The Evolution Of Audit Concepts Accounting Essay

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The primary aim of an audit is to judge the correctness of financial statements and establish their reliability and supporting accounting documents for a particular period. The dominant principle of audit is the examination of the accounts or statements made by an accountable party with a view to reporting to the person to whom the account is rendered on its truth or falsity.

The economic decisions of many people in the society depend upon the financial statements published by a firm. The decisions taken by such users of accounting information will be a fair one only if the financial statements on which they rely, reflect the true picture of the operating and financial performance of the firm. In many cases the purposes of the provider of accounting information go against those who use the information for their subsequent economic decision pertaining to the firm. Hence, there is an absolute need for an independent and competent accounting authority which can investigate into the true and fairness of the accounting information shown in the financial statement and inform whether the accounting information reflects the true and fair picture of operating and financial performance of the firm.

Evolution of audit concept:

The term 'audit' is derived from the Latin word 'audire' which means to hear and auditor literally means 'hearer'. In the early 1900s the auditors were engaged to provide almost absolute assurance against fraud and intentional mismanagement. However, there was a shift from fraud detection to determining fairness in financial statement reporting. The reason behind this shift was that in an increasing volume of business activities, fraud detection has become less feasible and the separation of management from ownership has made it necessary to determine the fairness of financial reporting. Hence, in the present day business environment, the concept of auditing focuses on expressing a fairness opinion on the reliability of financial statements prepared on the basis of accounting records.

There are two main elements in audit work, namely, analytical review and substantive testing. Analytical review is a process of making comparative analysis so as to assess the overall soundness of the firm. Substantive testing involves the direct verification of resources and obligations of the firm in the field and requires checking of physical verification of plant and machinery, inventories, creditors and debtors of the firm. Although the auditors developed sophisticated statistical techniques to design efficient sampling methods to cut these costs, substantive testing consumes the bulk of the auditing budgets. In a competitive business environment, now the auditors have shifted their production function from expensive substantive testing towards inexpensive analytical review. Most of their auditing works could now be done without leaving the office.

Now the flow of family savings into investment in corporations and the allocation of resources through securities markets have become highly dependent on the accounting information published by the management. To increase the confidence of fund providers and investors, they are supposed to be provided with an independent and expert opinion on the fairness of the financial and operating results of the firms. This has resulted in the new developments which demand for the services of specialists in auditing

Audit expectation gap:

In general, the term 'expectation gap' is used to denote the gap existing between a group of people who are considered to be experts and the group which intends to rely on that expertise. In the field of auditing, the perception of the public on the auditor's role and responsibility differs from that of profession. The existence of this gap is referred to "audit expectation gap". This term is not only used in accounting sense but also in other fields, for example, information systems industry, (Trauth et. Al, 1993); the difference existing between the expectation of advertising agencies and their clients for campaign values (Murphy and Maynard, 1996).

Conceptual definitions:

The concept of 'audit expectation gap' was first propounded in the literature of auditing by Liggio (1974), according to whom, audit expectation gap is said to exist when there is the difference between the expected standard of performance by the independent accountant and the users' expectation on the independent accountants' performance. In the words of Tweedie (1987), audit expectation gap seems to exist as it appears that users seem to require (a) protection against the fraud and misappropriation of funds; (b) early advice on the expected financial distress of the firm; (c) a guarantee for the financial stability of the firm and (d) simplified audit reports capable of being understood by users.

Factors contributing to the expectation gap:

A review of literature on audit expectation gap has identified the various causes contributing to the existence of an audit expectation gap. The following are some of the causes for audit expectation gap:

Complicated nature of an audit function: one of the important reasons for the audit expectation gap is the poor understanding of the public of audit function and procedures. In the words of Lee and Azham (2008), the objectives of auditing and the role of auditors are dynamic and keep changing in the changing business environment. According to Leung, et al (2004), the audit practices had undergone various evolutions during the past centuries leading to more complexity in terms of the understanding by the general public.

Conflicting role of auditors: According to Gloeck and Jager (1993) the conflict arising between auditors and their clients in respect of the provision of 'non-audit services' for audit clients has contributed a great deal to the expectation gap. Leung, et al., (2007), pointed out that many accounting firms have started providing a wide range of services and products such as, risk assessment, business performance measurement, information reliability systems, electronic commerce and health and elder care performance measurement.

Retrospection evaluation: Shaked and Sutton (1982) say that the audit profession is subject to heavy criticism due to the fact that the society does not have the ability to assess the quality of a good audit and its performance. This is because of the reason that it is very difficult for any one to determine the quality of an audit. Humphrey, et al (1992) is of the opinion that it is unfair to determine the quality of an audit after determining the benefit of knowledge being arrived from the audit process.

Time lag in responding to changing expectations: Humphrey, et al. (1992) pointed out that audit expectation may occur due to the time gap between the accounting profession identifying and responding to continually changing and expanding public expectations. Tricker (1982) argues that corporate enterprises are under a new crisis requiring corporate accountability which in turn resulted in the new demand on the audit function and subsequently to auditing standards and practice.

self-regulation process of the auditing profession: Like other professions, the auditing profession is also operating under a self-regulatory framework (Humphery, et al., 1992). Shaked and Sutton (1982) have highlighted that the self-regulatory framework requires an auditing profession to maintain service quality through out the auditing process and procedure as the audit beneficiaries are not capable of measuring the quality of audit service. Byington and Sutton (1991) asserts that self-regulation has resulted in to the creation of licensing boards and other government regulations which restrict practices of the profession and controls the minimum acceptable level of service quality and entry into the profession.

