10.0 22.0
Financial Analyst 16 16.0 16.0 38.0
Banker 13 13.0 13.0 51.0
Auditor 13 13.0 13.0 64.0
Professional Accountant 18 18.0 18.0 82.0
Lecturer of Accounting 18 18.0 18.0 100.0
Total 100 100.0 100.0
Source: Field Survey, 2018.

Table 4.4 above shows the responses of the respondents with respect to their user group.

The result revealed that 12 respondents representing 12.0% are managers; 10 respondents

representing 10.0% of respondents are investors; 16 respondents representing 16.0% of the

respondents are financial analyst; 13 respondents representing 13% are bankers; 13 respondents

representing 13% are auditors; 18 respondents representing 18% are professional accountants and

18 respondents representing 18% are lecturers of accounting.

63
Table 4.5: Highest Educational Qualification
Cumulative
Frequency Percent Valid Percent Percent
Valid B.Sc 23 23.0 23.0 23.0
Masters Degree 24 24.0 24.0 47.0
Others (Specify) 53 53.0 53.0 100.0
Total 100 100.0 100.0
Source: Field Survey, 2018.

Table 4.5 above shows the responses of the respondents with respect to the highest

educational qualifications of the respondents. The result revealed that 23 respondents representing

23% are B.Sc. holders; 24 respondents representing 24.0% are Masters degree holders while 53

respondents representing 53% of respondents are holders of professional degrees such as Ph.D,

ICAN, ANAN, CITN and CIPA. From the analysis above, it can be observed that majority of the

user groups are holders of professional degrees.

4.3: Data Analysis

This section provides answers to the research questions raised in the study.

Research Question 1: What are the perceptions of users groups on the existing duties and

responsibilities of auditors?

64
Table 4.6: Descriptive Statistics of the Perceptions of Users Groups on the Existing Duties
and Responsibilities of Auditors
Existing Duties and Responsibilities of Auditors N Mean Std. Deviation
1. The auditor ensures that full disclosure of profits
and losses are made according to the provisions of 100 4.1500 0.98857
the Companies Act.
2. A report on the soundness of internal control
structure is the responsibility of the auditors. 100 2.1700 1.36371

3. The auditors are responsible for expressing an

independent opinion on financial statements based on 100 4.7300 0.44620
their audit.

4. The auditors are responsible for preparing a

detailed report to the management of the reporting
entity and the report shall state the matters as 100 4.2500 0.95743

prescribed by the Companies Act.

5. It is the auditor’s duty to examine the financial

records of the company and take reasonable care to
ascertain that the financial records show the 100 4.7300 0.44620

company’s true position.

N= no. of respondents. Mean cut-off=3.00 (Accept item statement from 3.00 and above)

Source: Field Survey, 2018.

65
 Table 4.6 above revealed the perceptions of users groups on the existing duties and

responsibilities of auditors. The result revealed that item statements (1, 3-5) with mean responses

of 3.00 and above are the existing duties and responsibilities of auditors as perceived by the user

groups. While item statement 2 with mean responses below 3.00 is not an existing duty of auditors

as perceived by the user groups.

Deduction from the analysis is that the auditor ensures that full disclosure of profits and

losses are made according to the provisions of the Companies Act. The auditors are responsible for

expressing an independent opinion on financial statements based on their audit. The auditors are

responsible for preparing a detailed report to the management of the reporting entity and the report

shall state the matters as prescribed by the companies act and that it is the auditor’s duty to examine

the financial records of the company and take reasonable care to ascertain that the financial records

show the company’s true position. While a report on the soundness of internal control structure is

not the responsibility of the auditors since it has a mean response below 3.00

Research Question 2: What are the expectations of the users from the auditors?

Table 4.7: Descriptive Statistics of the Expectation of Users from the Auditors
Expectations of Users from Auditors N Mean Std. Deviation
1. The auditors are expected to detect frauds and all illegal
100 3.5020 1.4173
activities by management.
2. The auditors are expected to maintain accounting records. 100 3.4563 1.5735
3. The auditors are expected to give an opinion on the true
100 4.8600 0.34874
and fairness of financial statements.
4. The auditors are expected to report on management’s
inefficiency, and identifying ways to improve management 100 4.0400 1.27065
efficiency.

66
 5. The auditors are responsible for preparing a detailed report
to the management of the reporting entity and the report shall 100 4.2500 0.95743
state the matters as prescribed by the Companies Act.
N= no. of respondents. Mean cut-off=3.00 (Accept item statement from 3.00 and above)

Source: Field Survey, 2018.

