The Definition Of Audit Expectations Gap Accounting Essay



Auditing is increasingly difficult and challenging with new rules and regulations. Auditors have to enhance their efforts to detect fraud during an audit. Nowadays there are widespread criticism and claims directed against auditors. There is evidence that some of this criticism is based on society's lack of knowledge of company law and auditing standards and a misunderstanding of the fundamental role of the external auditor, i.e., an expectations gap.

This report presents the findings of an study on the audit expectations gap concerning the definition of Audit Expectations Gap­, its important components, how it may be changing in 2010 and how it might be eliminated [or at least mitigated]... Therefore, in this report the audit expectations gap is studied primarily from my own perspective based on the fact that it typically has a special responsibility in fraud cases.

Throughout the study I will pay attention to talk about changes to auditors' liability, possible assurance on new forms of corporate reporting as well as the more familiar stuff such as independence. Ethical Standards might also be relevant to lessening the expectations gap. I will also discuss how the most recent anti-money laundering regulations might affect the auditor and presumably the expectations gap. The information in the report is supported by references and convincing arguments.

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The sections of this report are organized as follows: The first section deals with the meaning of the audit expectations gap. Section two then considers components of the expectations gap. Section three discusses the possibilities of eliminating the expectations gap considers how ethical standards and recent anti-money laundering regulations might affect the auditor and presumably the expectations gap before a conclusion is arrived at.

Section I:

What is audit expectations gap?

The phrase "Audit Expectations Gap" was first introduced over twenty years ago by Liggio (1974). It was explained it is differences in the stages of expected performance as seen by the users of financial statements and also by the independent accountants (p.27). Tweedie (1987) set out the extent of the problem as follows: " The public appears to require (1) System of alarm a burglar (Safety against frauds)..... (2) a radar station (warning early of insolvency in future).....(3) a safety organization (re-assurance the cases of finance well-being).....(4) an neutral auditor (protection for the auditors neutral).....and (5) cohesive communications (statement knowledge the reports issues from the audit)" (p.20).

According to Pierce and Kilcommins , " the audit expectations gap is when external auditors' understanding of their role and duties is compared against the expectations of user groups and the general public".

We can conclude that the "expectations gap" is the difference between what the public and users of financial statements perceive the role of an audit to be and what the audit profession claim is expected of them during the conduct of an audit. This definition is preferred as it is important to distinguish between the audit profession's expectations of an audit on the one hand, and the auditor's perception of an audit on the other hand.

Section II:

Components of the Expectations Gap:

Responsibilities for Detecting Financial Statement Fraud

Of course auditors should be responsible for the detection of deliberate, material misstatement of earnings as well as other aspects of fraud in financial statements. Auditors should be alert to situations or transactions that could be indicative of fraud, errors or deliberate misstatements. We believe this is consistent with the auditor's ultimate objective to report on the fairness of the financial statements.

The expectation gap is caused by two variables: the auditor's ability to detect fraud, and the auditor's efforts to detect fraud. An auditor may have the skills to detect fraud, but might choose to take shortcuts or disregard obvious signs of potential fraud. Or, an auditor might use a variety of techniques, but lack the experience to effectively uncover red flags. Both situations will broaden the expectation gap.

We will focus here on the three main components of the audit expectations gap: (16%) the performance under the level, standards is not complete (50%) and (34%) un-logical expectations, can be the standards is not complete component it is the most objective component, while the performance under the level and un-logical expectations they are more subjective components. Un-logical expectations cannot be ignored because are constitutes a significant proportion of the expectations gap. The performance under the level even though forms just 16% of the expectations gap should not ignored. May be ignored if not taken all the possible measures for reducing this component. There are problems arising if was the individual auditors performance under the level component, standards is not complete stemming from the audit process but un-logical expectations issue from general people. For the reducing these problems you must know and understand ways in how to deal with analysis of the individual components of the expectation gap.


