INVESTORS’ PERCEPT ON THE EFFECTS OF AUDITED STATEMENT

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

       Etymologically, the word audit “is derived from the Latin word ‘audile’ which means “to hear”.  Thus, in the beginning, the word ‘audit’ was means to ‘hear and auditor literary meant a ‘hearer’ (Salehi, 2008). The origin of audit is in disputes  (Laubaya, 2005) but can be traced to ancient times when landowners allowed tenant farmers to work on their land while the landowners themselves did not become involved in the business of farming. The landowner relied upon an oversear who ‘listened’ to the account of stewardship given by the tenants (Adeniji, 2004).

       Thus was aimed at declaring correct that the account given was true and correct and his function was to give assurance against fraud and intentional mismanagement.

       Accordingly, the main objective of audit also transformed thus making the auditor declare that the accounts prepared by the companies as revealed by their financial statements were “true and fair” (Littleton  1993 p. 260) was the view that early auditing was designed to verify the honesty of persons charged with fiscal, rather than managerial responsibilities.

       The earliest audit, the auditors has been directly linked to management stewardship function (Flint 1971) with stewardship being regarded in the narrow sense of honesty and integrity. But the verifying function was on sampling basis because of the burgeoning volume of business activity. This functional shift in auditing from “true and correct view” to “true and fair view” to caused a paradigm shift in the audit process. Thus, also caused a change in audit opinion from “complete assurance” to “reasonable assurance”.

       The audit profession is crucial to current economies because of the assurance that auditors provide to users of financial statements (Arens and Leobbaecke, 2000). Auditing increases the reliability of financial information provided to investors and other users. The result of the audit practices appears in the audit report if they do not work according to guideline or issue a wrong report; it leads to a bad reputation of the audit profession. Example of such a case is Enron and Worldcom in the USA which collapsed shortly after an unqualified audit report had been issued. (Lee, Gloeck and Palaniappan 2007:1).

       The primary product of an audit by an independent certified accountant is an audit report which serves as a major vehicle of communication between the auditor and those who use the report; the auditor indicates the scope of his examination and the conclusions drawn about the appropriateness of the financial statements presentations. Low quality audits can mislead investors and results in misallocated resource.

1.2 Statement of Problem

       Investor’s inability to give good interpretation of Financial Statements to access effectiveness and efficiency of management is somewhat due to the technicality in accounting language used in the preparation of Financial Statements.

       Ekwueme (2000:14) explained that shareholders and most of the general public feel that as a result of the collapse of firms, the auditors safeguard are worthless. These perceptions draw a line that needs to define the role of the auditor in protecting the interest of the shareholders and ensuring that there is good corporate governance. Clients need value added and not an auditor that will vouch and do normal test (Nwokolo, 1998:25). Hillier (2000:64) stated that diverse clients now expect them to provide more services than just performing statutory audit and attesting to the credibility of Financial Statements. The difference between the actual nature and objective of an audit and that perceived by the users of audited Financial Statements has led to the concept of “audit expectation gap”.

INVESTORS’ PERCEPT ON THE EFFECTS OF AUDITED STATEMENT