AUDITEE’SLIFECYCLE,AUDITORINDUSTRYSPECIALISATIONANDAUDITQUALITYINTHENIGERIANDEPOSITMONEYBANKS

ACKNOWLEDGEMENTS IexpressmygratitudetoGodAlmightywhohasgivenmethegraceandpowertobealivetodayandmakeitpossibleformetocompletethiscourse. IappreciatemyfatherandmotherMrandMrsAwofolurinforbeingthereformethroughouttheperiodofthiscourse,youreffortsaregreatlyacknowledged.GodblessyoubothinJesusname. Also,Iacknowledgemyprojectsupervisor,Mr.A.OOdusinaforhiseffortsandencouragementtomakesurethatmyprojectisaccomplished.GodblessyouandyourfamilyinJesusname.GodwillcontinuetoblessandshowerhisblessingsuponyouandfamilyinJesusname Iappreciatetheeffortsofallmylecturerstowardsme;youareallappreciatedsirsandmas.Youreffortsarehighlyappreciated.GodblessyouallinJesusname Finally,Ithankallthemembersofmyfamilyfortheirsupportandencouragementthroughouttheperiodofmycourse.GodblessyouallformeinJesusname ABSTRACT Thestudyinvestigatedtheeffectofauditeelifecycleonauditqualityandexaminedtheeffectofauditorindustryspecializationonauditquality.Italsoanalysedtheinteractiveeffectofauditeelifecycleandauditorindustryspecializationonauditquality;andassessedthedynamicassociationamongauditeelifecycle,auditorindustryspecializationandauditqualityinNigerianDepositMoneyBanks.Thesewerewiththeviewtoexaminingtherelationshipamongauditeelifecycle,auditorindustryspecializationandauditqualityofNigeriabanks.Thestudyadoptedalongitudinalresearchdesign.Secondarydatafromaudiedfinancialstatementsoftheselectedbankswereusedforthestudy.Thepopulationcomprisedof14publiclyquoteddepositmoneybanks(DMBs)inNigeria,whilesamplesizeoftwelve(12)DMBswasselectedusingpurposivesamplingtechnique.Thesamplesizeselectionwasbasedontheavailabilityofcompletedatafortheperiodunderstudy.Datawascollectedfortheperiodbetween2006and2021.Therationaleforusing2006asthebaseyearwasasaresultofbankrecapitalizationandconsolidationexercisevariedoutbytheCentralBankofNigeria(CBN)inthatyear.Thedatacoveredcorporatelifecycle,capitalstructure,andcorporategovernancequality.ThedataobtainedwasanalysedusingStatacommand(pdlasso).Theresultshowedthatthegrowth(coef=0.085,p=0.002)andmaturityphase(coef=0.075,p=0.006)ofabankislargelyassociatedwithhigherauditquality,whichindicatedthatbanksintheirgrowthandmaturityphaserecordedhigherauditqualitythanbanksintheirintroductionanddeclinephase.Additionally,theresultshowedthatauditorindustryspecializationdidnothaveapositiveimpactonauditquality(coef=-0.002,p=0.018)andbanksshouldplacemorefocusontheirinternalcontrolandsegregationofduties.Thirdly,theresultshowedthattheinteractiveeffectofauditees’lifecycleandauditindustryspecializationonauditqualitywasnegativeduringtheintroduction(coef=-0.117,p=0.046)andmaturityphase(coef=-0.117,p=0.024)andauditfirmshouldadjusttheirauditstrategieswhileputtingthelifecycleofthebankintoconsideration.Finally,therewasadynamicrelationshipbetweenauditeelifecycle,auditorindustryspecializationandauditquality.ThestudythusconcludedthatauditeelifecycleandauditorindustryspecializationhasasignificanteffectonauditqualityofDepositMoneyBanksinNigeria. Keywords:AuditeesLifeCycle,AuditorSpecialization,AuditQuality,DepositMoneyBanks,Nigeria TABLEOFCONTENTS Titlepage Certificatepage Dedication Acknowledgement Abstract Tableofcontent CHAPTERONE:INTRODUCTION Backgroundofthestudy Statementoftheresearchproblem StatementoftheresearchQuestion Objectivesofthestudy Statementofresearchhypothesis Justificationofthestudy CHAPTERTWO:LITERATUREREVIEW 2.1ConceptualLiterature 2.2TheoreticalReview 2.3EMPERICALREVIEW CHAPTERTHREE:METHODOLOGY 3.0Introduction 3.1SourcesofData 3.2ModelSpecification 3.3AprioriExpectation 3.4StatementofHypothesis 3.5MethodofAnalysis CHAPTERFOUR:PRESENTATIONANDANALYSISOFDATA 4.0Introduction 4.1PresentationofData 4.2PresentationandInterpretationofRegressionResult 4.3DiscussionofFindings CHAPTERFIVE:CONCLUSIONANDRECOMMENDATIONS 5.0SummaryofFindings 5.1Conclusion 5.2Recommendation References CHAPTERONE INTRODUCTION 1.1 BackgroundoftheStudy Auditingpracticesoriginatedfromthechallengesofagencytheory.Agencyproblemisonethatcomesupbecauseofthecontractbetweentwoparties,theprincipal,whoaretheprovidersofthecapitalandtheagents;whoarethemanagerofthecapitalprovidedbytheprincipals.Theprincipalareaddressedastheshareholdersofthecompanyandtheyappointtheauditortomonitorwhatthemanagerdotoensurethattheirinterestinbeingprioritizeandcateredfor