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Some specialists added a liability gap to the audit expectations gap, because the public does not know to whom the auditor is liable. Auditor liability is a topic with different points of view. Auditors with reasonable skill and care will be liable to the company for any damages which it may sustain as a result of their carelessness. In addition, in light of current case law, a duty of care is owed by the auditors where it can be shown that the opinion of the auditors was given with respect to a particular transaction and with the intention that a particular person(s) should rely on it.

The issue is also working its way into the audit expectation gap. The firms' stance at present is that there is a need for reform, but given the fractured nature of their current systems, there is a lot of work to be done to harmonize the issue of liability in auditors work. But there is recognition that simply throwing auditors on the mercy of the courts is more cures and less prevention.

What is clear is that we should come up with a single standard that helps competition and ensures that audit firms are adequately protected from catastrophic liability.

Section III:

Eliminating the audit expectations gap:

(Gloeck and de Jager, 1993; CACA, 1992; Sikka et al., 1992) argued that components of the expectations gap by her nature make it difficult to eliminate, but a number of different approaches have been suggested as possible ways of narrowing the gap. These approaches include giving big role and responsibility more for auditors in the scopes of fraud and errors. Unlawful acts and do on development and strengthening independence of auditors.

In the expectation gap also been suggested the implementation of auditing education and it is one from means that reducing the gap. One possible means of reducing this expectations gap is to improve knowledge and understanding of the auditor's role and responsibilities. Conversely, the gap can be narrowed either by a reduction in society's expectations or an improvement in perceived performance. Now we will discuss some of these approaches in details.

Auditing Education:

Is surely audit education would help reduce the expectation gap on its own would, but not be enough to solve all the problems in components expectation gap. All accounting firms should participate in the structure of education and training. This is accomplished in various ways, including mentoring programs, formal open-door policies, and close relationships. We can mention here the importance of education in regarding the subject of ethical education in the accounting field. Ethical training needs to be emphasized more in education. Accounting firms hire ethics officers to ensure ethical standards.

Auditors' Independence:

Humphrey et al (1992) identified auditor independence it is a key element from elements primaries in audit expectation gap. Sikka et al (1992) to reduce the expectations gap and taken auditing profession must doing some reforms relating auditor independence processes and this is the step it is one of the steps (p.29). Directly related to the independence issue is auditor appointment and the role of directors and senior management in that appointment.

Types of independence

There are three main ways in which the auditor's independence can manifest itself:

Programming independence

Investigative independence

Reporting independence

Programming independence essentially protects the auditor's ability to select the most appropriate strategy when conducting an audit. Auditors must be free to approach a piece of work in whatever manner they consider best. As a client company grows and conducts new activities, the auditor's approach will likely have to adapt to account for these. In addition, the auditing profession is a dynamic one, with new techniques constantly being developed and upgraded which the auditor may decide to use. The strategy proposed methods which the auditors intend to implement cannot be inhibited in any way.

Investigative independence protects the auditor's ability to implement the strategies in whatever manner they consider necessary. Basically, auditors must have unlimited access to all company information. Any queries regarding a company's business and accounting treatment must be answered by the company. The collection of audit evidence is an essential process, and cannot be restricted in any way by the client company.

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Reporting independence protects the auditors' ability to choose to reveal to the public any information they believe should be disclosed. If company directors have been misleading shareholders by falsifying accounting information, they will strive to prevent the auditors from reporting this. It is in situations like this when auditor independence is most likely to be compromised.

Ethical Standards:

Ethical values provide the foundation on which a civilized society exists. Without this foundation, civilization collapses. The purpose of ethics in business is to direct business men and women to abide by a code of conduct that facilitates, if not encourages, public confidence in their products and services. In the accounting field, the AICPA maintains and enforces a code of professional conduct for public accountants.

