AUDIT EXPECTATION GAP

IFRS 9: Recognition, Measurement & Impairment of Financial Instruments
July 20, 2018
IFRS 36: IMPAIRMENT OF ASSET
October 12, 2018

AUDIT EXPECTATION GAP

AUDIT EXPECTATION GAP

INTRODUCTION
The expectation gap is the difference ( or gaps) between :

  • What the users of Financial statements and other
    members of the public think that the Auditors should do
    and
  • What the Auditors are actually required by the law and the profession to do.

DEFINITION
Expectation gap is the term used to signify the difference in expectations of users of financial statements and auditor’s expectations concerning audited financial statements. It can also be explained as the difference between the effectiveness of audit engagement what users believe and what auditors believes. i.e. What users believe audit is and what audit actually is.

THE EXPECTATION GAP
There are three main elements in the expectation gap:

A Standard gap: This occurs because of a perception that auditing standards are more prescriptive than they actually are, and that auditors have wide-ranging rules they must follow.

A Performance gap: This occurs because of a perception that audit work has fallen below the required standards.

A liability gap: This arises from a lack of understanding about the auditor’s liability and who the auditor may be liable to.
In addition, there is a perception that auditors have a responsibility for detecting all fraud, whenever this occurs:
High level of expectations about what auditors should do may lead to legal action against auditors if this level of expectations is not met.

CLOSING THE EXPECTATION GAP
A number of strategies exist that could assist in closing the
expectation gap and are follows:

  • The profession should attempt to improve the general level of
    knowledge and understanding about the audit process.
  • Controls over the auditing profession are very important in
    enhancing public confidence.
  •  Significant guidance for auditors and management aimed at
    increasing quality and addressing issues, such as going-concern has been issued by standard setters, professional bodies and all regulators.
  • Open and Candid communication between internal and external auditors, financial management and the audit committee is increasingly been seen as critical in helping reduce the expectation gap. Such communication helps the audit committee to perform their governance role with the necessary transparency and realistic expectations that will help to achieve effective risk management.
  • Enhanced communication between the parties and confirmation of their respective roles and responsibilities should be presented in the audit committee and director’s report to the shareholders. This will ensure that users become much more aware of the various parties roles and responsibilities beyond the understanding they gain from the audit report.
  • The expectation gap will hopefully narrow further as
    financial reporting participants work together even more
    effectively to improve the deterrence and detection of
    financial reporting fraud.

 

PROFESSIONAL SCEPTICISM IN AN AUDIT OF FINANCIAL STATEMENTS.
The public places value on the independent financial statement
audit because it enhances the degree of confidence of intended
users in the financial statements. A high quality audit features the
exercise of professional judgment by the auditor and importantly,
a mind-set that includes professional skepticism throughout the
planning and performance of the audit.

 

WHAT IS PROFESSIONAL SCEPTICISM?
ANSWER: This can be defined as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessments of audit evidence.
They explicitly require the auditor to plan and perform an audit
with professional skepticism recognizing that circumstances may
exist that cause the financial statements to be materially misstated.
i.e. An inquisitive mind

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