Chapter One: - Introduction

1.1 Back ground of the Study

External auditors play a critical role in validating company financial information. Potential lenders and investors often require externally audited financial statements before doing business with a company. The objectives of the auditor and the audit function are to assist users in determining the quality of information being received. The audit function ought to add to the credibility of information because the user of the information needs to have confidence in it when making decisions. An external auditor performs an audit, in accordance with specific laws or rules, of the financial statements of a company, government entity, other legal entity, or organization, and is independent of the entity being audited. Users of these entities' financial information, such as investors, government agencies, and the public, rely on the external auditor to present an unbiased, independent and quality audit report (IFAC2004). Audit service is very important to increase financial statement users’ trust in the financial report. This service will give benefit to the financial statement, in which users apply this information for decision-making.

Audit market environment in Ethiopia was characterized by rigid competition triggered by the bidding system to obtain audit clients among auditors, absence of international big auditors in the country and there is no strong professional body in charge of regulating the accounting and auditing profession and consistent rules applicable in discharging professional responsibilities (World Bank 2007).This unique feature of the audit market entails many concerns on the external audit practice in the country. World Bank (2007) also reported that most of the external auditors in Ethiopia complain audit quality in the country was very low. Hence, the purpose of this thesis is to examine factors determine the audit quality service provided by external auditors in Amhara Region. Having this unique feature of audit market environment, over the years, various researchers like Mihret (2010), Muluneh (2007), Adane (2014), Bethlehem (2009), Bethitina (2015), and Tamirat (2014) in their different capacities have taken a closer look at auditing practice in Ethiopian with respect to internal and external auditors. However, most of prior studies of external audit quality concentrates on audit firm specific factors (Bethitina, 2015; Adane (2014),) and less considered have given for

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corporate governance attributes in manufacturing share companies. Therefore, the aim of this study was to fill this gap by identifying the determinants of external audit quality in Amhara region.

1.2 Statement of the Problem

In Ethiopia, there are no reported scandals that involve auditors but with the increasing number of private audit firms and the increasing number of business companies many studies should be conducted on audit quality to challenge the factors that affect the quality of the audit. It is not questionable the audit practice should be performed at highest quality. Auditee whether they are government, not-for- profit or for profit organizations all need a high standard quality audit. All of them have different stakeholder’s government, management, taxpayers, donors, investors and a high-quality audit is essential for systematic and objective assessment of the Auditee financial statement. This will enable the users of the financial statements to rely on the accounts of the Auditee. The audit profession in Ethiopia has the specific features. First, the number of professional accountants is very low compared to the size of the economy. Second, there is no strong professional body. Third, the Ethiopian Professional Association of Accountants and Auditors (EPAAA) have no legal backing and not member of the International Federation of Accountants (IFAC). Fourth, the country has no quality assurance programs for Auditors. Fifth there is no legal requirement exists for auditors to have professional indemnity insurance. Sixth, the big-four international audit firm networks are not present in the country. Seventh there are no accountings and auditing standards set in Ethiopia and lastly every auditor determines accounting standards for their clients (World Bank, 2007). The above features that have a negative effect on auditor’s competence, auditor’s liability, and inconsistence auditors approach specially in the standards they are following create concerns on audit quality in Ethiopia. There are many researches done on audit quality in other countries like Nigeria, Vietnam, Malaysia, and Jordan. However, there are only limited studies done on audit quality in Ethiopia. The few studies are also industry specific; on commercial banks (Kitata, 2016), on Manufacturing companies (Leilina, 2015) and, on audit tenure (Gelaneh, 2011).

As mentioned above a few studies are either industry specific i.e. external audit on commercial banks and manufacturing companies or by using single independent variable i.e. audit tenure or audit fee or size of the firm etc. This study tries to feel the gap by not focusing on the external audit

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of one company or by not focusing the impact of only one variable but rather tries to see the perception of audit quality determinants from members of auditors in Amhara region on their audit work.

1.3 Objective of the Study

The study has both general and specific objectives.

1.3.1 General Objectives

The main objective of this research was to investigate factors affecting private audit quality in the Amhara Region.

1.3.2 Specific Objectives

Specifically, the study has the following objectives: -

I. To examine the effect of the audit fee on the audit quality.

II. To examine the effect of auditor’s reputation on the quality of audit.

III.  To investigate the effect of the audit firm tenure on the of audit quality.

IV. To investigate the effect of the size of the audit firm on the audit quality.

1.4 Hypotheses Development

According to Frankel (1979), a hypothesis is the tentative statement of fact that is yet to be verified by the researcher. In this study to concentrate on Private Audit quality determinants in Amhara Region one dependent variable against four independent variables would be investigated in line with the broad purpose statement of private auditors on Audit Quality in the context of Amhara Region. The dependent variable (are those variables that are explained by other variables), is Audit quality, while the independent variables (are variables that explain other variables) are audit fee, the auditor reputation, audit firm tenure, and size of the audit firm.

To achieve the objective of this study, in addition to the research questions presented above the following hypotheses concerning the auditor’s expert performance to audit quality task are tested.

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H1: There is a significant positive relationship between the Size of audit firm and the audit quality.

H2: There is a significant positive relationship between Audit tenure and the audit quality.

H3: There is a significant positive relationship between audit fee and the audit quality.

H4: There is a significant positive relationship between the auditor reputation and the audit quality.

1.5 Significance of the Study

The importance of this study is generally for the audit industry in the country. The following significance can be achieved after completion of this research.

•       It helps users of external audit to know about factors that have a positive and negative effect on audit quality.

•       This study will have a vital role in providing empirical support for their top-level decision, besides to encouraging the motivations of national potential partners that finally enabled the auditors to earn more revenue and market share.

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