Does The Audit Expectation Gap Accounting Essay


The credibility of the external auditors are increasingly to question where in many countries around the world, as demonstrated by the criticism and widespread litigation against auditors face. There is evidence that some of this criticism is based on the lack of common knowledge of company law and auditing standards and in other words, misunderstanding of the essential role of external auditors. One potential means to reduce the expectations gap is to improve knowledge and understanding of the role and responsibilities of the auditor . The purpose of this study to investigate whether the expectations gap exists and to find the means or ways it can be reduced.

The Auditors' Report

Report of the auditors is the final product of any audit .It may differ in presentation, but in all cases they must tell the users of the degree of correspondence between the information contained the in the financial statements and established standards in procedures. .Standard language is also developed for the purpose of achieving the degree to which financial statements conform to generally accepted accounting principles.

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Report of the auditors is necessary to audit or certification process because the other users know that checker work and conclusions reached. From the perspective of users, the report is the first product of the process of certification.

The Expectation Gap

The gap between expectation gap criterion auditor's actual performance and expectations for the performance of various public auditors (as opposed to their standard of performance required). Several members of the public expect that:

• auditors must accept prime responsibility for the financial statements,

• auditors 'certify' financial statements,

• a 'clean' opinion guarantees the accuracy of financial statements,

• auditors perform a 100% check,

• auditors must be given early warning about the possibility of business failure

• assume auditors to detect fraud.

Such public expectation of auditors, which exceeds the de facto standard of performance by auditors, has led to the expression 'expectation gap.

The idea of the expectations gap (for example, that: occurred first in the seventies as an act auditors under criticism in America. Idea of a knowledge gap published across Europe and the painting auditing standards produced 'expectation gap standards which come into force from 1990 to try and overcome the problem. In any case this has proved difficult like despite scandals there is nothing to say that there is a problem of standards for themselves and talk a gap expectation question the understanding of the role and duties of the auditor with the people and users financial information, which is audit objectives to be one thing and auditors themselves they consider to be others too.

Components of expectation gap

The gap is not a simple gap between two sets of views about the role and performance audit. We will make it clear that the gap pulled by a carrier (1993) in New Zealand, which is useful because of the installation use them to distinguish the various elements of the gap. Phase of the installation before, but adapted to give examples of some components thing discriminate.

A reasonableness gap that arises because people expect more of audit than it can give in practical terms, such as detecting all instances of fraud, however small. There is a belief in some quarters that examines the checker package and the balance of very lonely, as auditor of the practice being examined samples of transactions and balances when forming conclusions about the population of those transactions and balances. is clearly unreasonable would be to examine all transactions and balances of a large corporation. A performance gap between what can reasonably expect of auditors and what they are perceived to do. This gap is itself split in to two:

A deficient standards gap, that the gap between what auditors can reasonably expect to be working and that the law profession and asking them to do. Thus, a user might be expected reasonably auditors to report on cases of misappropriation of the assets of a company by senior managers or users to a regulator. If the profession of law and do not require this, a deficient standards gap you find. It is interesting to note that in the UK, auditors have a duty to report on these and other organizations of the things organizations fill in the item of financial services, including banks and housing associations, although it is not currently a requirement in general.

The performance gap is incomplete (which might be described as a gap audit rotting). therefore, if the auditing profession has issued a standard that says that auditors should observe the procedures taken Shares of the customer, but the auditors fail to do so, and then their minus say they will act in a manner that is consistent with professional auditing standards.

Of the above, we will discuss the expectations gap that has emerged for various reasons. One felt that the gap include different components, from one can seek solutions to close the gap constituents. therefore, if there is evidence that many of the auditors fail to perform adequately, one may provide post-qualification experience, or even, in the end, committed to withdraw their testimony. You may notice that there are those who propose that the risk of endorsing a look to check the work of the border rather than the narrower view of audit risk, may cause expectations to rise, which if not met will cause the gap for expansion.

Theory of Expectation Gap

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US National Commission on the preparation of Financial Reporting fraudster (the Treadway Commission) the source in October 1987 which concluded that it is still crucial for auditor to discover and deter financial reporting fraudulent although the role of the auditor with regard to fraud and other offenses secondary to those of the management the board directors.

U.S. National Commission on the preparation of financial reports fraudster (the Treadway Commission) The source in October 1987, which concluded that it is still crucial for the auditor to discover and deter financial reporting fraudulent Although the role of the auditor with regard to fraud and other offenses secondary to those of the management The Board of Directors.

