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DIPLOMA IN ACCOUNTING

CORPORATE AUDIT

THE AUDIT EXPECTATION GAP


Chapter Overview

 This chapter looks into the


public misunderstanding about
the reality of external auditors’
responsibilities as well as the
poor performance of the
auditors themselves which has
resulted in the audit expectation
gap.
AUDIT EXPECTATION
GAP
AUDIT EXPECTATION GAP :
 WHAT IS IT?
PUBLIC’S MISUNDERSTANDING ABOUT WHAT
AUDITORS DO.
REASONS FOR THE GAP:
 ARE NOT AWARE OF THE ACTUAL ROLE AND
RESPONSIBILITIES OF AUDITORS.
 AUDITORS OWN POOR PERFORMANCE
AUDIT EXPECTATION
GAP
Components of Gap:
 Performance Gap

 Reasonableness Gap

Performance Gap:
 Deficient performance – Lack of
competence and lack of auditors’
independence
AUDIT EXPECTATION
GAP
 Lack of competence –
Ignorance about auditors’ duties
on the part of auditors’
themselves or duties of auditors’
poorly performed.
 Lack of auditors’ independence
– threats to their objectivity,
integrity and independence
AUDIT EXPECTATION
GAP
 Deficient standards – Gap between what
auditors can be reasonably expected to do and
that the profession and the law asks them to
do.

Reasonableness gap
- Unreasonable expectations by public with
regards to auditors’ role.
- Example: Perception that auditors verify 100%
transactions in an audit of financial statements
AUDIT EXPECTATION
GAP
 WHAT ARE THE COMMON
MISPERCEPTIONS?
I) AUDITORS ARE APPOINTED BY
MANAGEMENT
II) AUDITORS PREPARES THE
ACCOUNTS
III) AUDITORS GUARANTEES THE
ACCOUNTS ARE CORRECT.
AUDIT EXPECTATION
GAP
IV)AUDITORS TEST
EVERY TRANSACTION
V)AUDITOR DETECTS
FRAUD AND ERROR
AUDIT EXPECTATION
GAP
WHY IS THIS A PROBLEM?

 INCREASED LITIGATION-SUED
FOR NEGLIGENCE
 INCREASED DIMINISHING ROLE IN
EXTERNAL AUDIT – PUBLIC MAY
LOSE CONFIDENCE IN THE ROLE
OF EXTERNAL AUDITORS
 INCREASED AUDIT RISK – RESULT
IN LOSS OF REPUTATION
AUDIT EXPECTATION
GAP
Potential ways of closing the gap:
 Understanding financial statements and the audit report
– False or unrealistic expectations in users of financial
statements are common as they do not understand the
conventions on which financial statements are prepared,
the inevitable degree of estimation and judgment
involved or test nature of audit work. The most significant
work to improve users’ understanding has been the
change in the audit report format – ISA 700 Auditor’s
Report on Financial Statements
AUDIT EXPECTATION
GAP
 Fraud – A high proportion of public believes
that auditor has a responsibility to detect
fraud and should actively search for fraud.
However, this is virtually impossible for the
auditors, given the limitations in audit.
 The auditors should attempt to explain
these limitations to users so that they are
aware that auditors have a responsibility to
only have ‘reasonable expectation’ of
detecting material fraud.
AUDIT EXPECTATION
GAP
 Control of the auditing profession
– Implementation of quality
control policies and procedures
over the firm and individual
audits, education in the form of
continuing professional
education, disciplinary
proceedings.

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