Relation Between Audit
Opinion And Factors
Influencing Audit
Opinion
[Document subtitle]
Course name: Audit and Assurance
Term paper: Relation Between Audit Opinion and Factors Influencing Audit
Opinion
Course name: Audit and Assurance
Course code: ACT 3103
Prepared for:
Md. Sohel Rana
Lecturer
Adjunct Faculty
Department of Accounting & Information Systems
Faculty of Business Studies
Bangladesh University of Professionals
Prepared by:
Aushaf E Rabbi (17211007)
Misha Glassy Rema (17211041)
Ilham Amrin Ahmadullah (17211063)
Tanvir Hassan (17211065)
Sakib Ahmed (17211067)
Munia Afrin (17211079)
Section-A, Batch-2017
Department of Accounting & Information Systems
Faculty of Business Studies
Bangladesh University of Professionals
Date of submission: 2nd May, 2019
i
Letter of Transmittal
Md. Sohel Rana
Lecturer
Faculty Adjunct
Department of Accounting & Information Systems
Faculty of Business Studies
Bangladesh University of Professionals
Subject: Submission of Term Paper
Dear Sir,
This letter is regarding the submission of our term paper that is based on “Relation between
Audit Opinion and Factors influencing Audit Opinion” that cover some of the core aspects of
Auditing & Assurance (ACT-3103). The main purpose of this term paper is to gain more
knowledge regarding Audit and Assurance and its usage in the practical world.
We have successfully completed our term paper as a whole in a group where every member
have provided their fair share of knowledge and our opinion to formulate this term paper in a
formidable manner. We tried our level best to present before you the term paper to be objective,
systematic and reliable. We would like to take this opportunity to thank our respected faculty
for giving us the utmost support and providing proper guidelines in order to prepare this term
paper.
Yours
________________
Sincerely,
Aushaf E Rabbi, Roll: 17211007
_________________
Misha Glassy Rema, Roll: 17211041
_________________
Ilham Amrin Ahmadullah, Roll: 17211063
_________________
Tanvir Hasan, Roll: 17211065
_________________
Sakib Ahmed. Roll: 17211067
_________________
Munia Afrin, Roll: 17211079
ii
Declaration
We hereby declare that, the term paper is completely made by our efforts and labor. No part of
it has been used for any further research or academic purposes in any other institution. We also
declare that we have used various sources from the internet as reference to prepare this report.
Therefore, this report is completely a unique and creative work.
________________
Aushaf E Rabbi, Roll: 17211007
_________________
Misha Glassy Rema, Roll: 17211041
_________________
Ilham Amrin Ahmadullah, Roll: 17211063
_________________
Tanvir Hasan, Roll: 17211065
_________________
Sakib Ahmed. Roll: 17211067
_________________
Munia Afrin, Roll: 17211079
iii
Acknowledgment
At the very beginning of this report, primarily we would like to thank Almighty Allah for His
utmost blessings upon us. This whole report is an accumulation of many people’s efforts. For
this, we are thankful to those people for their kind cooperation.
We would take this opportunity to thank our respected faculty Md. Sohel Rana, Lecturer,
Adjunct Faculty, Department of Accounting & Information Systems, Faculty of Business
Studies, Bangladesh University of Professionals, for his unending guidance and assistance in
the preparation of this term paper. His valuable advices and suggestion have helped us a lot in
building this term paper. We would like to pass on our immense gratitude to him for the support
during this period.
We would like to thank our parents, relatives, friends, well-wishers and every other person who
has been a helping hand throughout this preparation. It would not have been possible without
their support. We would also like to thank those people who have given their most valuable
opinion and have showed us the path in order to create this term paper.
We would also pass our token of appreciation to our institution, Bangladesh University of
Professionals for giving us the opportunity and having that belief in us that we could complete
this term paper. They have assisted us with all sorts of logistics; their supportive library has
worked as a place for us to gain the utmost knowledge to create the content for this term paper.