Auditqualityisanessentialelementofdefiningthedecisionsofvarietyofuserssinceithelpstoaddcredibilitytothefinancialstatements(FS).Eventhoughtherehasbeenvastresearchcarriedoutonauditquality,theconcept,definitionsandmeasurementshasnotbeenagreeduponunitedlybyacademicians.AQcanhavedifferentmeaningstodifferentpeople(stakeholders)dependingontheperspectiveitisviewedfrom.Thenon-existenceofmaterialmisstatementmayconnotehighAQtosomefinancialreportusers.Anauditmayalsobeperceivedashighqualitywhenevertheauditorcompliestothestandingrulesandregulationsoftheprofession.Regulatorsviewstrongauditqualityasonethatcomplieswithalltherequiredlawsandstandards.Inaddition,strongauditqualitymayalsobeoneinwhicheconomicproblemssuchasthosearisingfromagencyissuesmostlybecauseofownershipstructureandlong-termexistenceofthefirmmaybetakencareofandavoided.Therefore,anauditisregardedashighqualityiftheinformationstatedthereinisofhighquality. DespitethevariousdefinitionsofAQinliterature,thequestionofwhatinfluencesAQremainsinconclusive.Manyauthors(Dang,2004;DefondandZhang,2014;DeAngelo,1981)haveattributedauthorindependence,auditfee,auditorsize,auditcommitteeetctohaveaninfluenceonauditquality.Inrecenttimes,newstudieshavecomeuptoassociateandinvestigatewhetherthelifecycleofthefirmunderauditortheauditor’sspecializationhasanimpactontheAQ.Ithasbeendiscoveredthatfirmlifecyclephaseseffecthasnotbeenconsidered.Afirmlifecyclehasbeenclassifiedintobirth,growth,maturityanddeclinestage(DeHaan,Kedia,Koh&Rajgopal,2015;Pastor&Pietro,2003).Ithasbeenproventhatauditee’slifecycleinfluencefirmstrategicdecisions.Firmsmakedecisionsbasedonlifecyclestageandthisdeterminedthefirmoveralloperations.Krishnan,MyllymakiandNagar(2021)reportedthatauditeelifecycleisaninfluencingfactorofmaterialmisstatements.Theyarguedthatfirmsaremostlikelytoreporthighlevelofmisstatementsatintroductionanddeclinestagethanfirmatthematuritystage.Misstatementsriskareakeydeterminanttotheauditorservicestoberenderedsinceanincreaseinthemisstatementsriskoftheauditeeinfluencestheextentofservicestobeofferedbytheauditor.Despitethesignificanceofauditquality,scantyresearchhasbeenconductedonimpactofbusinesslifecycleandauditquality. Thetheoryofinformationasymmetrywhichisaproblemofagencytheoryisalsoamajoronetoconsider.Thistheoryexplainthattheinsiders(managers)havemoreadvantageandinformationcomparedtooutsiders(stakeholders).Thisthereforeaffectsthedecisionsthatthestakeholdersmake.Thisproblemhaslongbeenexistingandhasbeenrelatedinliteraturetoauditorindustryspecialization.IthasbeenarguedbyvariousauthorsinliteraturethatauditorswithspecializedindustryknowledgecaneasilyspotmaterialmisstatementinbanksFS’s.theNigeriabankingindustryplayssignificantfunctioninitseconomy.Thisindustryishighlyregularizedandpronetofinancialscandals.Despitebeinghighlyregularized,theNigerianbanksstillsufferfromfinancialscandalstilldateandnumerousmergersandacquisitionshavebeenmadetosavesomeofthebank.Therefore,thepartauditqualityplaysinreportingisamattertodebate. Auditorspecialisationindicatestheextentofexperiencewhichtheauditorpossesseswithinaspecificindustry.Anauditspecialistissaddledtoprovidehighqualityservicesbecauseoftherequiredamountofexperiencewhichtheauditoralreadypossesses.Forinstance,aspecialistauditorwithinthebankingindustrywillhavehighproximateinprobabilityofdetectinganylikelyfailureintheauditeeoperationsespeciallytherationalitybehindtheauditeeloanlossprovisionforagivenreportingperiod(Yiqiang,Kanagaretnam&Lobo,2011).Also,auditfirmdistinguishthemselvesinseveralwaysinordertogainappropriateclientfortheirservicedelivery.Onemajorareaofdifferentiationinaccountingfieldincludestheindustryfirmstrategywhereitispossibleforaccountingfirmstomakeanameforthemselvesdifferentfrompeersorcompetitorsespeciallybymeetingclientdemandandcompetingbasedonspecificindustryknowledge.Hence,itiscrucialtoexaminewhatinfluenetheauditorindustryspecialismhasontheAQofthesebanks.LiteratureconductedonauditorindustryspecializationindicatescompaniesbeenauditedbyBig4auditorsarewidelyperceivedtohavesuperiorquality,strongtransparencyandintegrityandloweraccruals(Balsam,Krishnam&Tang,2003). Recently,acommonalityhasbeendiscoveredtoexistbetweenAQandauditorindustryspecualisation.AresultofthesimilarityinthelifecyclestageandauditorselectionbetweenB4AsandNB4AsshowedthatthefirmlifecyclestagesareexpectedtomoderatetheimpactofB4Asonauditquality.Therefore,thisstudyintendstosystematicallyinvestigatetheassociationbetweenthesefactors. 