[[

Table 4.7 above revealed the perceptions of users groups on the expectations of the users

from the auditors. The result revealed that item statements (1-5) with mean responses of 3.00 and

above are the expectations of users from the auditors as perceived by the user groups.

Deduction from the analysis is that the users expect the auditors to detect frauds and all illegal

activities by management; the auditors are expected to maintain accounting records; the auditors

are expected to give an opinion on the true and fairness of financial statements; the auditors are

expected to report on management’s efficiency, and identifying ways to improve management

efficiency and that the auditors are responsible for preparing a detailed report to the management

of the reporting entity and the report shall state the matters as prescribed by the Companies Act.

The analysis revealed that there is an expectation gap as regards to the fact that the auditors

are of the opinion that it is not in their statutory roles and responsibilities to detect frauds and all

illegal activities by management. They are of the opinion that they are not to maintain accounting

records. However, there were no expectation gaps as regards to the fact that the auditors are

expected to give an opinion on the true and fairness of financial statements, the auditors are

expected to report on management’s inefficiency, and identifying ways to improve management

efficiency and that the auditors are responsible for preparing a detailed report to the management

of the reporting entity and the report shall state the matters as prescribed by the Companies Act.

Research Question 3: What factors are responsible for the nature of reports?
67
Table 4.8: Descriptive Statistics of the Factors Responsible for the Nature of Audit Reports
Factors Responsible for the Nature of Audit Reports N Mean Std. Deviation
1. In relation to the reliability factor, users can have
absolute assurance that the financial statement contains no 100 3.4300 1.41603
material misstatements.
2. In relation to the usefulness factor, audited financial
100 4.4300 0.49757
statements are useful for making economic decisions.
3. In relation to the reliability factor, an unqualified audit
100 3.8800 1.23321
report can be relied upon to make investment decisions.
4. Auditors are not independent in the Nigerian business
100 3.7600 1.28802
environment.
5. Auditors carry out their duties and responsibilities
without bias and undue influence as predicted by the 100 3.3900 1.34761
independence factor.
N= no. of respondents. Mean cut-off=3.00 (Accept item statement from 3.00 and above)

Source: Field Survey, 2018.

Table 4.8 above revealed the perceptions of users groups on the factors responsible for the

nature of reports. The result reveals that item statements (1-5) with mean responses of 3.00 and

above are the factors responsible for the nature of reports.

Deduction from the analysis is that the reliability factor ensures absolute assurance that the

financial statement contains no material misstatements; the usefulness factor ensures that audited

financial statements are useful for making economic decisions; the reliability factor ensures that an

unqualified audit report can be relied upon to make investment decisions; the independency of the

auditors is threatened in the Nigerian business environment and that auditors carry out their duties

and responsibilities without bias and undue influence as predicted by the independence factor.

68
4.4 Test of Hypotheses

This section provides the analyses of the hypotheses formulated in the study as well as the

implications based on the hypotheses of the study.

Hypotheses 1: There is no significant difference between the perception of user groups on the

existing duties and responsibilities of auditors.

Table 4.9: ANOVA Summary

Sum of Squares df Mean Square F-cal F-crit.. Sig.

Between Groups 2.312 1 2.312 2.562 3.94 0.113
Within Groups 88.438 98 0.902
Total 90.750 99
Source: Field Survey, 2018.

Table 4.9 shows that the F-cal. of 2.562 is lesser than the F-critical value of 3.94 at degree

of freedom (df) (1, 98). It also reveals that the p-value is greater than 0.05 probability level

(P˃0.05). This indicates that there are actually no statistical significant differences between the

perception of user groups on the existing duties and responsibilities of auditors. Hence, the null

hypothesis which states that there is no significant difference between the perceptions of user

groups on the existing duties and responsibilities of auditors is accepted.

69
Hypotheses 2: There is no significant difference between users’ expectation and what the auditors

provide from the financial statements.

Table 4.10: ANOVA Summary

Sum of Squares df Mean Square F-calc. F-crit. Sig.

Between Groups 6.390 1 6.390 16.258 3.94 0.000
Within Groups 38.520 98 0.393
Total 44.910 99
Source: Field Survey, 2018.

