Question

The audit report was recently expanded from the previous six paragraph format. The new format includes a section on key audit matters. This was an attempt to narrow the expectations gap. Discuss the expectations gap and whether you think the new audit report is likely to have any significant effect.

Answer 1

ANS : the expectations gap :

  

Expectation gap is the difference between public perception of an auditor’s role and responsibilities regarding audit engagements and what the auditor’s legal responsibilities actually are. Users of financial statements often believe that auditors are responsible for preventing and detecting all frauds and that they test transactions and balances more comprehensively than what actual practice is.

The expectation gap may be categorized into:

• Performance Gap i.e. the difference between the level of work an auditor is required to do by the auditing standards and what public believes they ought to do.
• Liability Gap i.e. the misperception regarding legal liability of the auditor.

The auditing process has certain limitations. For example, auditors employ sampling, thus testing a subset of transactions instead of testing all the records during a financial year. There is a chance that a sample chosen does not truly represent the population to which it relates. Another reason is that some of the evidence available to the auditor is persuasive but not conclusive. Therefore, an auditor’s opinion involves judgement and there is a rare possibility that the opinion given is false e.g. the opinion that financial statements are free from material misstatement, but they actually contain material misstatement.

Addressing the expectation gap in audit

There is an urgent need for audit to evolve and to listen to the public’s legitimate concerns about audit. It’s vital to ensure that the knowledge and performance gap components are addressed as part of properly addressing the evolution of the audit profession.

Closing the expectation gap in audit will support a more constructive discussion about how audit can evolve to meet society’s expectations of it. We call upon all stakeholders connected to the audit profession, including professional accountancy bodies, audit firms, regulators, journalists and politicians to contribute towards reducing the expectation gap in audit.