Easy Office
LCI Learning

Eliminating The Audit Expectations Gap: Reality or Myth?

CA. Rayan Sequeira , Last updated: 08 October 2007  
  Share


A gap between the auditor’s actual standard of performance and the public expectations of auditor’s performance.

Blessed is the man who expects nothing, for he shall never be disappointed” is one of the famous quotes by Alexander Pope what we had been listening to from our school days.

But the truth is that no man in this world is without expectations. So there always arises an expectation gap in each and every field. Audit profession is also not an exception to this general rule.

Let’s have a look on the expectation gap related to Audit profession….

This article provides some startling evidence of the existence of such a gap in investor perceptions of the assurance provided by an audit.           

 

Audit Expectations Gap was first introduced into the literature over thirty years ago by Liggio [1974]. Public expectations of auditors, which go beyond the actual standard of performance by auditors, have led to the origin of the “Expectations Gap”.

 

Auditor’s performance requires conformity to the prevalent statutes governing the conduct of business and adherences to the pronouncements issued by the governing regulatory authorities. By performing within the defined legal framework, auditors provide reasonable assurance that the financial statements are free of material misstatements. The primary responsibility for the preparation of financial statements free from material misstatements is that of the management including that of prevention and detection of fraud and error.

 

A significant segment of the users of the financial statements “The Public” considers the audited financial statements as a tool for their decisions. In sequel the public expectations of the attesting function by the auditors has gone beyond the actual standard of performance leading to expectation gap.

 

Public expectations of auditors as set out by Tweedie [1987] – “The public appears to require

(1)                A burglar alarm system              -           protection against fraud

(2)                A radar station                                      -           early warning of future insolvency

(3)                A safety net                              -           general re-assurance of financial well being

(4)                An independent auditor              -           safeguards for auditor independence

(5)                Coherent communication            -           understanding of audit reports”

 

The Commission on Auditors’ Responsibilities [AICPA, 1978] was established to investigate the existence of such a gap and was concluded that such a gap does exist. It was concluded that public was largely ignorant of the extent of the responsibilities entrusted to the auditors and that some of the most knowledgeable segments of the public feel that their expectations are not being fulfilled.

 

 

 

 

 

Actual standard of performance                                                                      Expected standard of performance

 

 

                                                 Expectations Gap

               

                Requirements Gap                                              Feasibility Gap

 

 


        Performance                                Standards

                Gap                               Gap

 

 

                       Professional                  Required

       Standards &                   standard

       Statutes                          of performance

 

 

The performance gap is caused by the failure to conform to statutory requirements and professional standards.

 

The standards gap exists where statutes and the professional standards fail to properly reflect the appropriate standard of performance deemed appropriate by the courts of law.

 

The feasibility gap is caused by society’s increasing, and often unrealistic, demands for accountability.

 

Narrowing the gap: The performance gap can be narrowed by closer monitoring of auditors’ performance and by improving the professional education of practitioners. Performance monitoring includes peer review. The standards gap may be narrowed by establishing professional standards and legislation that anticipates the feasible demands of society, as handed down in common law decisions. The feasibility gap may be narrowed by improving public education in order to demonstrate to the public that existing professional standards and legislative requirements are adequate.

 

Alternatively, auditors may either accede to society's more reasonable demands or improve the manner in which they communicate their findings to financial statement users. The accounting profession has adopted this approach in the past on a number of occasions and in a number of countries when a revised professional standard was released requiring the content of the standard audit report to be expanded in order to better explain the objectives and limitations of an audit to readers of the report.

 

 

 

Follow-up on Audit Qualifications: A leading industrialist once remarked in a seminar in a lighter vein, “All their life, my parents wished I should acquire more qualifications, I could not do it in my student career but now my auditors have fulfilled their dreams.”

“A follow-up is defined as a process by which the auditors determine the adequacy, effectiveness and timeliness of actions taken by management on reported audit findings."

Where agreed action plans are not completely implemented the auditor asks the following questions:

·                     What remains to be done?

·                     By whom and when?

·                     Have alternatives been implemented that may be more appropriate?

·                     Has the agreed action plan ceased to be of value?

·                     If no action was taken, why not?

·                     What is the issue or concern causing inaction?

 

The end result should be a brief summary of the status of every action plan agreed upon. For independent financial audit to be really meaningful there is a need for follow up on qualifications in audit reports. Effectiveness of audit is considerably diminished if, year after year, there is no follow up actions on qualifications made by the auditors.Audit profession survives on the perception of the society about the usefulness of its services. A real improvement in the quality of auditing coupled with efforts for creating a proper public perception about the role of auditors would go a long way in this direction.

 


Published by

CA. Rayan Sequeira
(Chartered Accountant)
Category Audit   Report

  8175 Views

Comments


Related Articles


Loading