Table 4.10 shows that the F-cal. of 16.258 is greater than the F-critical value of 3.94 at

degree of freedom (df) (1, 98). It also reveals that the p-value is lesser than 0.05 probability level

(P˂0.05). This indicates that there are actually statistical significant differences between users’

expectation and what the auditors provide from the financial statements. Hence, the null hypothesis

which states that there is no significant difference between users’ expectation and what the auditors

provide from the financial statements is rejected. This implies that there is a significant difference

between users’ expectation and what the auditors provide from the financial statements.

`4.5 Discussion of Findings

This section discussed the results of the findings.

The existing duties and responsibilities of auditors were revealed to include ensuring that full

disclosure of profits and losses are made according to the provisions of the Companies Act.

Responsible for expressing an independent opinion on financial statements based on their audit.

Preparing a detailed report to the management of the reporting entity that shall state the matters as
70
prescribed by the Companies Act and that it is the auditor’s duty to examine the financial records

of the company and take reasonable care to ascertain that the financial records show the company’s

true position. While a report on the soundness of internal control structure is not the responsibility

of the auditors. Statistical analysis in Table 4.9 revealed that there is no significant difference

between the perceptions of user groups on the existing duties and responsibilities of auditors since

the F-cal. of 2.562 is greater than the F-critical value of 3.94 at degree of freedom (df) (1, 98) and

p˃0.05.

Audit expectation gap was found as regards to the fact that the auditors are of the opinion

that it is not in their statutory roles and responsibilities to detect frauds and all illegal activities by

management. They are of the opinion that they are not to maintain accounting records. However,

there were no expectation gaps as regards to the fact that the auditors are expected to give an

opinion on the true and fairness of financial statements; the auditors are expected to report on

management’s inefficiency, and identifying ways to improve management efficiency and that the

auditors are responsible for preparing a detailed report to the management of the reporting entity

and the report shall state the matters as prescribed by the Companies Act. Statistical analysis in

Table 4.10 revealed that there is a significant difference between users’ expectation and what the

auditors provide from the financial statements. The findings of this study are in line with the study

by Obiamaka (2008) which revealed that there is a statistically large disparity between the opinion

of auditors and stakeholders in Nigeria with regard to the statutory role of external auditors. It is

also in line with the study by Dixon, woodhead and Sohliman (2006) which revealed that a wide

audit expectation gap exist in Egypt in the areas of auditor responsibilities for fraud prevention

and maintenance of accounting records. Also it is in agreement with the study by by Issahaku and

Muntari (2015) which revealed that an expectation gap was found to be in relation to; auditors’

71
responsibility for detecting and preventing fraud and errors and the soundness of the internal

control structure of the entity.

The result of the findings revealed that the reliability factor ensures absolute assurance that

the financial statement contains no material misstatements; the usefulness factor ensures that

audited financial statements are useful for making economic decisions; the reliability factor ensures

that an unqualified audit report can be relied upon to make investment decisions; the independency

of the auditors is threatened in the Nigerian business environment and that auditors carry out their

duties and responsibilities without bias and undue influence as predicted by the independence

factor.

72
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

This chapter deals with summary of the findings, conclusions and recommendations

proffered based on the findings of the study.

5.1 Summary

The research work was centered on audit expectation gap and its impact on users’ behaviour

of financial statements in Nigeria. The findings revealed thus:

The existing duties and responsibilities of auditors were revealed to include ensuring that

full disclosure of profits and losses are made according to the provisions of the Companies Act.

Responsible for expressing an independent opinion on financial statements based on their audit.

Preparing a detailed report to the management of the reporting entity that shall state the matters as

prescribed by the Companies Act and to examine the financial records of the company and take

reasonable care to ascertain that the financial records show the company’s true position. While a

report on the soundness of internal control structure is not the responsibility of the auditors.

Audit expectation gap was found as regards to the fact that the auditors are of the opinion

that it is not in their statutory roles and responsibilities to detect frauds and all illegal activities by

management and to maintain accounting records. However, there were no expectation gaps as

regards to the fact that the auditors are expected to give an opinion on the true and fairness of

financial statements; expected to report on management’s inefficiency, and identifying ways to

improve management efficiency and that the auditors are responsible for preparing a detailed

73
report to the management of the reporting entity and the report shall state the matters as prescribed

by the Companies Act.

The result of the findings revealed that the reliability factor ensures absolute assurance that

the financial statement contains no material misstatements. The usefulness factor ensures that

audited financial statements are useful for making economic decisions. The reliability factor

ensures that an unqualified audit report can be relied upon to make investment decisions. The

independency of the auditors is threatened in the Nigerian business environment and that auditors

carry out their duties and responsibilities without bias and undue influence as predicted by the

independence factor.

