List five financial statement user expectations responsible for the audit expectation gap

Expert Solution

Financial statement user expectations responsible for the audit expectation gap:

1. The Financial statements are prepared in accordance with the GAAP and other regulatory requirements and auditors audit the same to confirm whether there are any deviations from the required disclosures. To understand the financial statements, users need to have some level of understanding of the financial statements. The lack of accounting education to users may be responsible for the gap.

2. Users are of the opinion that the audited financial statements can be used as proof or as an evidence for them to beleive in the affairs of the company and invest in them. But audited financial statements refers to the opinion given by the auditor that the financial statements are free from material misstatements. They can't be based upon for decision making. Users need to use other data in addition to the financial statements to make decisions.

3. Users expect that auditors provide absolute assurance, that is 100% assurance. But auditors provide reasonable assurance and not absolute assurance.

4. Users expect that, auditors examine entire financial information of the entity being audited but auditors have certain inherent limitations of audit and one among them is time constraint. Auditors can't check entire financial transactions, that is why they implement certain analytical procedures like sampling. Thus, only if the sample data has material misstatements, auditors are able to trace them out.

5. Users expect Auditors to do thorough examination of the affairs of the company. But it is out of scope to the auditor. If the employees and management perpetrates into a humongous fraud, auditor may not be able to find when the fraud is supported by the management.

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