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

The expectation gap in auditing is defined as “the difference between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are”

Audit Gap can be classified in three different gaps namely:

1. Knowledge gap

2. Performance gap

3. Revolution gap.

Below is a chart explaning all the three gaps.

Ways to reduce expectation gap :

The Key Audit Matters (KAM) are defined as “Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance

The purpose of communicating key audit matters is:

A. Enhancing the communicative value of the report of the auditor by offering better transparency about the audit which was executed.

B. It offers additional information to users of such financial statements in assisting them to understand those matters which in the professional judgment of the auditor, were of critical importance in the audit of financial statements of the relevant period.

C. It might also assist the users of such financial statements to understand the entity and also help in understanding the areas of crucial management judgment in such audited financial statements.

The Key audit matters will definely help reduced the expectation gap and provide more visibility to the shareholders/ investors with the state of affairs of the company.