1.2 StatementoftheProblem AuditservicesprovidetheneededopiniontoagivensetofFSs,thereby,addingcredibilitytothem.Thevarioususersofthefinancialstatementsrequirefinancialinformationwhichwillbefreefromanyelementofmaterialmisstatement.So,theyneededanindependentindividualtoprovideexaminationofsuchstatementsagainstanyformofestablishedcriteria,andforsuchindependentindividualtogiveopinionwhethersuchstatementsarenotcomplyingtotherequiredcriteriaforreporting.Therefore,theusersofthefinancialstatements,theregulatorsandanyothercontractualpartiestotheorganizationalarrangementandbusinessoftheentityexpecttheauditortogiveanopinionreflectingexpectedamountofquality.Theyexpecttheauditor(basedonhis/heropinion)toidentifyanyelementofbreachintheFSswheneverthereispossibilityforsuchabreach(Abedalqader,Thuneibat,Tawfiq,Ahmad&Baker,2012;Cahan&Sun2014;Chee-Yeow&Hun-Tong,2014;Habib&Bhuiyan,2019). AuditqualitygainedrecognitionamongstakeholdersduetothenumerousscandalsthatledtothecollapseofgreatandbigorganizationssuchasEnronscandal,Tycocompany,CadburyPlc,WorldCometc.thismaderesearcherstakeauditqualityasanimportantdeterminantfordefiningthedegreeofassuranceorcertaintyoffinancialstatements.However,tilltoday,therearestillchallengesastowhataffectstheauditqualityofworkdelivered.Auditqualityrepresentstheoutcomeofresultsanalysisoftheclientasperformedbytheauditorandtheoveralltendencyofsuchanalysismeetingtherequiredanddefinedlevelofcriteriaforperformanceofaudit.Thequalityofauditserviceismajorrequirementforanauditprocessexpectedtobeprovidedtoagivenclientandthisisdeterminedbymanyfactorswhichtheclientlifecyclestageandauditorindustryspecializationareanimportantpartofthedeterminantsinfluencingqualitydeliveryofauditservice(Agarwalla&Gort,2002;Chi&Chin,2011;Habib,2011;Khuonget.al.,2022;Yuan,Cheng&Ye,2016). IthasbeenarguedrecentlybyJainandAgarwalla(2022)thatthestrategicdirectionofaclientfirmdependsonthestagewhichitcurrentlyoperates.Firmcurrentlifecyclestagedeterminesitssize,profitability,discretionaryaccrualstendency,growthandmanyothercorporateissues.Afirmoperationispurelydefinedasafunctionofitslifecyclestagesincethisstagewillprovideitwithnecessaryexposuretodealwiththevariouscomponentsexistingintheenvironment(Habib&Hasan,2017).Studies(Miller&Friesen,1984;Kohet.al.,2015;Nagar&Sen,2017)confirmedthatcompaniescanbecategorizedintoseverallifecycles,usuallybirth,growth,maturityanddecline.Uniquenessineachstageisidentifiedbysimilarityinsize,growthopportunities,agencyownershipandcapitalmix,cashinfloworoutflowandthedividendratios.Theaccruallevelishighandtheopportunitiestobeinconspicuousinthereportedfiguresmaybegreaterinnewintroducedcompaniesthaninmaturecompanies.HabibandHasan(2017)opinedthatcorporateriskbecomehigherthroughouttheinceptionanddeclinestagebutdrasticallyreduceduringthegrowthandmaturitystage.Theearlystageappearstobethebiggestproblem,andevidenceshowthattheSECandotherregulators,whichrecordsmostcases,ismuchmorelikelytohaveinternaloversightoffinancialreporting,budgetadjustment,andenforcement,asignificantnumberofintentionalerrorsormaterialmisstatements(Krishnanet.al.,2021).Asthefinancialinformationqualitychangesthroughoutthelifecycle,knowledgeofthestagecanalertanalysts,auditors,andotherstoanalyzeandtrackcustomercompanies/lifecyclestagesthatposeaproblem(Krishnanet.al.,2021;Khuong,Anh&Van,2022).Hence,auditservicesshouldbeabletoidentifyanybreachorerrorsinthefinancialstatementswhileputtingthefirm’slifecyclestageintoconsideration.Forinstance,thereishightendencyofmaterialmisstatementsintheoverallreportingofanentityattheinceptionordeclinestagethanatthegrowthormaturitystagesasprovenbystudies(Kohet.al.,2015;Habib&Hasan,2017;Sunet.al.,2020;Krishnanet.al.,2021). Mosttimes,entityatearlystageoflifecycletakeoutmultipleloansandpayheavyfinancecostwhichmaybeunderstatedtoenticeinvestorstofinanceandparticipateintheirbusiness.Eachindustryhasitsownpeculiarity.Thebankingsectorforinstanceisdifferentfromthemanufacturingoroilandgasindustrybytheirrevenuegeneratingactivity.Itisthereforeimportantthatcompetentauditorswhohavestrongknowledgeoftheauditee’sindustryauditscompaniesinthissector.Thisisbecausetheauditorhasmoreknowledgeofthefinancialstatementandofpossibleaccountsthathavehighreportingrisksormisstatementrisk.ItisnecessarytoconsidertheinfluenceauditorindustryspecializationhasonAQwhileputtingthefirmlifecycleintoconsideration.Auditorindustryspecializationisimportantinassessingtheservicequalitytobedeliveredtoagivenclient.Bedard&Biggs(1991)andCarcello&Nagy(2004)arguedthattheserviceprovidedbyanindustryspecialistauditorcanhelpfirmsespeciallywithinthebankingsectortakesappropriateoperationaldecisionsthroughprovisionofappropriatedecisions.Forinstance,theauditopiniongivenbyanindustryspecialistauditorcanbetterassesstheadequacyofloanprovisionandalsoallowancesmadeonloanlossthanifsuchauditofferingisgiventoanon-specialistauditor(Yiquianget.al.,2011).Thisspecializationhelpsauditorincreasedemandforauditandnon-auditservices,improveauditefficiencybyenablingeconomiesofscale,differentiateauditproducts,andcreatebarrierstoentrybyforcingnewentrantstoinvestsignificantresourcesinappropriateareas,industriesandaffectsauditresultsrelatedtoclients,suchasauditfeesandthequalityoffinancialreporting(Gramling&Stone,2001;Habib,2011).Inaddition,Habib(2011)specificallyopinedthattheindustryspecialistauditordevelopedreputationthroughservicesprovidedtotheauditee,therebyaddingcredibilitytothefinancialreportingsystemultimatelyleadingtotheattractionofclients.Industryspecializedauditorhavethehightendencytopredictlikelyauditriskespeciallytheinherentriskintheprocessofdealingwiththeauditeeanditsbusiness.Moreover,auditorswithindustryexperiencearemoreeffectiveatsightinginaccuraciescomparetoauditorswithnoindustryexpertiseandhaveanincentivetoreportthoseerrors,theycanimprovethetimingofreportedinformation.Thespecialistknowledgecanhelpintroduceeconomicofscaleintheauditprocessandtherebyenhancedauditquality.However,theindustryspecializedauditorcanincreasetheauditfeesfromparticularauditee’sseekingqualityauditservicewhichcanleadtointenserivalryintheauditindustryandcanconsequentlylowertheauditquality(Brown&Knechel,2016).Theworksof(Brown&Knechel,2016;Cahan&Sun,2014;Carson,2009;Chee-Yeow&Hun-Tong,2014;Yuanet.al.,2016)agreedthattheindustryspecializationcanhelptheauditortodeliverhighqualityauditingservicesbutthereisstrongtendencyofbeingaffectedbysomespecificfeatureswhichdefinetheauditeeespeciallywithregardtoitslifecyclestage.Forinstance,theindustryspecializedauditormaybeabletoprovidemorequalityserviceforentity’sattheinceptionandgrowthstageoftheirlifecycleduetoawell-definedoperationalsystemandreporting.Thisissupportedbystudies(Francis,1984;Habib,2011;Palmrose,1986)whichdiscoveredthatindustryauditorsarehighlycompensatedforlargeauditsbutnotforsmallandmedium-sizedclients(mostauditeeintheintroductionstagearerelativelysmall).Sincetheoverallauditprocessinvolvetwokeysteps.Firstly,thematerialmisstatementmustbediscoveredthatnotallaccountingfirmshavethesufficientqualificationsandknowledgetodetectandreportaccountingpracticesthatarefoundquestionableespeciallyifthelifecycleoftheauditeecreateacomplexitywhichfortheauditor. Despitetheeffortsputinbythegovernmentandthegovernmentalpolicies,regulationsandreforms,theproblemofauditqualitypersistsbothgloballyandlocally.InNigeria,duetothenumerousfinancialscandalsthathaveoccurredespeciallyintheNigerianDepositMoneybanks,thereisneedforeffectiveauditservices.Thevariablesinfluencingthequalityofauditserviceshaveremaininconclusive.So,thereisneedtoconsiderwhetherauditorindustryspecializationimpacttheauditqualitytobeprovidedasinvestigatedbystudies(Cenker&Nagy,2008;Chee-Yeow&Hun-Tong,2014;Chi&Chin,2011;Yuanet.al.,2016)andalsoconsidertheperformanceofsuchqualityauditserviceinthefaceofauditeelifecyclestage.Verylimitedstudies,suchas(Jain&Agarwalla,2022)haveconsideredtheexplicitjointeffectoffirmlifecyclewiththespecifictypeofauditfirmselection(i.e.,Bg-4orNonBig-4)basedonmyknowledgeofavailableliteratures.Thisbroughtabouttheneedforthisstudytoaddtothelimitedknowledgeregardinghowtheindustryspecializationofauditorinfluencesauditqualitybasedontheauditeelifestyle. 1.3 ResearchQuestions Toadequatelyaddresstheseissues,thefollowingresearchquestionswouldbeanswered. Towhatextentdoestheauditeelifecycleinfluenceauditquality? Whatistheeffectofauditorindustryspecializationontheauditquality? Whatistheinteractiveeffectofauditeelifecycleandauditorindustryspecializationonauditquality? 