1. BACKGROUND OF STUDYMajorcorporate and financial collapses over the past decade have highlighted thevalue of internal audit (Pitt, 2014).According to (AbdulGaniyy, 2013), the collapse in the US of Enron andWorldCom together with their auditors, Aurthur Andersen, has focused the publicspotlight on the company audit and made it a highly controversial aspect of theaccountant’s work.
The US enacted the Sarbanes-Oxley Act 2002 in response tothe decline of public trust in accounting and financial reporting practices (Idigbe, 2007). In Nigeria, we alsoexperienced the AP Plc accounting scandal, Cadbury Nigeria Plc scandal in 2006etc. Suffice to say that the world as a whole has had cause to doubt theefficiency of the accounting and auditing profession. Thequestion of whether or not internal audit plays an important role has beengenerating lots of controversies over the years ( (Ugwu, 2014). The potentials forinternal audit to add value to organisations has been recognized as early as1948 according to (Pitt, 2014). (Mutchler, 2003), further states that the particularrole and placement of an internal audit unit in an organization determines thedegree of reliance that should be placed on the assurance and consultingservices provided. Thisstudy aims to explore the possibility that the external auditor’s reliance onthe internal audit of a company is dependent on the independence of the boardand the effectiveness of the audit committee. According to the (Chartered Institute of Public Finance and Accountancy, 2006),the aim of the relationship between internal and external auditors is toprevent duplication of work.
International Standards on Accounting (ISA) 610further suggests that since the means of achieving the objectives of internaland external auditors are often similar there is an opportunity for asubstitution of effort between the internal and external auditors in order toavoid unnecessary duplication of work. Some regulatory system permits externalauditors to rely on the work of internal auditors in performing their financialstatement audit. According to Public Company Accounting Oversight Board (PCAOB)the internal auditing function must have met certain criteria before externalauditors would find efficiency in relying on the internal auditors’ work.
Research has shown that an internal audit system that reports directly to theaudit committee is considered reliable by external auditors. 1.2. STATEMENT OF RESEARCH PROBLEMSPriorliterature has focused on the effect of external auditing on the financialreporting of companies without exploring the effects the external auditors’reliance on internal auditing plays in external auditors’ effectiveness and howthe corporate governance of the organization affects the level of the externalauditor’s reliance on the internal audit function.
It is of general knowledgethat some recent corporate failures in Nigeria was as a result of weakcorporate governance (Deloitte, 2016). Until recently,research has failed to connect failures in internal audit reliance withinefficiency and independence of the board of directors. It was however observed by (Gramling, Maletta, Schneider, & Church, 2004) that an internalaudit function that directly reports to the audit committee rather than to theorganisation’s management is seen as being more valuable and reliable from theexternal auditor’s perspective. It has however been observed that there are nostipulated or statutory rules guiding the effect that corporate governance hason internal audit reliability. It was observed by (krishnamoorthy & Maletta, 2016) that the role of corporate governance oninternal audit reliance are issues not fully addressed in Federal regulations,auditing standards or stock exchange till date. Otherproblems are: Other problems are:i. The effects of board of directors’ lackof independence on the reliability internal audit functionii.
The impact of board’s lack of integrityand objectivity in selecting the members of the audit committee.iii. The effect of audit committee financialand technical inefficiency on the enterprise risk management techniqueiv. External auditors’ inability to rely oninternal auditor’s work due to its lack of objectivity.v.
The effect of audit committee lack ofdiligence on the internal control system of an organization.Theabove observed problems gave rise to the research objectives, researchquestions and the research hypothesis discussed in the succeeding parts of thisstudy 1.3.OBJECTIVES OF RESEARCHi. To determine the extent of· Toascertain the relevance of audit committee financial knowledge on internalaudit reliance· Todetermine the impact of audit committee diligence on internal audit reliance1.4. RESEARCH QUESTIONS· Towhat extent does the level of board independence affect the reliability ofinternal audit?· Isaudit committee financial knowledge relevant to the level of reliance on internalaudit?· Towhat extent does audit committee diligence influence the reliability ofinternal audit?1.5.