The unawareness and unreasonable expectations: Humphrey, et al. (1993) says that the existence of audit expectation gap can be attributed to the public's misconception of the nature, purpose and capacities of an audit function. This ignorance of the public is likely to cause unreasonable expectations on the role and responsibilities of the auditors. According to Lee and Azham (2008) as a result of unreasonable expectations of the auditors, the public fails to recognise the contribution of auditors to the society and spoiled the value of the profession. Porter (1993) and Porter and Gowthorpe (2004) and Lee, et al (2007), from their analyses, have identified duties which considered to be "unreasonable" expectations of the auditor. They also argue that the public is the free raider of an audit function and hence the public may insist that auditor's carryout those duties that are not cost-beneficial for auditors to perform. Hence, the so called unreasonable expectation cannot be avoided as long as the public are not required to bear the cost of an audit function. This has lead to the fact that the existence of an audit expectation gap may be due to unreasonable expectations of auditors.

How to eliminate the expectation gap:

Sikka et al, (2003) argue that given the nature of the elements of the audit expectation gap, it is very difficult to eliminate altogether. It becomes very difficult for any one to measure the perceived performance of an external auditor. However, audit expectation gap is capable of being substantially reduced though it is not possible to eradicate fully.

Researchers and practitioners have suggested many recommendations for reducing the expectation gaps. One of the recommendations made is demanding a comprehensive audit report providing a broader scope for more and reliable information for the users. Another measure is demanding the reframing of the standard of performance of external auditors dealing with fraud, illegal acts which will facilitate the auditors be independent (Pierce and Kilcommis, 1995).

Yet another important suggestion is that steps must be taken by responsible bodies to provide auditing education among the public which will surely reduce the expectation gap. Many experts say that audit education would partly solve the problems of unreasonable expectation gap, though it would never address deficient standards of substandard performance (Porter, 1993).

But, McDonald Commission argues that the expectations of the users of financial statements and the public are reasonable only and are with the reach of auditors within the reasonable framework and therefore audit education would not prove to be effective.

In the words of Sikka et al, the concern of audit expectation gap can be very well address by widening the responsibilities of audit profession. Further redesigning the professional framework would also facilitate the resolving the crisis of audit expectation by enforcing new standards for the audit profession.

In the words of Pierce and kilcommins, the misunderstanding of auditing exists in the minds of users in the following ways:


Ethical and legislative framework

Liability ; and

Audit report

There exist a widest gap in the process of detecting and reporting of fraud by external auditors. In relation to the ethical and legal frameworks are concerned, there is a big gap in respect of issues such as auditors' independence, auditors' appointment and audit regulation. As far as the liability of an auditor, there exists a gap as the users of the accounting information and the public at large are not aware of the role and responsibility of the external auditors.

However, it could also be argued that the substandard performance component of the expectations gap already embraces the liability gap as auditors are encouraged to under perform in the absence of any statutory duty of care to third party shareholders- especially since no economic incentives exists for them to owe a duty of care to such shareholders.

Anti-money laundering:

The main goal of many criminal activities is to generate a profit for the individual or group that carries out the act. Money laundering is the process being attempted to distinguish these proceeds from their illegal origin. Money laundering is another serious issue in corporate scenario and has become a social evil. Hence there is a proper investigation into this issue in order to find out suitable measures to eradicate the problem.

In the initial stage of money laundering, the money launders used to mix the illegal profits into the financial system by breaking the large amount of illegal profits into smaller amount of cash and then money would be deposited directly into bank or by purchasing different kinds of monetary instruments which would be collected and deposited into accounts in some other location. This would facilitate the money launders to mobilise the illegal profits conveniently from its origin to the places where there is less risk or no risk.

Once the funds have been successfully entered into the financial system, and then come the second stage of money laundering. In this stage, the launderers resort to a series of conversions or movements of the funds for distancing them from the sources of origin. The funds might have been diverted through the purchase and sale of different kinds of financial instruments across the world. Probably, the funds thus floated would travel into those jurisdictions that would not provide opportunities for proper and legal investigations. In some cases, launders would redirect the funds in the form of payments for goods and services which would give them a legitimate appearance.

Then the launderers would enter into the third stage which would facilitate them to make an integration of funds in the places where legalisation of funds would become easier, where the launders would convert the funds into legitimate investments in to real estate, business operations, luxurious assets and so many other investment options.

As money laundering is a consequence of almost all profit generating crime, it can occur practically anywhere in the world. Generally, money launderers attempt to seek out countries or sectors in which there is a low risk of detection due to weak or ineffective anti-money laundering programmes. Because the objective of money laundering is to get the illegal funds back to the individual who generated them, launderers usually prefer to move funds through stable financial systems.

The funds so mixed into the financial system would probably endanger the ethical standards of the international financial system. If such illegal funds are actively put into the financial system, the institutions would be drawn into the complicity with criminals and become an active part in the overall criminal network.

A great deal can be done to fight money laundering, and indeed, many governments have already established comprehensive anti-money laundering regimes. These regimes aim to increase awareness of the phenomenon - both within the government and the private business sector - and then to provide the necessary legal or regulatory rolls to the authorities charged with combating the problem.


One of the serious issues concerning the accounting and auditing profession is the prevalent audit expectation gap. The question of whether the expectation gap can be eliminated or not has not found an answer in view of solving the problem of audit expectation gap. In the words of Sikka, Puxty, Cooper and Wilmott, audit expectation gap has become very difficulty to be eradicated as there exists conflicting understanding of audit principles.