Solutions To Narrowing The Audit Expectation Gap: An Essay.

You have accepted an invitation to present at a well-respected conference of senior managers and finance directors. The overall theme of the conference is on current auditing issues. Your report-based presentation will lead to a
discussion on the following:

“The review and evaluation of selected suggestions put forward as a means of narrowing the audit expectations gap ”
This report should include:
• an introduction to the topic, incorporating history/background as appropriate
• the key issues for the auditing profession within this topic; and
• how the situation might develop or be resolved within the next year or so. 

Processes to Reduce Audit Expectation Gap

Auditing is the process of inspecting the financial reports of the business organizations in order to confirm that there is not any material misstatement or frauds in them. In the process of auditing, one of the major concepts is the Audit Expectation Gap. Audit expectation gap can be defined as the difference between the expected and actual performance of the auditors (Gold, Gronewold and Pott 2012). As per the American Institute of Certified Public Accountants (AICPA), audit expectation gap can be described as the gap or difference between what the users of financial statements and public expect the auditors are responsible for and what the auditors believe what their responsibilities are (Ruhnke and Schmidt 2014). In many of the cases it has been seen that the there are difference between the performance of the auditors. The concept of audit expectation gap has been developed out of this concept. In addition, audit expectation gap can also be defined as the gap between the effectiveness of the process of audit engagements. Thus, it can be said that audit expectation gap is a vast area that helps to identify the gap in the expected and actual performance of the auditor (Porter, hÓgartaigh and Baskerville 2012).

Over the decades, the users of financial reports target the auditors for not doing their jobs in the appropriate manner. This process leads to the development of audit expectation gap of the auditors. However, some specific methods are there for the reduction of audit expectation gap. Some of the methods are discussed below:

Expanded Audit Report: Many research programs have been conducted for the investigation of the messages communicated by the auditors in the financial reports. In this regard, expanded audit report plays an important part. It has been seen that the users of financial reports perception regarding the responsibilities of management and auditors have been changed with the introduction of expanded audit reports. The wording modification of the auditor’s report has significantly changed the nature of audit report of the companies (Velte and Freidank 2015). In case of the bankers, it has been seen that they have found that the expanded audit reports are more understandable and useful when compared with the short form of audit reports. According to most of the research and studies in the same filed, it has been seen that the expanded audit report is useful to provide full understanding of the significance, nature and scope of the audit process and it also creates influence the user’s perception regarding the role of the auditors. Thus, based on the above discussion, it can be said that the expanded audit report has significant role in redoing the audit expectation gap.

Pros: Expanded audit reports provide the users with the detailed financial and accounting information of the company. Thus, the users can judge the true financial health of the company. In addition, the investors of the companies use this expanded audit reports in order to make their investment decisions (Mgbame, Eragbhe and Osazuwa 2012).

Auditor’s Responsibilities

Cons: It needs to be mentioned that often expanded audit reports are polished on short-term basis like half yearly pr quarterly. In many cases, it can be seen that the expanded audit reports put overemphasis on the short-term results of the companies that harm the company and many of the stakeholders in many ways.

Education: According to many studies and researches, knowledge of the users has influence on the audit expectation gap. Thus, it can be said that education has significant role to play in narrowing the audit expectation gap (Ihendinihu and Robert 2014). Many studies state that the educated and knowledgeable users place less responsibility on the auditors. On the contrary, less educated and knowledgeable users blame the auditors largely for audit expectation gap. More educated and knowledgeable users have less expectation from the auditors regarding assurance. Thus, many of the researchers state that one of the major ways to narrow the audit expectation gap is to make the users and public aware about the nature and limitations of the audit process. For this reason, it is necessary to analyze and evaluate the advantages and disadvantages of the audit process in every possible chance. In addition, the audit reports must indicate the effectiveness of the audit assurance. In addition, the role of the auditors needs to be re-examined (Bowie, Bradley and Rushmer 2012).

Pros: The main benefit of education is that it helps to narrow the audit expectation gap in a significant manner. With the help of education and knowledge, users become more knowledgeable about the roles and responsibilities of the auditors.   

Cons: Education makes the users know about the roles and responsibilities of the auditors. Thus, it may happen that the uses interfere in the works of the auditors. This process reduces the effectiveness of the audit operations.

Structured Audit Methodologies: With the help of decision aids of the auditors, it is possible to reduce the audit expectation as this process helps to reduce the legal liabilities of the auditors. The business organizations able to reduce the audit expectation gap with the adoption of structural methods of audit operations. The auditors of the companies become able to find conclusive financial and accounting information with the help of structural audit methodologies. According to many of the researchers, auditors use the decision aids in order to take effective audit decisions (Okafor and Otalor 2013).

Pros: With the assistance of structured audit methodologies, it is possible to reduce the audit expectation gap from the audit process. On the other hand, structured audit methodologies provide the auditors with the aids to take effective decisions (Holm and Zaman 2012).

Cons: Many of the researchers consider the aspects that the structural method of date collection can lead to the certain dysfunctional aspects of the companies. This is the major disadvantage of structural audit methodologies.

