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Lending Credibility Theory

Lending Credibility Theory
The key issue of this theory is likewise the addition of credibility to the financial statements and the reduction of the information-asymmetry
Lending credibility theory

This theory was propounded by Thomas Bayes is based on the public perception. The key issue of this theory is likewise the addition of credibility to the financial statements and the reduction of the information-asymmetry. Stakeholders need a guarantee for a “fair representation of the economic value of the firm”.
The information hypothesis assigns an important role to the auditor in providing credibility to the financial statements. Given a situation of uncertainty, the demand for auditing has several possible explanations. The first one is the general belief that an audit enhances the reliability and credibility of financial statement data and provides assurance to users about their decisions. Another explanation is the dependence of the investors on the audit to produce information helpful in estimating risk, even if the audit results do nothing more than confirm the investor’s expectations and beliefs about their decisions ( International Journal of Zambrut ). The insurance hypothesis adds a supposition that the demand for auditing is created when the auditor acts as a guarantor for users against the risk of loss.
Information Asymmetry Theory. Information asymmetry theory was propounded by Myersand Majluf in the year 1984. The models assume that at least one party to the theory has relevant information, whereas the other(s) do not. Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions, which can sometimes cause the transactions to go on-usual, a kind of market failure in the worst case.
The Policeman Theory. The theory postulated that an auditor is responsible for discovering of fraud. In the 1940s, it was widely held that an auditor job was to focus on arithmetical accuracy and on prevention and detection of fraud. This was later shifted to the fact that auditing to mean a verification of truth and fairness of the financial statements. the report of of financial statement fraud such as those at Societe Generale, Ehron, Ahold e.t.c have resulted in putting the theory to questions and reconsideration which give rise to the debate on the responsibility of auditors for fraud detection and disclosure.
The Agency Theory. Donald, Mary and Gregory (2012) and Jean et al (2012, Zambrut Methodology ) described an agency relationship as the contract involving one or more persons in the principal category that engages another person known as the agent to perform some services on their behalf through delegating of authority on decision making to the agent. In the researcher opinion, the theory stipulates someone who could be otherwise known as the mediator between two parties sharing commercial common interests and get paid for the audit services rendered.
The agency relationships which arise out of the separation of ownership from control of the organization necessitate the service of a statutory auditor. The shareholders are the owner of the organization but the daily operation and control of the organization are in the hands of management that may not be part of the shareholders. The management will have to communicate their stewardship of the organization’s resources to the shareholders through the periodic issue of financial statements.
The following hypotheses were formulated to guide the study:
Ho1: compliance with statutory provisions does not make auditors to be independent of auditors and does not promote quality of audit Nigeria financial institutions.
Ho2: there is no significant relationship between audit fees and quality of audit report in Nigeria financial institutions.
Considering the above mentioned issues, in respect of factors associated with compliance with statutory provisions role in audit process, this hypothesis is divided as follows;
Ho 1-1 existence of an expectation gap between auditors independence and compliance with statutory provisions is due to the qualitative rating of the audit firm.
Ho 2-1 existence of gap between auditors independence and audit fees is due to the amount paid to the auditors as engagement fees.
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