1.4 ResearchObjectives Thebroadobjectiveofthisstudywastoanalysetheinterrelationshipamongauditeelifecycle,auditorindustryspecialization,andauditqualityintheNigerianbankingindustry,whilethespecificobjectiveswereto: InvestigatetheeffectofauditeelifecycleonauditqualityofdepositmoneybankinNigeria; ExaminetheeffectofauditorindustryspecializationonauditqualityofdepositmoneybanksinNigeria; Analysetheinteractiveeffectofauditeelifecycleandauditorindustryspecializationonauditquality 1.5 ResearchHypotheses Thetestablehypothesesstatedinthenullformsareasfollows: Auditee’slifecyclehasnosignificanteffectonauditquality. Auditorindustryspecializationhasnosignificanteffectonauditquality Theinteractiveeffectsofauditeelifecycleandauditspecializationhavenosignificanteffectonauditquality 1.6 SignificantoftheStudy Thisstudyaimedatanalyzingtheinterrelationshipamongauditorindustryspecialization,auditeelifecycleandqualityofauditofNigerianDepositMoneyBanks.Therefore,resultsandconclusionfromthestudywillberelevanttovarietyofuserssuchasbankandthebankstakeholders,generalpublic,creditor,businessowners,auditors,managementetc. Forbankstakeholders,itservesasanenablerfrothemtotakeappropriatedecisionsthatisprimarilyonthequalityofaudit.Someuserswillbeabletotakeappropriatedecisionswhenevertheyareabletopredictthelikelyoutcomeofauditqualitybasedontheindustryspecializationoftheauditorandthelifecyclestageofthebank.Thestudywillbeusefultothemanagementofanentityexclusively,especiallyindecidingwhetherthespecializationofanauditorinthesameindustryitoperateisacriteriontobemetbeforeofferingtheauditroletotheauditor.Also,thestudywillexclusivelyhelptheauditortodeterminetheleveloftrainingtogiveauditor’ssoastoensurethattheauditor’sarewellspecializedtodeliverhighauditquality.Italsohelpsauditorstodeterminetheauditriskinvolvedpertheauditeelifecycle. Inaddition,thepresentgapinliteratureonauditeelifecycle,auditorindustryspecializationandauditqualitywillbeaddressed.Thestudywillbeasignificantcontributionintheauditqualityacademia’sdebateandalsoserveasareferencematerialforresearchersandscholars,aswellascreateaplatformforfurtherstudiestobeconducted.Thestudywasofgreatbenefittomanagersofbankinginstitutionandallstakeholdersinvolvedindecisionsmakingatlarge. 1.7 ScopeoftheStudy Thestudylookedattheinterrelationshipamongauditeelifecycle,auditorindustryspecialization,andauditqualityintheNigerianbankingindustrybetween2006and2020.TheNigerianbankingindustrywasselectedbecauseofthedearthofpubliclyavailableinformationinmanysectorsinNigeria.Inaddition,Nigeriabanksareregularizedandhaveaconsistentpatternofreporting.Year2006wasusedbecausetheyearmarkedthebeginningofanewbankingerainNigeriaafterthebankingconsolidatedexercisethathappenedin2004-2005whichledto89banksreducedto25.12publiclyquotedmoneydepositbankswillbeusedforthisstudy. Thevaraiablesofthestudycomprisedof(i)auditeelifecycle,whichwillbemeasuredwithDickinson’s(2011)model,(ii)auditorindustryspecializationwhichwillbemeasuredusingmarketshare(iii)auditqualitywhichwillbemeasuredusingdiscretionaryaccruals.Thedatawasextractedfromtheauditedfinancialstatementsoftheselectedbanks. CHAPTERTWO LITERATUREREVIEW 2.1 ConceptualReview 2.1.1 AuditQuality AuditqualityisoftenusedinterchangeablywithFinancialReportingQualityandtherelationshipisstillmisunderstood.Tilldate,thereisstillnoagreementontheoptimalapproachtomeasureauditqualitydespitethemanyworksthathavebeencarriedoutonitandthemanyconstructsusedtomeasureauditquality.DeAngelo(1981)explainedauditqualityas“variationofthejointmarket-assessedprobabilitythatagivenauditorwilldetectandreportabreachintheclient'saccountingsystem".Thisdefinitionalthoughwidelyusedisdiscoveredtoreducethedutiesorimportanceofanauditortojustdetectingandreportingfraudsandprinciples/standardviolation.Itisofnodoubtthatthedetectionofmaterialmisstatementsinthefinancialstatementsaretheresponsibilitiesoftheauditor,however,theworkofanauditorgoesfarbeyonddetectionandstandardsviolationtoensuringthatthroughhighauditquality,financialstatementqualityisalsoincreased.Itisexpectedthatthefaithfulrepresentationoftheunderlyingeconomicconditionsofafirmisalsoconsideredbyhighqualityauditorswhenperformingauditfunctions.Inotherterms,thegeneralqualityofanauditworkisreferredtoasauditquality.Manyfactorshavebeendiscoveredtoinfluencethequalityofauditinliterature.Thesefactorsareauditfees,auditcommittee,auditfirmsize,auditor'sexperience,locationoftheauditwork,auditor'sindependenceetc.Ahighauditqualityislargelydependentonthesefactors. AuditorsareaccountableforensuringthatInternationalFinancialReportingStandardsisusedandtheguidelinesarefollowedwhenpreparingthefinancialstatement.Additional,theauditorisalsoobligatedforgivingreasonableassurancethroughtheauditopinionthatthefinancialstatementsfollowtherequirementofIFRS.Thisimpliesthattheauditorsareconcernedwiththeapplicationofthesestandards.Itisimportanttonotethatauditorsarelegallysaddlewiththeresponsibilityofensuringfinancialstatementreflecttheeconomicconditionsofanentity(Ball,2009).HwangandGao(2003)definedauditqualityas"compliancewithprofessionalstandardsandcontractualterms"inrelationtotheauditworkathand.Inaddition,thevolumeofworkcarriedoutbyanauditorhasbeenlinkeddirectlytoauditquality(Carcelloetal.2002).PeecherandPiercey(2008)andCasterellaetal.