The auditors have the responsibility to render the opinion whether the financial statements of the company are developed in the fair way or not. In this regard, the auditors have the responsibility to carry their works as per the auditing standards and principles. In the first stage, the auditors need to make an enquiry about the management and other aspects so that the auditors can gain the undemanding about the business processes of the companies. In this aspect, the auditors need to analyze and evaluate the internal control of the company. After gaining the understanding, the auditors need to perform various analytical techniques on different accounting and financial variances of the companies. In this process, the auditors need to test the documentation process of various accounting and financial reports. The auditors also need to observe the count of the inventory of the company. The auditors need to perform these job responsibilities in order to make the public understand the role of auditors (Salem 2012).

Expansion of Auditor’s Responsibilities and Enhancement of Auditor Independence

In the process to narrow the audit expectation gap, there is a strong need to expand the responsibilities of the auditors and to enhance the independence of the auditors. Most of the researches all over the world suggest that the auditor’s responsibilities need to be expanded in regards to detect the fraud in the financial statements and reports. Apart from the existing responsibilities of the auditors, there is a proposal of four additional responsibilities of the auditors. First, the auditor’s analysis and evaluation of the internal control system of the business organization. Second, the auditors must develop a report regarding the compliance. Third, the auditors of the companies need to report directly to the auditing regulators. Fourth, there must be association between the auditor and the interim financial information of the business organizations. All these aspects need to be done in order to narrow the audit expectation gap from the auditing profession (Mock et al. 2012).

Pros: From the above discussion, it can be said that the expansion of auditor’s responsibilities and the enhancement of auditor’s independence play an integral part in narrowing the audit expectation gap. The operational area of the auditors will become broad after the expansion of their responsibilities. In case the expansion of the auditor’s independence, they will be able to carry on their audit operations more freely. All these aspects will create benefits for the companies (Simnett and Huggins 2014).     

Cons: Expansion in the auditor’s responsibilities will create more job pressure on the auditors as they will be more responsible for the audit works of the companies. On the other hand, the increase in auditor’s independence will make the auditors more accountable to the audit clients. These are the major disadvantages.

Conclusion:

Based on the above discussion, it can be said that audit expectation gap is a major concern in audit profession. However, there are some major ways to reduce the audit expectation gap from the audit profession; they are the introduction of expanded audit report, education to the users of audit report, adoption of structural audit methodological and others. Apart from this, it can be seen that the auditors needs to perform their audit operations in the perfect way in order to make the people understand the roles and responsibilities of the auditors. Lastly, the expansion of the auditor’s responsibilities and independence largely contributes towards narrowing the audit expectation gap.

References:

Bowie, P., Bradley, N.A. and Rushmer, R., 2012. Clinical audit and quality improvement–time for a rethink?. Journal of evaluation in clinical practice, 18(1), pp.42-48.

Gold, A., Gronewold, U. and Pott, C., 2012. The ISA 700 auditor's report and the audit expectation gap–do explanations matter?. International Journal of Auditing, 16(3), pp.286-307.

Holm, C. and Zaman, M., 2012, March. Regulating audit quality: Restoring trust and legitimacy. In Accounting forum (Vol. 36, No. 1, pp. 51-61). Elsevier.

Ihendinihu, J.U. and Robert, S.N., 2014. Role of Audit Education in Minimizing Audit Expectation Gap (AEG) in Nigeria. International Journal of Business and Management, 9(2), p.203.

Mgbame, C.O., Eragbhe, E. and Osazuwa, N.P., 2012. Audit partner tenure and audit quality: An empirical analysis. European Journal of Business and Management, 4(7), pp.154-162.

Mock, T.J., Bédard, J., Coram, P.J., Davis, S.M., Espahbodi, R. and Warne, R.C., 2012. The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice & Theory, 32(sp1), pp.323-351.

Okafor, C.A. and Otalor, J.I., 2013. Narrowing the Expectation Gap in Auditing: The Role of the Auditing Profession. Research Journal of Finance and Accounting, 4(2), pp.43-52.

Porter, B., hÓgartaigh, C.Ó. and Baskerville, R., 2012. Audit Expectation?Performance Gap Revisited: Evidence from New Zealand and the United Kingdom. Part 2: Changes in the Gap in New Zealand 1989–2008 and in the United Kingdom 1999–2008. International Journal of Auditing, 16(3), pp.215-247.

Ruhnke, K. and Schmidt, M., 2014. The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business research, 44(5), pp.572-601.

Salem, M.S., 2012. An overview of research on auditor's responsibility to detect fraud on financial statements. Journal of Global Business Management, 8(2), p.218.

Simnett, R. and HAccounting Horizons, 28(4), pp.719-747.

Velte, P. and Freidank, C.C., 2015. The link between in-and external rotation of the auditor and the quality of financial accounting and external audit. European Journal of Law and Economics, 40(2), pp.225-246.uggins, A., 2014. Enhancing the auditor's report: to what extent is there support for the IAASB's proposed changes?.