Question

The negative publicity associated with financial scandals worldwide has seriously eroded public confidence, trust in the auditing profession and damaged the reputation of the profession (Fadzly & Ahmad, 2004). Many believe that this crisis is due to “audit expectation gap”.
Required
Critically evaluate the above statement and to what extent you believe that the above mentioned crisis can be explained by “audit expectation gap”. You are required to provide a “theoretically explanation” why an audit expectation gap could exist between auditors and users of financial statements. You are also required to provide an in-depth discussion on what are the contributing factors of an audit expectation gap and comment whether such a gap can be totally eliminated.

Answer 1

The negative publicity associated with financial scandals worldwide does have had an impact on confidence and trust on auditing profession. In a common man's perspective the audit process seems to have failed when financial scams hit the news.

Users of financial statement comprising largely of the numerous shareholders of an entity judge financial well being of the entity in which they have invested their money in; on the basis of 'audited' financial statements and audit opinion stating the truth and fairness of these statements. However, when such scams come to their notice the authenticity and credibility of the audits carried out gets eroded and as a result reputation of the whole auditing profession dwindles downward. "Audit expectation gap" is one of the major cause of this crisis.

Audit expectation gap implies the gap or difference between

• perception of people or the users of the audit reports and audited financial statements about auditor's duty and scope of work; vis a vis
• auditor's actual scope of work and extent of his execution of scope to professionally satisfy himself to opine on the credibility of reports under audit.

It is often said that auditors are watchdogs who simply bark at suspicious activities and not bloodhound that actively searches for something suspicious. Auditor's primary duty is to assure the users of financial statements that  the data presented by the management therein is true and fair. To arrive at this opinion auditor executes various audit procedures in order to detect any wrong doing or misrepresentation. However, a meticulously executed scam may escape auditor's attention due to various factors, some of which are stated below:

• Auditor may work only on a sample of data which may not help in bringing out evidences to illustrate suspicious happenings
• There might be unreasonable delay in availability of data from the entity's management hence forcing the auditor to work in limited time which may restrain his ability to judge the situation
• The nature of business may be beyond auditor's understanding which would lead to a great reliance on external expert's opinion
• Meticulously executed scams may not leave any suspicious evidence behind so that the auditor notices it in his regular audit procedures
• If the management as a whole is party to the scam, the auditor would not come to know of a wrong doing since the transactions may all seem to be in line with standard operating procedures laid down by the same management
• There might not be sufficient cooperation from the management in providing data w.r.t. all areas under audit and auditor's unreasonable reliance on management's representations may misguide the auditors

Audit expectation gap may not be fully eliminated but can be reduced if following factors are taken care of:

• Users of financial statements are aware of the scope of auditors work, their ability and experience in the profession. They should be aware that financial statements are primararily management's representations and auditors only provide a additional assurance based on their overall supevision of underlying transactions. Audit should not be treated as investigation which belives that 'something is wrong'. This awareness can be brought about by organisations or statutory authorities or auditors through various interaction platforms like general body meetings, magazines, journals etc.
• The gap may arise either due to auditor's inability or auditor's unwillingness to site a suspicious issue and analyse it to detect a possible fraud underneath. Auditor's professional body may critically analyse every scam that come to the picture to undestand why audit procedures did not detect the same. Strict action needs to be taken against any auditor found guilty in the process.
• It should be ensured that auditors are technically trained enough to understand nature of business of every auditee under audit.
• Auditor's need to mandatorily update themselves with technological upgrades to enhance their understanding of business and also the auditng techniques to optmize the audit prcoedures to arrive at quality audit finding with limited resources and time