In 1988, the Canadian Institute of Chartered Accountants (CICA) adopted a further study on the expectations of the public audit (Report MacDonald).

In the UK, financial features for managing the company (Commission Cadbury) issued another hard to achieve an investigative auditor responsibility for fraud and other irregularities in 1992. The most radical in this report, the proposed legislation to extend legal protection to all auditors who report a reasonable suspicion of fraud investigative authorities

How we can reduce it?

Challenge to reduce the expectation gap stands in front of all auditors, internal and external. While the profession has made great strides through legislation, instruction, and standards of scrutiny, it should apply this guidance within the rank of private, spend the effort and develop the ability to reduce this gap.

Checkers or auditors cannot be held responsible for all types of fraud detection. Collusive frauds and other complex schemes are very difficult to detect. This does not, however, gives auditors a covers an excuse to refrain from the search for fraud. Develop correct thinking, ensuring forensic procedures, and ask about all opportunities for fraud increase auditors found.

To reduce the gap between public expectations and perceptions of auditors regarding the roles and responsibilities of auditors in an audit of the financial statement. Standards gap forecast is intended to (1) public interest in Title of detection errors, breaches and wrongful acts, (2) assist auditors in the audit planning the most effective, (3) improve communication Auditor of State, and (4) improve internal communications [Gay & Sullivan (1988)])

Role of audit committees

Cadbury committee, which started as a result of concern about the collapse of some world renowned companies, gave incentives to the start of audit committees in the United Kingdom.

Improving the auditor's independence is likely to derive from the fact that the Audit Committee managers were equipped with non-executive director to provide an independent body within the company that the auditor can be mentioned. He notes also in the guidance on audit committees by the Audit Committee should recommend to the shareholders ratify the appointment of auditors and remuneration and terms of correlation checker. Admitted that the code share authority and duties of the audit committee must be clearly defined if this improvement to happen. Clearly, if the Commission was entirely up to the plate cap in main will be ineffective. The same applies if his or her duties did not include the meeting of the auditor to discuss audit and report on problems and if he had no role in relation to the appointment of the auditor and the design of remuneration.

In audit committees there is the power and duties. That means the authority of the Audit Committee must have clear rights to the will of the information and decision-making and the implementation of the duties prescribed.

In the United Kingdom, the role of audit committees continues to develop, but pointing Smith on audit committees, a step towards greater consistency in their duties and accepted their roles. Direction Smith summarizes a number of roles and responsibilities of the Audit Committee and we put these out below.

Financial reporting

*Issues and the provisions of the review mission took part in the preparation of annual accounts, interim accounts and preliminary data..

*Consider the suitability of important accounting policies and any changes that have been made to them. Assess significant estimates and judgments and the suitability of the treatment of important or unusual transactions. They also make sure that disclosures in the financial statement are enough.

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* refer to the internal financial control and also, unless labeled by a separate committee, a risk management company. The latter include the receipt of reports from the company's management on the effectiveness of control. The Audit Committee should review and also give their consent to any data included in the financial reports relating to internal control and risk management.

* analysis the company's policy with regard to storm a whistle and guarantee there are proper mechanisms applied to investigate and followers of the whistle that blows things.

* Analysis and observe the effectiveness of the company's internal audit function of the accounts. Review the nature of the work that will lead by the internal auditors and monitor their impact. The Audit Committee must also ensure that the functions of internal audit are sufficiently productive again. Where a company, then the function of an internal audit, then they should be on annual basis is the need for such a function.

Audit matters

* Recommend the appointment, the conditions of correlation and the size of the remuneration of external auditors.

* Ensure independence and objectivity of external auditors. When evaluating the independence of external auditors by the Audit Committee must take into account the non-audit service provided by them. The Audit Committee must also ensure that the audit company to comply with the legal and professional requirement regarding the independence Checker. For example, the Audit Committee should want reassurance that there is no family or financial relationship between the auditors and the company.

* Be involved in developing the company's policy with regard to item non-audit services provided to a company audit. The main concern of the Audit Committee will ensure that the item non-audit services will not compromise the independence of the audit company. Thus, the Audit Committee would be interested in the case, such as the nature of the service is not equipped with a check and wages for the work of non-audit compared to the wage for the work of scrutiny.

* Values audit plan, including the levels of the sources and material to the neutral nature of the audit scrutiny.