The role of the audit is determined by ethical and legislative particular arrangements which are always subject to change and as a result it is difficult for the audit to have fixed roles. Michael Josephson, in Chapter 1 of Ethical Issues in the Practice of Accounting, 1992, described the ten global values. They were as follows: honesty, integrity, promise-keeping, fidelity, fairness, caring, respect for others, responsible citizenship, pursuit of excellence, and accountability.

Even though social and global changes have shaped the role of the auditor and hence the role of an audit, some components within the definition of an audit can be fixed. Auditors should have past experience with the entity about the honesty and integrity of management. Ethical and legislative framework include issues dealing with auditor independence, auditor appointment and audit regulation are considered very effective means of reducing the expectations gap.

Anti-Money Laundering Regulations:

In today's highly regulated business environment, corporations are required to comply with a multitude of regulations around the globe, including privacy, financial reporting, industry and process related regulations. It is clear that compliance with the new regulations is of the utmost importance, and helps set the standard for best practices in accounting.

As long as firms are enhancing their existing efforts in the fight against money laundering around the globe, this will affect auditors work definitely as they will comply with all anti-money-laundering efforts wherever they operate. The regulations also impose new requirements regarding client information and verification of that information. Financial services firms are required to verify the identity of the clients with whom they do business, determine the source of funds in a client's account and obtain the information about a client's wealth.

We can conclude that the advent of technology and internal control systems have definitely transformed the environment within which an audit operates. The anti money laundering regulations form a guaranteed procedure for reducing the audit expectations gap.

Audit Reports:

Audit reports are significant in the context of the expectations gap, not only because they are a direct source of differing beliefs about auditing, but also because of the suggestion that they should be used as an educational tool to alter expectations. The Auditing Research Foundation (1989). The auditor's report is very important and considered one of the cornerstone issues and the report attempting to address audit all users' expectations.

The ICAI (1992) argued that: the report of audit should be expanded and showing scope to understand the users of that is actually the auditors doing this is contribution to understanding more users improving from audit process may be made from through the audit report. (p.89 (

Often been the expectations gap has framed in terms of the problems if the users knew the code better, this code should be used by auditors to report their opinions (p.13)

Rely on more parties on the audit report or benefit from the audit for thus performing auditors the audit in many ways for beliefs and desires of those parties who rely on the audit report.(Gray and Manson, 2005)

Audit Expectations Gap in 2010:

The year 2010 is already running, and with the beginning of the year there were no remarkable trends in the economy to suggest that either the expectations of the users or the performance of the auditors is likely to change significantly. At least there were no such developments indicative of likely changes in audit expectation gap, but regarding the continuous highly regulated business environment and the assurance services that audit firms can provide and assess the benefits of providing these services to management and external users such as:

i) Risk assessments

ii) Business performance measurement

iii) Systems reliability

iv) Electronic commerce

We can deduct that audit expectations gap will be changing to its minimum limits in 2010 depending on the size of the item or error judged in the particular circumstances of its omission or misstatement.


In conclusion, it is not my intent in this limited space and time to cover all the aspects of audit expectations gap issue. However, I have tried only to focus my attention to the major aspects of this issue. These were the definition, components and possibilities of eliminating of audit expectations gap . I have also attempted to illustrate different components of it and explain some of these components in details. To conclude , in this report I have tried to explore some of the criticism claimed against auditors work. Undoubtedly, audit expectations gap is an issue that needs to be studied in details to find out a critical decision about it. Scientific researches have definitely assured the difficulty of eliminating such gap, but a number of different procedures have been suggested as possible ways of narrowing the gap. I tried to illustrate some of these means which I believe should be applied together to eliminate the gap. One of these means was definitely ethical standards that should be adopted by auditors. It has also become clear that recent anti-money laundering regulations can definitely help reduce that gap. Through the report I have concluded that audit expectations gap will be changing to its minimum limits in 2010. I hope at the end of this report that I conveyed to the readers a clear picture about the issue of audit expectations gap.