Their valuable contribution has facilitated the successful completion of the term paper.
iv
Abstract
The report “Relation between Audit Opinion and Factors Influencing Audit Opinion” was
prepared for the course Audit and Assurance and to achieve practical knowledge on the field
on audit and assurance. The report attempts to display the factors and the variables that may
affect and audit opinion. It shows the significance of some of the variables in judging the audit
opinion of a company.
As a prerequisite of the term paper, we have accumulated data for 5 years of 12 companies that
are listed on Dhaka Stock Exchange (DSE). We have mentioned in the term paper the main
aim of this topic and how the variables related to the topic have been duly analyzed. We have
worked with 6 variables, one dependent variable that is Audit Opinion, and 5 independent
variable which are Audit Opinion, Audit Quality, Audit Fees, Audit Independence, Number of
members of the Audit Committee and Firm size respectively. We have performed various tests
and run many statistics using the sample size 60 to build a relationship among the variables.
We can conclude at the end that the report was based upon true research, relevant and
appropriate data.
v
Table of Contents
Letter of Transmittal ............................................................................................................. ii
Declaration........................................................................................................................... iii
Acknowledgment ................................................................................................................. iv
Abstract ................................................................................................................................ v
Chapter-1 .............................................................................................................................. 1
1.1 Introduction ................................................................................................................. 1
1.2 - Background of the study ............................................................................................ 2
1.3 - Rationale or Significance of the study ....................................................................... 2
1.4 – Objective .................................................................................................................. 3
1.5 – Limitations ............................................................................................................... 3
Chapter 2 – Literature Review ............................................................................................... 4
Chapter 3 – Methodology ...................................................................................................... 6
3.1 - Sample ...................................................................................................................... 6
3.2 - Sources of data .......................................................................................................... 6
3.3 - Data Collection and analysis ..................................................................................... 6
Chapter 4 - Findings & Analysis ........................................................................................... 7
4.1 - Audit Opinion ........................................................................................................... 8
4.2 - Audit Fees ................................................................................................................. 9
4.3 - Audit Quality .......................................................................................................... 11
4.4 - Audit Independence................................................................................................. 12
4.5 – Number of Members of the Audit Committee ......................................................... 13
4.6 – Firm Size ................................................................................................................ 14
Chapter 5 - Conclusion ........................................................................................................ 15
References .......................................................................................................................... 16
vi
Chapter-1
1.1 Introduction
A financial audit is an independent, objective evaluation of an organization's financial reports
and financial reporting processes. The primary purpose for financial audits is to give regulators,
investors, directors, and managers’ reasonable assurance that financial statements are accurate
and complete. Audit process involves using an individual body for evaluating the financial
transactions and statements of a business. The ultimate purpose of financial audit is presenting
an accurate amount of the business transactions of a company. Besides, it ensures that the
accounts presented to the public and shareholders are accurate and justified. The results of
financial audit are useful for banks, shareholders, and anybody else with an interest in the
company (Ready Ratios, 2019).
Generally, four key phases are outlined for financial audit process. These phases include
planning the audit, determining the working of internal control, testing significant assertions
about the data and evaluating compliance, and reporting the evaluations. These phases are
explained below:

Planning: The process of financial audit begins with a plan that involves the method of
collecting data to form an opinion about the organization or company’s financial status.

Internal controls: The next step involves giving a look at the internal controls. The
auditor demands info, looks closely at the records, and watches financial procedures in
action. Without these steps, the auditor cannot give a statement about the financial
status of the organization.

Testing: Testing implies checking whether the internal controls are working or not. An
auditor requests more info, returns to the company for more inspections, and watches
how financial procedures are being performed.

Reporting: The final step in financial audit involves giving a conclusion on how the
company adheres to accounting standards. The audit from a CPA gives the organization
an unqualified approval, a qualified approval, a disclaimer, or an adverse finding. The
unqualified approval is considered as the best result and the adverse finding is
considered as the worst result (Ready Ratios, 2019).
