Many world firms have collapsed while others have gone on the verge of collapsing after auditors have audited without picking any irregularities, for this reason questions are raised on the reliance that can be placed on external auditors. The main objective of this research is to evaluate the extent on which users of the financial statements can rely upon the audit opinion when making economic decisions. Data collection instruments of interviews and questionnaires were used in the research. Secondary sources of data used in the research include published textbooks, journals and the internet. Literature reviewed revealed that auditors can only provide reasonable assurance and not absolute assurance because of the inherent limitations of an audit. Data collected was presented in tables, graphs and pie charts for analysis. Information obtained indicated that users of the financial statements can rely on the audit opinion to a greater extent in making economic decisions since the auditor’s objective is to provide reasonable assurance to both the client and third parties. The research also highlighted that upon negligence, the auditor is fully liable for the opinion they express on the financial statements.
1.1 Background of the study
In April 2011, the management of Bank PHB concealed the underperforming loans in the financial statement for the year ended 31 December 2011 and 2012 and the external auditor failed to pick up and highlight the creative accounting performed by the management. The issue came on the spotlight after the central bank of Nigeria learnt of the bank’s crooked dealings and wrote a letter informing The EFCC. Bank PHB covered its true state of financial position so as to prevent the handover of its operating license to the Central bank.
The concealing of underperforming loans on the bank financial statement resulted in unaware investors coming in and investing in a bank already facing liquidity crunches (Management Investor Analysis Report 31December 2013).
The financial statements misled the shareholders of Bank PHB when they made judgments as to whether to reappoint or replace the board of directors. The shareholders assessed the accountability of the former directors based on annual reports and the audited financial statements for the year ended 31 December 2011 when deciding whether to reappoint or replace directors on the annual general meeting (Annual General Meeting 28 December 2013).(Flood J, 2013)
1.2 Statement of the problem
Scandals of large banks going on the verge of collapsing without any hints to the stakeholders transpire time and again. Those banks must have had external auditors for so long but the external auditors audit without picking up and highlighting any financial struggles and creative accounting made by management. It is in light of this fact that this paper aims to assess the impact of audit reports on the users of financial statements.