This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
The audit expectations gap has been and continues to be considered one of the most major issues that the accounting profession is concerned about and comes up against. There have been proposed various definitions for the audit expectations gap. The American Institute of Certified Public Accountants (AICPA, 1992) suggest that the expectation gap could be defined as the difference between what auditors believe their responsibilities are and what the financial statements users and public believe that auditors are responsible for. Despite the many deflective views, according to profession such gap can be definitely be narrowed with the application of the appropriate strategies.
Audit Expectations Gap Analysis:
According to Porter's (1991, 1993) analysis, the expectation gap may be decomposed into two major components: the reasonableness gap and the performance gap. Reasonableness gap appears when the expectations of people are much more than what the audit can give in practical terms such as the 100% credibility after the audit. The latter gap - the structure of which is presented in figure 1.1-, refers to the difference between what auditors are perceived to do and what they can be reasonably expected to do. However, this gap can be further split into: deficient performance gap and deficient standards gap. The deficient performance gap refers to situations when auditors do not comply with the existing standards and the latter refers to situations when certain issues are not required by the standards to be reported by the audit. If auditors fail to perform at least one duty expected by society the result is that society will have unfulfilled expectations.
History of Audit Expectations Gap:
According to Chandler and Edwards (1996), this phenomenon is more than 100 years old and has existed and studied in many countries of the world such as Canada, China, USA, Spain and Australia. The phrase 'audit expectations gap' was initially used in United States in 1974. Humphrey and Turley (1992) state that the expectation gap was firstly be recognised with the start of company auditing in the 19th century. Since then, the gap is becoming more and more apparent due to events ranging from the collapse of Arthur Anderson to the ongoing loan and saving problems.
The accounting profession alleges two main views as the causes of such gap. The first is the nature of auditing; particularly it refers to the audit practices that are not fully understood by non-auditors and the other view regards to the large development of audit responsibilities due to the continually change of the audit meaning and the expanding public expectations.
Past actions which were taken place:
Many attempts were taken place in an effort to narrow the expectations gap and they have been primarily to deal with the unreasonable expectations of the public.
The ASB amended that the auditors' report should correct and educate users as to the responsibilities of auditors. Nevertheless, the expectation gap continues to exist; a fact that suggests that these attempts have been unsuccessful. The Companies Act(1862) required from the company auditors to report on whether the company's Balance Sheet was properly drawn up; representing the true and fair view of the company. Despite the legal requirements, until the end of the nineteenth century many cases were denounced by non-auditors but they were ignored without even becoming an object of investigation.
In 1978 there was an attempt to pass a bill for introducing a state auditing board which would be responsible for the appointment and licensing corporate auditors. Nevertheless, the bill never became a reality. In UK in 1980s, the accounting profession introduced educative seminars to the public so as to reassure them that the profession's desire was to operate in the public interest. Additionally, the auditing profession was tinged with increased pressure which led to the creation of the Auditing Practices Committee which published in 1980 the first set of Auditing Standards. Since then, many Authorities and Committees were publishing guides and standards for clarifying the duties of auditors. However, most of them were highly subjective due to the inclusion of unambiguous wordings. Such an example is the ICAEW guidance; published in 1990.
Gray et al. (2011) clarifies the main reasons for the existence of the gap with four main insights. First, the unintended communications of the audit reports make the expectation gap impossible to be determined precisely. Second, common terms such as 'materiality', 'reasonable' and 'sampling' are frequently be misinterpreted by users. Third, users never read the whole auditor's report and instead, they just have a look for checking the name of the accounting firm and if it has any unqualified opinion. They use secondary sources of financial data. Finally, the majority of users find PCAOB-based audits superior to ASB-based audits as they are more rigorous and provide more useful information for them.
Despite Gloeck and de Jager (1993) argued that the gap possibly will never be entirely closed down due to its nature; Humphrey(1997) suggested that with time such problems are expected to disappear. The gap is 'endemic to auditing'- Power stated - but it can be narrowed. I agree with Power to a certain degree and I add that despite the growth of the gap of the last 20 years and the previous failed attempts to bridge it there is still a hope for bridging this gap and call for 'fresh thinking'(European Commission, 2010).
Future actions in an attempt to narrow the gap:
In order to reduce the unintended communications, misperceptions and therefore the expectation gap, audit standard setters should make significant changes to the audit reports. Being aware of the gap's synthesis enables us determining the way in which it can be narrowed.