Audit process is almost same in every country. According to the Companies Act 1994, it is
mandatory for every listed company to audit their financial statements. Bangladesh follows
1
BSA guidelines in conducting audit procedures and the Companies Act 1994, the Banking
Companies Act 1991, the Insurance Act 1938, the Securities and Exchange Commission Act
1993, the Securities and Exchange Rules 1987, the Foreign Donations Regulation Rules 1978,
and the Co-operative Societies Ordinance 1984 regulate the audit procedures.
This report consists of the analysis of 12 textiles companies’ annual report based on 6 variables,
which are: audit opinion, audit fees, audit rotation, audit quality, no of audit committee
members and firm size. Exports of textiles and garments are the principal source of foreign
exchange earnings. By 2002 exports of textiles, clothing, and ready-made garments (RMG)
accounted for 77% of Bangladesh's total merchandise exports (Wikipedia, 2019). Since the
textile and clothing, industries provide the single source of growth in Bangladesh's rapidly
developing economy, it is very important to conduct the audit procedure properly for this
sector. Exports of textiles and garments are the principal source of foreign exchange earnings.
1.2 - Background of the study
The textile industry is one of the biggest sector of Bangladesh. Export and readymade garments
has been one of the biggest revenue earning source of Bangladesh. It has been expanding over
years in terms of number of formal institutions, higher number of financing instruments and
bigger volumes of assets. They have been operating effectively and have been able to fulfill
customer orders both domestically and internationally but this sector is on big threat due to
constant scams, heist and malpractices. This decreases the efficiency and effectiveness of the
company. This has concerned the customers and other stakeholders such as suppliers,
stockholders and government. As one of the reputed sector for revenue sector of Bangladesh,
the textile industry, poor performance in this sector will affect the overall economic growth of
the country. Therefore analyzing these problems is a vital issue so introduction of the auditor
is important to portray a true and fair view of the financial statement. Therefore, the study is
conducted to reveal the audit nature in the textile sectors.
1.3 - Rationale or Significance of the study
The findings related to the study will help the stakeholders related to this sector like the
government who regulate this sector and the customers of both Bangladesh and abroad who is
directly related to this sector and the shareholder who will invest in the company’s. This paper
will reveal which textile company is effectively operating and free of errors and frauds and
maintaining proper standards. Using this findings the shareholders can get aid whether to invest
2
in the company’s and whether they will get sufficient return and it will also help the government
to know information regarding the laws and regulations followed by the company and general
people can choose their textile companies based on their trustworthiness.
1.4 – Objective
The main objective of the study is to determine the effectiveness and the quality of the audit in
textile industry. As audit procedures determine whether there are any material misstatements,
frauds and errors, it helps to establish a culture of honesty in the financial report. We have done
the study to show the auditing nature of the textile sector.
Other objectives are:

To analyze the audit opinion.

To evaluate the audit quality.

To examine the trends of the audit fees.

To inspect the audit firms protection.

To check the number of the members and independent directors in the audit committee.
1.5 – Limitations
Though we tried our best to prepare the best paper with all available resources, yet there were
some lagging that was unavoidable.

Our major limitation was the financial reports, which were our major source of data,
were not readily available on the website. Therefore, we had to go Dhaka Stock
Exchange (DSE) in order to collect the data.

We did not have sufficient time to complete and submit the report as it took a long time
to collect the data.

As this was, our first time working with contents related to audit opinion so we had lack
of expertise related to these topics.
3
Chapter 2 – Literature Review
In this part of the study, previous studies that examined the factors influencing the audit opinion
are shown. There has been a substantial research effort for the development of the quantitative
models that aim to recognize factors influencing the audit opinion. Preceding studies
demonstrate that quantitative models are very expedient in recognizing factors that affect the
audit opinion.