(2009)intheirresearchanchoredtheirworkonpoorauditqualityandtheywereabletodiscoverthenegativeresultsfromcarryingoutanaudit.Anexampleofsuchispossiblelitigationinthecourseofanengagement. 2.1.1.1ComparisonbetweenAuditQualityandFinancialReportingQuality Auditqualityisanelementoffinancialreportingquality(FRQ),henceahigh-qualityauditisaprerequisiteforahigh-qualityfinancialstatement.GreaterassurancethattheunderlyingeconomicconditionofafirmwillbepresentedintheFSsleadstoincreasedcredibility.However,thereareotherelementsinFRQapartfromauditquality.Pre-auditedFSsqualitywhichisapartoftheauditprocessandservesasaninputalsohasaneffectonthefinancialreportingquality.Thepre-auditedESsqualityisdependentontheinternalcontroladfinancialreportingsystemqualityofthefirm,firm'sintrinsicqualities,anditsunderlyingeconomics.ItisalsodiscoveredthatauditorsspendlessertimeauditingthefinancialstatementofafirmwithhighFRQ,allotherthingsbeingequal.AccordingtoDeFondandZhang(2014)AQincreaseswithincreasedFRQandviceversa.Also,firmsthathavelowqualityfinancialreportingsystemsgetssignificantlyimprovedwithhighauditquality.ThefinancialreportingsystemqualitydoesnotrestricttheFRQassurancethathighauditqualityprovides.TheauditqualityformpartoftheFRQintriguingproxy.Theearningqualitymeasuresformulatedtodiscovercreativeaccountingcasesareemployedbyauditingresearchestodetecttheauditquality.Thisstemsfromtheassumptionthatanhighauditqualityresultinlowerearningsmanagementandviceversa.TheDiscretionaryAccrualsmodelbyJones1991,accrualsqualitymetricsandtimelylossrecognitionareusedtoattainthistarget.DechewandDichev(2002)statedthattheFRQmetricsarenotasdirectastherestatementsandgoingconcernbecauseoftheauditorsinfluenceonreportingislimited.TheuseofFRQtocaptureauditqualityhasseveraladvantageswhichincludes;theauditqualityisacomponentofthefinancialreportingqualityandthus,theFRQmeasuresareagreatproxyforauditquality.AnotheradvantageistheabilityfortheFRQmeasuretodetectearningsmanipulationandmismanagementLevitt(1998).TheFRQmeasureisnotwithoutitsdisadvantage,oneofitsmajordisadvantagesisthehighmeasurementerrorandevenbiasnessandthelackofagreementonthemostappropriatemethodstomeasurethediscretionaryaccrualsandaccountingconservatism. 2.1.1.2ClassificationofAuditQuality Auditqualityhasbeenbroadlycategorisedbydifferentstudies,prominentamongthemareDeFondandZhang(2014),Dang(2004),andKnecheletal.(2013).Dang(2004)broadlyclassifiedauditqualityproxiesintoactualauditquality(AAQ)andperceivedauditquality(PAQ)proxies.AAQistheabilityoftheauditortodiscoverandaccountforfraudulentfinancialmisstatements.PAQandAAQseemtobedifferent.However,theaimtoachieveanimprovedactualauditqualitymakestheinvestigationofactualauditqualitymoreimportant.TheAAQcanonlybeappraisedwhentheauditworkiscompletedbecauseitcannotbeobserved.Bonneretal.(1998)andDiesandGiroux(1992)measuredAAQwithauditor'slitigationactivitiesandqualitycontrolreviewsrespectively.KrishnanandSchauer(2000)alsousedcompliancewithGAAPasactualauditqualitymeasure.Perceivedauditqualityhavebeentestedbymanyresearchersinanattempttomeasureactualauditquality.DeAngelo(1981)inhisstudydemonstratedthatthePAQwillbehigheriftheauditfirmislargerduetothelowerincentivetheauditorhastobehaveopportunistically.Thus,measuringauditqualityhasproveddifficult;theperceptionofthemarkethasmadeiteasiertomeasure.Thiscanbedonebyobservingauditedaccountinginformationprovidedbythemarket.TheAAQwouldbecoveredbythemarketresponseofPAQifthemarketistotallyefficient.Ifthemarketisinefficient,thentheperceivedauditqualitywillnotcaptureactualauditquality.Therefore,perceivedauditqualityshouldbetestedtoascertainifactualauditqualityiscaptured. DeFondandZhang(2014)classifiedauditqualityintooutput-basedandinput-basedauditquality.Theformerisrestrictedbytheintrinsicfirmqualitiesandconfoundedbythereportingsystem.Thisfurtherhasvariousdimensionswhichincludesdirectness,egregiousness,actualversusperceivedandothervariousdimensionsmeasurement.Directnesscanbedefinedasthedegreeoftheauditor'scapacitytoinfluenceandcontroltheoutput. Egregiousnessisdescribedashowseriousthelevelofmisconductimpliedbythemeasureis.ActualvsPereciveddimensionexplainswhetherauditqualityisintendedtobemeasuredthroughtheAAQinthelikesofrestatementsorPAQinlikesofreactionofstockprices.Lastly,severalmeasurementsrelateddimensionsincludemeasurementerrors,consensusonthemeasurementanddiscreteness.Thevariousoutputproxiesarediscussedbelow; 2.1.1.3ProxiesforAuditQualityItcanbequitedifficultandchallengingtomeasureauditqualitybecausethelevelofassuranceanauditorcanprovidecanbebarelyobserved.ThefollowingarethedifferentAQproxiesthathavebeenemployedinliterature. 