AUDIT EXPECTATION GAP

Audit Expectation Gap

Audit Expectation Gap

Introduction

Theoretically the term audit gap in expectations emerged during the 1970s from a study by Liggio (1974, 20) in which he defined gap as the differences between the audit work performed by the auditor and what customers expect users of financial statements from them. To reduce the audit expectation gaps, there are numerous solutions such as extending the report by making it more understandable to users, extending the responsibilities of auditors and clients by making them more informed on the duties and responsibilities of auditors with financial statements etc.

There have been many reasons for the lack of credibility among auditors. Since the auditors did not mention clearly about the difficulties faced by companies in the reports, there has been many difficulties in maintaining and enhancing continuity. The aspect of emergence of lawsuits pertaining to the auditors served as a key de motivator that led to a lack of confidence in the auditors. Users of financial statements have been known to bring law suits against auditors as well as increased demands for compensation.

Definition

Expectations gap is described as the annual review of the discrepancy between the expectations of year-end target procedure and the actual content of the annual review. An audit expectations gap can lead to unsatisfactory data from the execution of the annual review as well as by the laws which are insufficient for the public's understanding.

In principle there are two different starting points. Firstly, the expectations of the public may be an appropriate measure to try to limit the auditing. Secondly, expectations on the other hand may bring improvement of the contribution achieved by the accountants. This can be done through:

Delimitation of the expectations of the public with better communication between the public and the professional accountants

Disclosure of examination reports in case of insolvency

Peer Review (quality control of accountants)

Expansion of the range of the test (final exam as "examination of management")

Enforcement Mechanism

Better control of employment

The personal liability

Separation of examination and consultation

Discussion and Analysis

Generally, the public expects a judgment on the quality of management which is practiced by the organization. There are also various expectations regarding the reliability of the accounts. Professionals do not consider directly the possibility of the existence of a fraud which affects the financial statements. This is due to the fact that they do not meet the needs of users of the audit reports. The gap between the needs and the approach practiced is defined in various countries as part of the “Audit GAP Expectation." (Humphrey, 1992, Pp.137)

Experts believe that numerous issues are responsible for auditing the financial statements based on documents provided to them and they do not seek fraud. In the United States and Europe, such professionals insist that they are more of controllers rather than detectives. There is clearly a gap between the design of their mission and expectations of the public demands.

Numerous auditing bodies were established to investigate the existence of this gap and they put forward various suggestions for reducing or eliminating the ...