Laitinen and Laitinen (1998) established a model by using accounting variables to recognize
factors affecting the auditor’s opinion in Finland. The results infer that lower growth rate and
low profitability reduce the probability of receiving an unqualified audit opinion and the
unqualified audit opinion is associated with the number of employees and the share of equity
in the balance sheet. Moreover, they also highlighted that this model may convey indications
to the auditors to recognize problems that may be challenging to be discovered by traditional
auditing methods. Based on a sample that comprises one hundred firms operating in Greece,
Spathis (2003) employed a logistic regression model that can be used to recognize factors
affecting the audit opinion. The experimental findings tell that the audit opinion is strongly
connected with financial information such as the liquidity level of firms. The model constructed
with financial and non-financial information correctly categorizes all sample firms with an
accuracy of 78%.
Kirkos et al. (2007) employed three distinct data mining methods; decision tree, neural
networks, and Bayesian belief network, to differentiate between the unqualified audit opinion
and the qualified audit opinion. A model is built based on 26 financial ratios. The experiential
results disclose that financial distress measured by Altman Z-score is closely linked with the
audit opinion and firms that show low profitability accept qualified opinions, approving the
findings of previous research studies (Loebbecke et al., 1989; Laitenen and Laitenen 1998).
They also specified that these models could be a valuable analytical device for auditors when
evaluating the firms’ financial position and performance.
Citron and Taffler (1992) specified that firms facing financial distress are likely to accept
adverse audit opinion and smaller audit firms do not issue lower rate of adverse audit opinions
than large audit firms do. Mutchler (1985) examined the relationship that exists between the
type of audit opinion and publicly available information. He used discriminant analysis based
on accounting ratios to forecast audit opinion and deduced that accounting ratios seem to be
suitable in forecasting audit opinion. Dopuch et al. (1987) established a probit model based on
financial and market variables to predict the audit opinion and appealed that current year loss,
4
industry return, and the change in the ratio of total liabilities to total assets play a vital role in
forecast of the audit opinion. Anandarajan and Anandarajan (1999) examined the efficiency of
three prediction models for the audit opinion. Artificial neural networks, expert systems and
multiple discriminant study are employed as a forecast model. In this investigation, 14
independent variables are taken into account and the sample contains of 90 firms listed in New
York Stock Exchange and American Stock Exchange. They recommended that artificial neural
network offer better decision expediency than other methods in forecasting the type of audit
opinion. It is also notable that many derogatory qualitative variables that may influence the
audit opinion are not included in these models.
Keasey et al. (1988) formed a logistic regression model to determine factors shaping the audit
opinion by applying auditor variables, organizational and financial variables. They deduced
that firms audited by a large audit firm and firms which have decreasing earnings, a long audit
report delay and few directors are more likely to obtain a qualified audit opinion. Maggina and
Tsaklanganos (2011) employed discriminant analysis and logit model to identify factors related
to the audit opinion. In the empirical analysis, 11 accounting ratios are used and the final sample
includes275 firms. According to the results of logit model, the percentage of correctly classified
firms is above 95%. They also asserted that the models can also be used to identify financially
troubled firms. (Özcan, 2016)
5
Chapter 3 – Methodology
This chapter contains the detail discussion of the method used in the conduct of the analysis. It
includes three sections sample, sources of data, and data collection and analysis which explains
the method used in collection of data analyzing those data.
3.1 - Sample
We have worked with 5 years of data (2013-2017) of 12 companies in the textile sector of
Bangladesh. They are as follows Anlima yarn Dyeing Ltd, Metro Spinning Ltd, Apex Spinning
and Knitting Mills Ltd., Saiham Cotton Mills Ltd, R.N Spinning Mills Ltd, Safko Spinning
Mills Ltd, AL-Haj Textile Mills Ltd, Mojaffar Hossain Spinning Mills Ltd, Paramount
Insurance Ltd, Rahim Textile Mills Ltd, Desh Garments Ltd, and Matin Spinning Mills Ltd.