Statistical analysis revealed that there is no significant difference between the perceptions of

user groups on the existing duties and responsibilities of auditors. Statistical analysis in revealed

that there is a significant difference between users’ expectation and what the auditors provide from

the financial statements.

5.2 Conclusion

The research indicated there are some over-expectations of users of audited financial

statements regarding the duties and responsibilities of auditors with respect to audited financial

reports. Pertinently, while external auditors play a vital role, the deterrence and detection of fraud

is, however, not solely the auditor‘s responsibility. According to the auditing standards, the

primary responsibility for fraud prevention and detection rests with the management of the

company. An auditor, however, in accordance with International Standard for Auditing (ISA) is

responsible for obtaining reasonable assurance that the financial statements as a whole are free

from material misstatement, whether caused by fraud or error.

74
 The analysis indicated that issues in relation to fraud prevention and detection and

maintenance of accounting records are one of the most uncertain events for auditors. Finally, it can

be concluded that audit expectation gap exists in Nigeria in relation to the auditor‘s responsibility,

specifically, in relation to fraud detection, soundness of internal control structure of the audited

entity and maintenance of accounting records. The audit expectation gap is detrimental to the

auditing profession as it has negative influences on the value of auditing and the regulation of

auditors in the modern society. Hence, in order to close the gap, the duties appropriate to auditors

must be clearly defined.

5.3 Recommendations

Based on the findings of the study, the following recommendations are proffered:

i. A clear understanding and consensus of the role an auditor plays is needed in order to

understand and evaluate the reasonableness of perceptions that users of auditing services

have of the auditing profession as well as claims by auditors regarding their responsibilities

and functions. However, this can only be achieved when both auditors and those whom

they serve have a clear understanding of the role of external auditors in the society.

ii. Users of audited financial statements are encouraged to seek professional advice before

investing in a company. This will further assure them of the safety of their investment than

merely interpreting that an unqualified audit report is a clean bill of health of the company.

The public (users of financial statements) should be educated about the objects of an audit,

auditors’ role and responsibilities.

75
iii. The auditors should strive to ensure that they discharge their duties objectively,

professionally and ethically in order to sustain the confidence reposed in the profession by

users of financial statements.

iv. There should be an independent government agency like the Public Interest Oversight

Board (PIOB) in USA, to oversee the implementation of audit regulations in Nigeria.

v. Finally, the professional bodies such as Association of Chartered Accountants (ACCA)

and Institute of Chartered Accountants (ICAN) should embark on repeated education of

both its members and the public to deepen the understanding of everyone on the respective

responsibilities of the auditor and the management.

76
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APPENDIX

The Department of Accounting

Faculty of Business Administration
University of Uyo
83
 Uyo
Akwa Ibom State.

Dear Respondent,

REQUEST TO FILL A QUESTIONNAIRE

I am an undergraduate student of the aforementioned Institution. I am carrying out a research on

the topic titled: “Audit Expectation Gap and its Impact on Users’ Behaviour of Financial

Statement”.

This questionnaire is very important in obtaining data for the research. I therefore solicit for your

valuable cooperation by completing this questionnaire to facilitate this research endeavour.

It is imperative to emphasize that this study is purely an academic exercise; hence all information

provided herein shall be treated as confidential and used strictly for academic purpose.

Thank you.

Yours faithfully,

Essien, Raymond Ukpong

Researcher

QUESTIONNAIRE

This questionnaire is divided into two (2) sections: the first section is concerned with some

respondent’s personal data while the second section is concerned with questions relating to the

84
research topic: “Audit Expectation Gap and its Impact on Users’ Behaviour of Financial

Statement”

Section One: DEMOGRAPHIC AND RESPONDENTS PROFILE

1. Gender Male Female

2. Age
a) Less than 20 [ ]
b) 20 – 30 [ ]
c) 31 - 40 [ ]
d) 41 – 50 [ ]
e) above 50 [ ]

3. User Group
a) Manager [ ]
b) Investor [ ]
c) Financial Analyst [ ]
d) Banker [ ]
e) Auditor [ ]
f) Professional Accountant [ ]
g) Lecturer of Accounting [ ]
h) Other, please specify......................................................

5. Highest Educational Qualification?

a) WASC [ ]
b) HND/Equivalents [ ]
c) B. Sc [ ]
d) Master’s Degree [ ]
e) Others (specify) ……………...............................................