RESEARCH HYPOTHESIS In order to fulfil this research, thefollowing hypothesis are outlined.Hypothesis OneH0:the level of board independence does not affect internal audit reliabilityH1:the level of board independence affects internal audit reliabilityHypothesis TwoH0:audit committee financial knowledge is not relevant to the level of reliance oninternal audit H1:audit committee financial relevance is relevant to the level of reliance oninternal auditHypothesis ThreeH0:audit committee diligence does not influence the internal audit’s reliabilityH1:audit committee’s diligence influences internal audit’s reliability.1.6.
SCOPE OF STUDYThescope of study is limited to the auditing department of selected companieslisted on the Nigerian Stock Exchange and their corresponding externalauditors.1.7. SIGNIFICANCE OF STUDYTheresearch will be relevant to the following persons:· The board of directors inorganisations: this study will inform the board ofdirectors in companies that the responsibility of internal audit effectiveness,independence and reliability is not only the function of the internal auditsand the audit committee.
It shows that the board as a whole has a major role toplay as their independence or lack of it reflects on the results produced bytheir subordinates.· The internal auditors inorganisations: the internal auditors can use theresearch work to assess their performance to ascertain the quality andindependence of their work, how reliable their work would be perceived byexternal auditors and how their work can help reduce duplicating.· Audit committee members: itreveals the important roles that the audit committee plays in organisations andthe skills and diligence required of audit committees.· External auditors: thisresearch is relevant to external auditors to know the extent of their reliance oninternal audits and the factors that might affect the level of reliance.· Government: itwill serve as a source of enlightenment to government on the arears of thebusiness world that needs adjustment and helps in the formulations of auditingand corporate governance standards and regulations.· Other students:this study will a good reference material for continuous study on relatedsubject matters1.
8. LIMITATIONS OF THE STUDY· Time constraint:the researcher despite wanting to dig deeper into the study could not do thisdue to time constraint and the need to also juggle academics with undertakingthe research.· Data gathering:fact finding is the foundation on which any research work is built. However,organisations are usually reluctant to give important information concerningtheir organisations out as this can bring dire consequences to the privacy ofthe organization. · Resource constraint: Theresearcher had to limit the scope of the study due to limitation in resourcessuch as limited funds, limited facilities and this limits the data collection,visits to the organization and in-depth research on the subject matter.
1.9. OUTLINE OF CHAPTERSThisresearch is divided into five chapters.
The first chapter consists of theintroductory aspect of the research work. The second chapter explains thevarious factors inherent in the research topics and this includes the previousrelevant literature on internal audit reliance, board independence and auditcommittee effectiveness and the theories that validates the application of thesubject matter in listed organisations. The third chapter addressed themethodology employed in carrying out the study. Chapter four focuses on thepresentation and analyses of data. Chapter five consists of recommendations,findings and conclusion of this research study.
1.10. DEFINITION OF TERMS· Audit:Audit is a systematic and independent examination of the financial statementsof an organization to ascertain that they show a true and fair view.
· Internal audit:According to (Talabi, 2015) internal audit is an annual review ofthe accounting record of an organization by the company’s accountant in orderto evaluate and report any weakness to the management and make appropriaterecommendations.· External audit:External auditing is the examination of an organisations’ financial statementby an independent body providing an opinion on whether the financial statementsreflect a true and fair view.· Financial statement:It is an organized presentation of the financial activities of an individual ororganization to reflect their financial position at a given period.
· Financial reporting: financial reporting can be defined as a formalpresentation of statements that disclose the financial status of anorganization to management, investors the government and other users. Companieslisted on the stock exchange are mandated under the law to publicise theirfinancial reports. · Effectiveness:According to business dictionary, effectiveness is the degree to which thegoals and objectives of an organization are achieved. · Independence: independenceis a state of not being influenced or controlled by external factors.· Contingent:this means the possibility of an event occurring or not occurring. It is whenthe occurrence or non-occurrence of an event is based or dependent on afuturistic event.