3.2 - Sources of data
The relevant data for this analysis was collected through secondary source using the annual
reports of 5 years of each company. Some of those reports are collected through several
websites including related company’s website and some are collected from Dhaka Stock
Exchange (DSE) library. Many definitions and terms where defined and supported through
various websites with the help of internet.
3.3 - Data Collection and analysis
We have taken 6 variables for this analysis, where only one variable as dependent and others
are taken as independent variable. These are Audit Opinion (Dependent), Audit Fees, Audit
Quality, Audit Independence/Rotation, no of member in audit committee, and Firm size. These
variables are collected from the five years annual report of each company.
The analysis of data are described mostly in quantitative manner. In this analysis Audit opinion
represent whether the annual report has a modified or unqualified opinion. If modified then it
was expressed in 1 otherwise 0. Audit fees are expressed in their actual amount. Audit quality
represent whether companies have been audited by the firms that are related to Big-6 or not. If
it is related with Big-6 then it is 1 otherwise 0. For Audit committee members we have analyzed
how many members are there in the audit committee. Total assets of each company measured
the firm size.
6
Chapter 4 - Findings & Analysis
In order to find empirical evidence regarding the fact that how the dependent variable is
effected by the independent variable we have taken into 12 companies which is the sample size
for our analysis. We have taken into account the textile sector of Bangladesh and one company
from the insurance industry due to limitations, the overall audit environment, and the
governance and compliance area. The companies are as follows:
1. Anlima Yarn Dyeing Ltd.
2. Metro Spinning Ltd.
3. Apex Spinning and Knitting Mills Ltd.
4. Saiham Cotton Mills Ltd.
5. R. N. Spinning Mills Ltd.
6. SAFKO Spinning Mills Ltd.
7. Al-Hajj Textile Mills Ltd.
8. Mozaffar Hossain Spinning Mills Ltd.
9. Paramount Insurance Ltd.
10. Rahim Textiles Mills Ltd.
11. Desh Garments Ltd.
12. Matin Spinning Mills Ltd.
The dependent variable that we have worked with in these companies are elaborately explained
below they are Audit Opinion, and the independent variables are Audit Fees, Audit Quality,
Audit Independence, Number of members in Audit Committee and Firm size and we have tried
to show how they have made significant impact on the audit conditions in general.
7
4.1 - Audit Opinion
We have collected data from Auditors’ Report of the Annual Report from the above 12
companies and we have critically analyzed in what way they have represented the Audit
Opinion that is the only dependent variable in our analysis. We have taken into account the
data of 5 years of the 12 companies to show any variation of statistics. In an audit opinion there
are two outcomes possible they are Unqualified opinion and Modified Opinion. An unqualified
opinion is one were a statutory auditor gives his opinion that the financial statements are
presented in a true and fair view, where there are no exceptions and the financial statements
are in compliance with accounting standards. In total, we have examined 60 auditors’ reports’.
Among these 60 reports we have acquired 56 unqualified audit opinions and 4 modified
opinions, the 4 modified opinions is as follows, the annual report of 2016 of SAFKO Spinning
Mills Ltd and the annual reports of 2014, 2015 and 2016 of Desh Garments Ltd. We have
performed regression analysis for the audit opinion data and it is as follows in Fig 1 (Regression
Analysis). The result of the regression analysis shows that the independent variable could not
significantly influence and explain the dependent variable. The values and data demonstrate
that companies in the textile sector are very genuine and cautious in preparing the financial
statements and the auditors’ are very much responsible in doing their assigned tasks. Even
though we have a big sample size we have only found modified opinion in two of the
companies, a reason behind it can be that the companies are sincere in their reporting and
internal control of the companies are very strong. On the other hand, it can also be said that
there might be a presence of high audit fees and thus the audit team might be partial or biased
in forming audit opinion for the companies and the actual information may be hidden. In the
end, it can be deduced that the audit team needs to be competent and unbiased in order to
provide a proper audit opinion.