Section Two:

85
Instruction: Please tick (√) in the box that is most appropriate to your opinion on each of the items

below. You are given five options based on:

(1) Strongly Agree (SA)

(2) Agree (A)
(3) Undecided (UN)
(4) Strongly Disagree (SA)
(5) Disagree (D)

The Perceptions of User Groups on the Existing Duties and Responsibilities of Auditors
Please, tick the extent to which you agree or disagree with the SA A UN D SD
following
1. The auditor ensures that full disclosure of profits and losses are made
according to the provisions of the Companies Act.
2. A report on the soundness of internal control structure is the
responsibility of the auditors.
3. The auditors are responsible for expressing an independent opinion
on financial statements based on their audit.
4. The auditors are responsible for preparing a detailed report to the
management of the reporting entity and the report shall state the matters
as prescribed by the Companies Act.
5. It is the auditor’s duty to examine the financial records of the
company and take reasonable care to ascertain that the financial records
show the company’s true position.

86
 The Expectations of Users from Audited Financial Reports by Auditors.
Please, tick the extent to which you agree or disagree with the SA A UN D SD
following

6. The auditors are expected to detect frauds and all illegal activities by
management.

7. The auditors are expected to maintain accounting records.

8. The auditors are expected to give an opinion on the true and fairness of
financial statements.
9. The auditors are expected to report on management’s inefficiency, and
identifying ways to improve management efficiency.
10. The auditors are expected to give an opinion on the company’s ability
to continue as a going concern.

Factors Responsible for the Nature of Reports

Please, tick the extent to which you agree or disagree with the SA A UN D SD
following
11. In relation to the reliability factor, users can have absolute assurance
that the financial statement contains no material misstatements.
12. In relation to the usefulness factor, audited financial statements are
useful for making economic decisions.
13. In relation to the reliability factor, an unqualified audit report can be
relied upon to make investment decisions.
14. Auditors are not independent in the Nigerian business environment.

15. Auditors carry out their duties and responsibilities without bias and
undue influence as predicted by the independence factor.

Existing Duties and Responsibilities of Auditors N Mean Std. Deviation

87
1. The auditor ensures that full disclosure of profits
and losses are made according to the provisions of 100 4.1500 0.98857
the Companies Act.
2. A report on the soundness of internal control
structure is the responsibility of the auditors. 100 2.1700 1.36371

3. The auditors are responsible for expressing an

independent opinion on financial statements based on 100 4.7300 0.44620
their audit.

4. The auditors are responsible for preparing a

detailed report to the management of the reporting
entity and the report shall state the matters as 100 4.2500 0.95743

prescribed by the Companies Act.

5. It is the auditor’s duty to examine the financial

records of the company and take reasonable care to
ascertain that the financial records show the 100 4.7300 0.44620

company’s true position.

Expectations of Users from Auditors N Mean Std. Deviation

1. The auditors are expected to detect frauds and all illegal
100 3.5020 1.4173
activities by management.
2. The auditors are expected to maintain accounting records. 100 3.4563 1.5735
3. The auditors are expected to give an opinion on the true
100 4.8600 0.34874
and fairness of financial statements.
4. The auditors are expected to report on management’s
inefficiency, and identifying ways to improve management 100 4.0400 1.27065
efficiency.
5. The auditors are responsible for preparing a detailed report
to the management of the reporting entity and the report shall 100 4.2500 0.95743
state the matters as prescribed by the Companies Act.

88
Factors Responsible for the Nature of Audit Reports N Mean Std. Deviation
1. In relation to the reliability factor, users can have
absolute assurance that the financial statement contains no 100 3.4300 1.41603
material misstatements.
2. In relation to the usefulness factor, audited financial
100 4.4300 0.49757
statements are useful for making economic decisions.
3. In relation to the reliability factor, an unqualified audit
100 3.8800 1.23321
report can be relied upon to make investment decisions.
4. Auditors are not independent in the Nigerian business
100 3.7600 1.28802
environment.
5. Auditors carry out their duties and responsibilities
without bias and undue influence as predicted by the 100 3.3900 1.34761
independence factor.
ANOVA Summary

Sum of Squares df Mean Square F-cal F-crit.. Sig.

Between Groups 2.312 1 2.312 2.562 3.94 0.113
Within Groups 88.438 98 0.902
Total 90.750 99

ANOVA Summary

Sum of Squares df Mean Square F-calc. F-crit. Sig.

Between Groups 6.390 1 6.390 16.258 3.94 0.000
Within Groups 38.520 98 0.393
Total 44.910 99

89