* Discuss with the external auditors any key issues arising from the accounting audit auditing task and check the terms and ranges of errors discovered during the audit.

*Review any management letter issued by the auditors and letters of representation.


*To complete the audit, evaluate the effectiveness of the audit and the ability of auditors as described you are dealing with the emergence of issues during the audit and respond to the Committee's questions on the audit..

Money Ldering

Money laundering is the process of changing large amounts of money obtained from crimes, such as drug trafficking, into origination from a legitimate source. It is a crime in many jurisdictions with varying definitions.

Typical Money Laundering Scheme

To disguise the source of their income from illicit activities, criminals first must place the money in legitimate financial institutions. Someone accomplishes this by transferring funds into the account of a confederate who has issued him or her an invoice for products or services never delivered.

Next, the accomplice adds a deceptive layer of complexity to the process by wire-transferring those funds, in relative anonymity, to a bank account in a laxly regulated "offshore" jurisdiction. The account holder then "lends" the money to the person who paid the fake invoice.

In the final step, the first criminal integrates his or her money into the economy by purchasing real estate and other legitimate assets with large amounts of difficult-to-trace-but illegally earned-cash.

Generally, businesses are most useful to money launderers as conduits for tainted funds. So, since money launderers usually don't expropriate assets, they seldom leave evidence of their activity on financial statements, making it difficult to detect their illegitimate activities during conventional audits.

Nevertheless, independent auditors have a responsibility under SAS no. 54, Illegal Acts by Clients, to be aware of the possibility that illegal acts may have occurred, indirectly affecting amounts recorded in an entity's financial statements. In addition, if specific information comes to the auditor's attention indicating possible illegal acts that could have a material indirect effect (for example, the entity's contingent liability resulting from illegal acts committed as part of the money laundering process) on the entity's financial statements, the auditor must apply auditing procedures specifically designed to ascertain whether such activity has occurred.

Possible indications of money laundering activity include the following:

*Transactions that seem to be inconsistent with a customer's known legitimate business or personal activities or means; unusual deviations from normal account and transaction patterns.

*Situations in which it is difficult to confirm the identity of a person.

Unauthorized or improperly recorded transactions; inadequate audit trails. *

*Unconventionally large currency transactions, particularly in exchange for negotiable instruments or for the direct purchase of funds transfer services.

*Apparent structuring of currency transactions to avoid regulatory recordkeeping and reporting thresholds (such as transactions in amounts less than $10,000).

*Businesses seeking investment management services when the source of funds is difficult to pinpoint or appears inconsistent with the customer's means or expected behavior.

*Uncharacteristically premature redemption of investment vehicles, particularly with requests to remit proceeds to apparently unrelated third parties.

*The purchase of large cash value investments, soon followed by heavy borrowing against them.

*Large lump-sum payments from abroad.

*Insurance policies with values that appear to be inconsistent with the buyer's insurance needs or apparent means.

*Purchases of goods and currency at prices significantly below or above market.

*Use of many different firms of auditors and advisers for associated entities and businesses.

*Forming companies or trusts that appear to have no business purpose.

When an auditor becomes aware of information concerning a possible illegal act, SAS no. 54 requires him or her to obtain from management-at a higher level than those employees potentially involved-information on the act's nature, the circumstances in which it occurred and its possible effect on the client's financial statements.

If management does not provide conclusive evidence that an illegal act has not occurred, the standard requires the auditor to consult with the client's legal counsel or other specialists about how relevant laws apply to the situation and the impact it may have on the financial statements.

To better understand the act, the auditor may also have to perform additional auditing procedures, such as comparing invoices, canceled checks and other supporting documents with accounting records.


Expectation gap and found a wide, especially on the issues of the responsibilities of the auditor and the deletion misstatement reminder, to prevent and detect fraud in addition to the 100 percent examination in audit procedures. Even less, a gap expected to find on the responsibility of the auditor for the production of financial statements, internal control stiffness, using the work of an auditor or other expert and the responsibility of the auditor in the annual report. This underlines the need to educate the public about the duties and responsibilities of the auditor as well as limitations on the audit process.

There was no expectation gap found on the issue of ruling use and this appears to be the only good finding among all of the proportions and statements.

Expectation gap and found that it had been reduced in a very small percentage of users after reading the report of the auditor. Auditor's Report was effective to reduce the expectation gap significantly. Generally, users will still determine the extent of understanding about responsibility and duty of the auditor, in addition to the standards organization that checker built in the procedures they detect.