8
4.2 - Audit Fees
Audit fees is the amount of money that a company pays to statutory auditor for the auditing
services it gives to the specified company. A number of criteria can value the audit fees of a
certain audit firm. The first criteria is the “type of audit”, it can be Statutory Audit, Internal
Audit, Concurrent Audit in banks, and VAT Audits etc. the fees vary according to the type of
audit. The second criteria is the “size of work”, the audit fees might range based on the size of
the auditing provided by the audit firms. The third criteria is the “size and type of the client”,
if the company is a partnership firm or if it is a group company or if the company has other
concerned company then the auditor has to go through a lot of books and accounts and hence
the audit fees may vary accordingly. The fourth criteria is the “Costing”, that is the amount of
labor given by the audit team, the printing costs, the travelling, the accommodation and
miscellaneous costs should be taken into consideration while computing the audit fees.
The audit fees of the 12 companies for the past 5 years has been taken into account and it was
found that Anlima Yarn Dyeing Ltd. Performs audit at the least audit fees of Tk, 30,000 and
the highest audit fees was of Matin Spinning Mills Ltd. who performs audit at the audit fees of
Tk. 690,000. The regression analysis of audit fees shows that P value is 0.95 which indicates
that it is more than 0.05 hence it will not significantly influence the independent variable and
there is no relationship between the variables.
The figure below shows that most of companies in the textile industries do no give that much
focus on their audit, hence most of the companies give away very less audit fees. In the textile
industry, the importance to audit and other factors related to governance is given less
importance, thus showing such a negative skewness. The graph depicts only 4 bars that are
relatively higher the rest of the bars are below the average line, the highest bar is of Matin
Spinning Mills Ltd where the audit is performed by ACNABIN.
9
Variation of Audit Fees
800000
700000
600000
500000
400000
300000
200000
100000
0
Audit Fees
Anlima Yarn Dyeing Ltd 2013
Anlima Yarn Dyeing Ltd 2015
Anlima Yarn Dyeing Ltd 2017
Metro Spinning Ltd 2014
Metro Spinning Ltd 2016
Apex Spinning and Knitting Mills Ltd 2013
Apex Spinning and Knitting Mills Ltd 2015
Apex Spinning and Knitting Mills Ltd 2017
Saiham Cotton Mills Ltd 2014
Saiham Cotton Mills Ltd 2016
R. N. Spinning Mills Ltd 2013
R. N. Spinning Mills Ltd 2015
R. N. Spinning Mills Ltd 2017
SAFKO Spinning Mills Ltd 2014
SAFKO Spinning Mills Ltd 2016
Al-Haj Textile Mills Ltd 2013
Al-Haj Textile Mills Ltd 2015
Al-Haj Textile Mills Ltd 2017
Mozaffar Hossain Spinning Mills Ltd 2014
Mozaffar Hossain Spinning Mills Ltd 2016
Paramount Insurance Ltd 2013
Paramount Insurance Ltd 2015
Paramount Insurance Ltd 2017
Rahim Textile Mills Ltd 2014
Rahim Textile Mills Ltd 2016
Desh Garments Ltd 2013
Desh Garments Ltd 2015
Desh Garments Ltd 2017
Matin Spinning Mills Ltd 2014
Matin Spinning Mills Ltd 2016
Anlima Yarn Dyeing Ltd 2014
Anlima Yarn Dyeing Ltd 2016
Metro Spinning Ltd 2013
Metro Spinning Ltd 2015
Metro Spinning Ltd 2017
Apex Spinning and Knitting Mills Ltd 2014
Apex Spinning and Knitting Mills Ltd 2016
Saiham Cotton Mills Ltd 2013
Saiham Cotton Mills Ltd 2015
Saiham Cotton Mills Ltd 2017
R. N. Spinning Mills Ltd 2014
R. N. Spinning Mills Ltd 2016
SAFKO Spinning Mills Ltd 2013
SAFKO Spinning Mills Ltd 2015
SAFKO Spinning Mills Ltd 2017
Al-Haj Textile Mills Ltd 2014
Al-Haj Textile Mills Ltd 2016
Mozaffar Hossain Spinning Mills Ltd 2013
Mozaffar Hossain Spinning Mills Ltd 2015
Mozaffar Hossain Spinning Mills Ltd 2017
Paramount Insurance Ltd 2014
Paramount Insurance Ltd 2016
Rahim Textile Mills Ltd 2013
Rahim Textile Mills Ltd 2015
Rahim Textile Mills Ltd 2017
Desh Garments Ltd 2014
Desh Garments Ltd 2016
Matin Spinning Mills Ltd 2013
Matin Spinning Mills Ltd 2015
Matin Spinning Mills Ltd 2017
10
4.3 - Audit Quality
Audit Quality is one of the independent variables of our analysis and the outcomes of the audit
quality is such that if the company is audited by a Big 6 audit firm then it is taken into account
and is measured as “1” and if it is not audited by a Big 6 audit firm it is measured as “0”. The
Big 6 audit firms are as follows:
I.