2.1.1.3.1MaterialMisstatements AccountingRestatementsandAuditingEnforcementReleases(AAERs)arethetwomostwidelyusedmetricsofmaterialmisstatementsandthesemetrichaveimpactonauditquality.Errorsinpriorfinancialstatementarefixedwithrestatement.Itiswellusedinmeasuringareaslikeauditorindustryspecialisation,characteristicsofauditcommitteesandnon-auditservicefees.AAERsaremostlyusedincasesinvolvingcourtproceedingsandfraudulentaccountingpractices.AAERsarenotfrequentlyusedbecausetheyarenotcommonLennoxandPittmnan(2010).Theseproxies,usingauditoutput,trytomeasureactualauditquality.Theyusuallyhaveloworlittlemeasurementerrorsbecausetheyaremeasuredasdiscretevariables.Thesemeasureshavetheirbenefitsandshortfalls.Someoftheadvantagesarethattheymostlyserveasevidencethattheauditqualityispoorandmanagementfraudifpresentmaybeeasilydiscovered.Someofthebenefitsare;ifAAERorrestatementsarenotpresent,itdoesnotindicatethattheAQishighandAAERandrestatementsarenotcommon. 2.1.1.3.2EarningsResponseCoefficient TeohandWong(1993)measuredauditqualityindirectlyusingtheERC.AccordingtoDangandZhang(2014),perceptionssuchasEarningsResponseCoefficient(ERC)isthereactionofstockmarkets,andthecostofcapitalareusedtomeasuretheauditquality.Todeterminewhethertheauditqualityisimpairedthroughthreats,andwhetherbigauditing.Companiesprovideincreasedquality,theERCareused.ThestockmarketisusedinrelationtotheGCAandtoaccesschangesinauditors.ThequestionofwhetherhighauditqualityhasarelationshipwiththeBig4orwhetherauditqualityisimpairedthroughperceivedthreatsisaddressedusingthecostofcapital(DangandZhang,2014). 2.1.1.3.3AuditorSize AccordingtoDeAngelo(1981),theassociationexistingbetweentheauditorsizeandtheAQispositivebecausebiggerauditfirmshavetheobligationtosafeguardtheircredibilitythansmallerauditfirms.Therefore,thebiggertheauditfirm,thehigherthequalityandthesmallertheauditfirm,thelowerthequality.Inherstudy,theauditfirmsizeismeasuredbynumberofitsclients.Shestatedthatauditorswhohavemoreclientsarealwayscarefulintheauditprocess,andtheyreportmaterialmisstatementdiscoveredinthecauseoftheauditbasedoffprotectingtheirreputation.TheresultofherresearchshowedthatBig4vsnon-Big4areusedtoestimatetheconnectionbetweenauditqualityandsize. 2.1.1.3.4DiscretionaryAccruals Thismeasureauditqualityandthisisdonebyassessingthequalityofthefinancialstatement.Earningsqualitytilldatedoesnothaveagenerallyacceptedmeasureandasaresult,manyresearcheshavebeenconductedtoexaminethenumerousdimensions.Anexampleofsuchdimensionistheneutralitywhichisproxiesusingdiscretionaryaccruals.Thisismeasuredby howmuchaccrualsdeviatefromtheusual.Ithasbeendiscoveredinliteraturethattherelationshipexistingbetweendiscretionaryaccrualsandauditqualityproxies(includingBIG4auditors,auditor'sspecialization,audittenure..,andauditofficesize)isnegative(Kimetal.,2003).Otherdimensionincludesthecredibilityofearnings,andaccountingprecautions(Casterella,JensenandKnechel,2009).Tilldate,itisnotyetcertainwhetheritisappropriatetoproxyearningsqualityandAQusingdiscretionaryaccrualsbecausetheyhavebeenheavilyscrutinized.Auditqualityhavebeenproxiedseverallythroughdiscretionaryaccrualsthroughtheelementofearningsmanagementtendency(Chee-Yeow&Hun-Tong,2014;Jones,1991).Accrualqualityisakeymeasureofauditqualityasdonebyvariousscholars(Dechow&Dichev,2002;McNichols,2002).AuditqualitywillbeproxiedbyapplyingthemodifiedaccrualqualitybyMcNichols(2002) 2.1.1.3.5AuditFee AccordingtoBonneretal.(1998),auditfeeandauditqualityareinterconnected.Therefore,iftheauditsizecanserveasaconstructforAQ,thenauditfeecanalsobeusedequally.Copley(1991)agreedwiththisstudyandaddedthatusingauditfeeismoreefficientthanusingauditfirmsizedichotomy. 