Auditors can be assisted by ISA 220(2004) and ISQC (2004) published standards and be better informed about what is expected of them and their responsibilities under law, statute and regulations. Porter and Gowthorpe(2003) found that in 2000 approximately 13 per cent of UK auditors were either incorrect or uncertain about their existing duties. Anthothy H. et al (2012) suggest that Big Four should drop the pretence of doing "independent audits," as they neither do audit nor they are independent. Instead, they should refer to their services as ''financial accounting certifications performed by consultants''. By dropping the term 'audit' they cannot held liable for missing any kind of fraud and thus the public will expect less and the gap will be narrowed. Another proposed solution is to establish an independent authority in order to regulate audit fees, improve independence and clarify auditors' duties and responsibilities. It can be also suggested increasing the use of decision aids by auditors such as standard forms, computer programs or checklists that help auditors in making better decisions with the assurance that all relevant information had been considered.
Porter analysed the expectations gap into three different components according to the entity that they come from for helping in understanding the factors underlying the gap and thus look at the appropriate solutions.Â Deficient standards (50%) come from the audit profession; sub-standard performance (16%) comes from the individual auditors, and unreasonable expectations (34%) from the public.
Deficient standards component is comparatively the most easier to reduce it. This gap appears where professional standards and statutes fail to reflect properly the suitable standard of performance that was deemed as the most appropriate by the courts of law. Therefore, it may only be reduced by establishing professional legislation and standards that reflect the feasible society demands and auditors' duties. Additionally, clearer definitions should be provided within the accounting standards in order to give the auditor a better understanding regarding his duties. Auditors depend on the interpretation of the referred terms thus their clarification and objectivity is highly important.
The reasonableness gap is referred as one of the more subjective components. This gap finds its causes in society's increasing and mostly unfeasible demands for accountability. Therefore, it can be narrowed by increasing and improving public education in order to prove them that the existing professional legislation requirements and standards are enough and they should reduce their unreasonable expectations of auditors. In addition, auditors have to familiarize themselves to the more reasonable society's demands and improve the way in which they communicate their findings to the public.
Like the reasonableness gap, the performance gap, is very subjective. It is caused by the failure to comply with the professional standards and the requirements of statute. This gap can be reduced by more frequent and stricter inspections of auditors' performance. Such monitoring can be probably include, for example, a review of the functions and procedures performed in an auditing firm by an independent member of an extrinsic auditing firm. Since 1989, in UK and NZ, monitoring of auditors' work has been introduced and this led, at least in part, to an improvement in auditors' performance. Procedures can be settled for promoting greater compliance with professional and statutory requirements and creating incentives for audit firms to reflect on the consequences of their actions; for example through penalties. Therefore, auditors will think twice before their engagement in negative acts.
Nevertheless, in the application of these practises there are some difficulties that will be lurking, creating obstacles in the effort to narrow the expectations gap. In the 21st century, the society is marked by an unequal distribution of wealth, power, social practices and competing institutional structures and worldviews. All these contribute to variable demands of the public and to their continually changing expectations of auditors, which means that the professional standards and the requirements of statute are being unstable and the meaning of audit is subject to transformation and negotiation. Additionally, any change in auditor's responsibilities may risky impact his audit profile. The use of decision aids, the admission of seminars and educative programs for both auditors and users, the increased attention for the disclosures in audit reports and maybe the additional disclosures; means additional audit costs for the audited company and additional time spent by auditors for auditing. Costs, balancing benefits and risks will be probably added to the regulators' and audit standard setters' challenges
If history repeats itself, how incapable someone must be in order to not learning from experience?
Audit expectations gap has concerned and became the object for debating for many years. The majority of the actions that were taken place in order to narrow the expectations gap were proved to be deficient and unsuccessful. After so many attempts for narrowing it, why we finally did not manage to bridge it with success?
My view is that the existence of such a gap can be considered useful as well. Such a gap is the cause for the continually debate on issues regarding the defects of audit function. Thus, it can assist us in better understanding weaknesses and problems of corporate auditing and its regulation. However, on the other hand, the expectations gap can be characterised as bad from its nature. A large gap leads to lower earning potential, credibility and definitely lower prestige regarding to auditors' work. This means that if the gap was not existed or was very small, the system of audit would be in a much healthier state and there will be no need for continually debates. Thus, it is of utmost importance that we should attempt to eliminate the gap as much as it is feasible. In a society marked by evolutionary developments of demands on the auditors the audit expectations gap can only be narrowed if auditors can react in a faster rate than before to the business needs. There is no room for further failures since the business needs and society's demands are in a continuously evolutionary development. I believe that the gap can be bridged by the appropriate strategies - some of them were discussed above - and which they will assist in providing a 'one real way' in looking at the audit function.Â