II.
Rahman Rahman Huq and Co
Abul Qasem and Co
III.
Nurul Faruk Hasan and Co
IV.
Hawladar Younus and Co
V.
VI.
Masih Muhith Haque and Co
ACNABIN
The above companies are considered as Big 6 since they have adequate amount of skills,
competency and knowledge regarding auditing and accounting. They are the six largest
auditing firms in the world and the above six auditing firms are under the Big 6 parent firms.
They offer services like audit, assurance, services, taxation, management consultancy,
advisory, actuarial, corporate finance and legal services. They have a certain quality of audit,
which stands out and is considered as the best. (Anon., n.d.) Out of the 12 companies in the
sample size we have found that only one company have audited through a Big 6 firm and the
rest have audited through firms out of the Big 6. We have also performed a regression analysis
it shows that a very small amount of companies in the textile sector audit their financial
statements through the Big 6 and thus it can reduce the level of quality of the audit. The
companies that do not use the Big 6 might have greater chances of having errors, misstatements
or other irregularities, and it can turn out to be a threat of the textile sector as a whole and the
stakeholders might be less interested to invest in these companies.
11
4.4 - Audit Independence
The Securities and Exchange Rules 1987 Section 10.2(2), a certain company shall not appoint
the same firm of Chartered Accountants as its statutory auditors for a consecutive period
exceeding 3 years. Rule 10.2 (3) also states that the auditor/audit firm shall not also be eligible
for performing the auditing of financial statements of the company for a consecutive period
exceeding three years (SEC, 2012). Hence, the banks should also rotate their audit firms and
appoint other audit firms to ensure neutrality in the audit.
A core reason behind the rotation of auditor is that there might be a build of a relationship
between the audit firm and the respected company and it might create an undue influence on
the auditors’ report. There might be some breaches in the financial statements if the
independence of the auditor is hampered by the relationship between the audit firm and the
company and it will question the objectivity of the audit firm as well. One more reason behind
the rotation of audit firm is that, it will help avoid situations in which the managers of the
company are becoming too allied with the auditors of the audit team which can also hinder the
independence of the auditors. In order to evade such objectionable situations, it would be
augmenting for the auditor’s independence if there is a fixed number of terms on the period in
which one audit firm may be appointed to the same client and it should be highly disciplined.
The mandatory rotation of auditors improves audit quality by augmenting auditor independence
and introducing a new look at the client’s financial reporting. When auditors are rotated on a
regular basis, it will help to avoid situations in which auditors are becoming too familiar with
one specific client. (Eelke, 17 May, 2016)
According to our analysis, we have come to discover that most of our companies had audit
independence but for two of the firms there was a lack of independence, SAFKO spinning
Mills Ltd and Saiham Cotton Mills Ltd because they changed it only once in 5 years. When an
audit firm audits a company for a long time then there could be a presence of a familiarity
threat. Due to familiarity threat, the audit opinion could be biased. Therefore, due to rotation
of the firm, the familiarity between the audit firm and company reduces and it produces a better
quality report. The regression analysis of audit independence shows that P value is 0.48 which
indicates that it is more than 0.05 hence it will not significantly influence the independent
variable and it shows that there is no relationship between the variables.