2.1.1.3.6AuditorCommunication Theauditopinionstillremainstheonlyformofdirectinteractionbetweenanauditorandtheequityholdersabouttheauditprocess.Thisopinioniscommunicatedinformofanauditreportandthisreportexplainseitherthecompanycontinuedasagoingconcernornot.Auditorsarepressuredbymangerstoalwaysissueacleanopiniononthisareaduetothecostsitimposesontheclient.Theauditor'sindependenceisimpairedifthemanagerssucceedinpressurizingtheauditorssuchthattheauditorsdotheirbidding.Thisresultsinreductioninauditquality. Theperceivedthreatstoauditqualityarecapturedusingthegoingconcernopinionsofauditors.Thegoingconcernassumptionareusedtomeasureauditqualitydirectlybecausetheauditopinionisunderthecontrolandinfluenceoftheauditoranditisthereforetheauditor'ssoleresponsibility.Anauditorwhofailstocommunicateathreattothegoingconcernassumptionhasfailedtoperformhisresponsibilityandhasexperiencedanauditfailure(Dang&Zhang,2014).ThegoingconcernhasmanybenefitswhenusedtomeasureAQ.ThefirstbenefitisthatlowAQcanbeeasilydetectedifanauditorfailstoissueaGCreport.AnotheradvantageisthattheindependenceofanauditorcanbeeasilyaccessedthroughtheGCauditingprocess(Watts&Zimmerman,1981).Despitethemanyadvantages,theGCalsohasseverallimitations.OneofthemisthatGCisrarelyused.Itisexclusivelyusedforfinanciallydistressedcompaniesandisthereforelimited.AnothermajorlimitationisthatGCaspectisnarrowandonlyaddressesalimitedaspectofauditingandnotthewholeauditingprocessitself(Kaplan&Williams,2013). 2.1.2.1LifeCycle Hanksetal.(1993)descriedthelifecycleofafirmas"auniqueconfigurationofvariablesrelatedtoorganizationcontextandstructure".Itislikeastructuraldimensionabusinesspassesthroughbasedontheoperationsorfinancing,andotherkeyareasofthebusiness. 2.1.2.2ProxiesforLifeCycleLifecyclecanbeproxiedinmanyways.Someofthesewaysincludetheentityage,entitysizeandentityprofitability(Bhattacharya&Sen,2004).Theseproxiesaccordingtoliteraturehavewidelybeingusedaslifecycleproxies,theyhavebeendiscoveredtoshowalinearprogressionoverthelifecycle.However,otherstudieshavedemonstratedthatentitylifecycleisdynamic(Helfat&Peteraf,2003). AccordingtoDickinson(2011),theuseoffirmageasaproxyforlifecycleisnotadequatebecauseofvariousreasons.Thefirstreasonbeingthattherearevaryingtimeorperiodfordifferentcompaniesinthesameindustrytotransitfromlifecycletothenext.Anotherreasonisthattherateatwhichdifferentfirmslearnmakesitdifficultforthemtogrowatthesameratewhichisamajorlimitationwhenusingfirmageasaproxy.Anothermajorlimitationoffirmageisthatmoststudiesusethelistingyearofafirmtomeasureitsage.However,afirmmayhavebeenexistingforlongwithoutbeinglistedandthiswillresultininaccuracyinmeasurement. DeAngeloetal.(2006)inoneofhisworksarguedthatfirmlifecycleisbettermeasuredusingtheproportionofretainedearningsandtotalassetortotalequity(RE/TA)or(RE/TE).WhenRE/TAishigher,afirmistermedolderormatureandviceversa.Thisworkhasbeenwidelyacceptedbutmetacriticismforitsinabilitytocategorisebusinessesintodifferentstagesoftheirlifecycles.Thisledtointroductionofthemulti-stagelifecyclemodelbyvariousauthors.Greiner(1972)implementedamodeloffivestagesfromgrowththroughcreativity,Adizes(1972)introducedatenstagemodelfromcourtshipthroughdeath...andMillerandFriesen(1984)classifiedafirmfrombirththroughdecline.AccountinginformationbasedmodelwasfirstusedbyAnthonyandRamesh(1992)usingtheentityage,theirrevenuegrowthovertheyears,dividendyieldandcapitalexpenditureasvariablestoclassifyafirmintomultiplestages. Thefirmlifecyclehasbeenmeasuredthroughusingseveralfinancialmeasurementssuchasentityage,profitabilityratios,firmsize,salesgrowthetc.,(Hasan&Habib,2017).Someofthesemeasuresoflifecyclehavebeenfaultedanddeemednottobeaccurateasproxyforfirmlifecycle.Forinstance,thefirmageisdeemnottobeanaccuratemeasuresincefirmtransitionacrosslifecyclevariesfromfirmtotheotherandalsovariesacrossindustries;firmslearnatdifferentratewhichcan'tmakethembeatthesamecycleeveniftheypickup thesamecyclebefore;andtheuseoflistingasbeingdoneempiricallyisnotanidealmeasuresinthisregard(Dickinson,2011;Faffetal.2016).DeAngeloetal.(2006)scoutedtheproxiedoflifecycleasaproportionofretainedearningstothetotalassetsortotalequityofafirm.Theargumenthereisthatretainedearningsbettercapturenecessaryinformationaboutafirmlifecycle.Dickinson(2011)providesamoreaccurateandentityspecificlifecyclemeasurethroughtheuseofcashflowstatementofafirm.Dickinson(2011)arguedthatcashflowcaptureafirmprofitability,growthandrisk,soitisagoodmeasuresoffirm'slifecyclethroughthreeareasofcashflowincludingoperatingcashflow(OANCF),investingcashflow(IVNCF)andfinancingcashflow(FINCF)whichcanbeappliedtogroupingfirmsintofivelifecyclephasessuchasintroduction,growth,mature,shakeoutanddecline.HasanandHabib(2017)classifyentityintothefivelifecyclephasesusingthecashflowpatternassetoutby(Dickinson,2011).Thisclassificationbasedoncashflowpatterninclude; (i)IntroductionPhase:ifOperatingCF0,InvestingCF0; (iii)Mature:ifOperatingCF>0,InvestingCF