12
4.5 – Number of Members of the Audit Committee
When a certain company is building its governance structure one of the key aspect it should
look into is the members of the audit committee and number of those members. Through an
audit committee, a company can address principal-agent problems and effectively absolve their
fiduciary duties, which is financial reporting. In order to avoid an arrangement where the
management would be controlling itself, and thereby limit conflicts of interest, several options
are specified, depending on the usual legal tradition, they are: (Ahmed, 2017)
i.
confirming a majority of external members to be independent in a one-tier board
structure;
ii.
instructing that the non-executive directors have special supervisory responsibilities for
the financial situation without forming a separate audit committee;
iii.
appointing a special sub-committee of the board, which may or may not contain
additional members with special expertise; or
iv.
the establishment of a separate supervisory board
According to Governance Code 2018, the Audit Committee shall be composed of at least 3
(three) members, and the Board shall appoint members of the Audit Committee who shall be
non-executive directors of the company excepting Chairperson of the Board and shall include
at least 1 (one) independent director. All members of the audit committee should be “financially
literate” and at least 1 (one) member shall have accounting or related financial management
background and 10 (ten) years of such experience. According to the 12 companies, that we
have worked on all of the companies had at least three members in their audit committee and
an independent member. Out of the 12 companies 4 companies had more 3 members and the
highest number of members where 5 in R. N. Spinning Mills Ltd and Matin Spinning Mills
Ltd. The regression analysis of the members of the audit committee gave a P value of 0.59
which is more than 0.05, thus there is no relationship between the variables and one variable
will not significantly affect the other variable.
13
4.6 – Firm Size
The firm size denotes the size of the company that is being audited. The total assets of the
company evaluated the firm size. The greater the assets of the company the larger the size of
the firm. A company that is considerably large in size would have to pay greater amount of
audit fees since there would be various books of accounts and transactions that the audit team
has to go through. Out of the 12 companies only 4 companies can be considered large in this
analysis. According to the graph below it can be evaluated that the largest company is Matin
Spinning Mills Ltd with total assets of Tk 7,076,727,571 and the smallest company is Desh
Garments Ltd with total assets of Tk 41,258,099. The regression analysis shows that the P value
is more than 0.05 so there is no significant influence of the firm size on the audit opinion and
there is no relationship between the variables.
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Chapter 5 - Conclusion
The research was conducted in order to conclude the relationship between audit opinion and
factors affecting the audit opinion. The conclusion can be drawn as follows:
1. The audit opinion is not significantly affected by the independent variable, the audit
opinion in the textile industry is more or less similar, and most of the reports showed
unqualified opinion.
2. The audit opinion depends largely on the audit quality, even though there was no
relationship between the variable, if a company is audited by a Big – 6 it holds more
value to the stakeholders.]
3. The audit opinion is supposed to be significantly affected by the audit fees but
according to the data, it does not have that much variation, and there is no relationship
between the variables.
4. Audit independence is a crucial part in order to formulate a proper audit opinion, most
of the companies in the sample size have had proper audit rotation and maintained audit
independence with only 3 exceptions.
5. The number of members of the audit committee is set in code of governance and most
of the companies have abided by the regulations, having at least 3 members in the audit
committee.
6. The firm size shows how much work the audit team has to do and it also determines the
audit fees to some extent, there is not significant relationship between the firm size and
the audit opinion.
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References
Ahmed, J., 2017. The relevance of audit committee in central bank. The Financial Express, 14
March.
Eelke, P., 17 May, 2016. The Effects of Audit Firm Rotation on Audit Qality. pp. 12-14.
Özcan, A., 2016. Determining Factors Affecting Audit Opinion: Evidence from Turkey.
International Journal of Accounting and Financial Reporting, 6(2), p. 17.
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