Discuss the proposition that the ‗expectations gap‘ has arisen because of the public‘s ignorance and should therefore be resolved by the public themselves

The expectations gap should be reduced by the auditing profession since it is the profession, which suffers as a result of the gap. This is because, the users of the auditors report do not understand it and hence claims for negligence may be raised against the auditor.

A more detailed look at expectations gap follows:-

The Expectation Gap

There has been considerable discussion in recent years on the role of the auditor, and the ‗Expectation Gap‘.

In general terms this can be described as the gap that exists between what the public, especially users of financial statements, believe auditors do (or ought to do) and what the auditors actually do. Such a gap usually surfaces on the unexpected failure of a company.

Various elements of this gap have been identified

(a) A Standard gap
Where the public perceive auditing standards as different from what they actually are.

(b) A performance gap
Where auditors perform below existing standards.

(c) A liability
Where the public does not know to whom an audit is legally responsible.

Potential ways of closing the gap

(a) Understanding financial statements and the audit report

False or unrealistic expectations in users of financial statements are frequent. They may not appreciate the conventions on which accounts are prepared, the inevitable degree of estimation and judgment involved or the test nature of audit work.

Communication with these users to improve their understanding could be improved. The most significant work on this area has been ISA700 Auditors‘ Reports on Financial Statements, which requires the auditor‘s report to define the responsibilities of the auditor and the directors in relation to the financial statements.
(b) Fraud
When questioned, a high proportion of the public believes that the auditor has a responsibility to detect fraud of all kinds, or that he should actively search for fraud. However, deep-seated fraud with wide collusion maybe virtually impossible to identify, given the limitations of audit techniques. The auditor may not reasonably be expected to have discovered a particular fraud in particular circumstances.

Once again, the profession should attempt to explain these limitations to the users of accounts, so that they are aware of the auditor‘s responsibility is to have only a
‗reasonable expectation‘ of detecting material fraud.

Alternatively the auditor could be required to limit the opportunity for fraud in the first place. Requirement could be set for companies and their auditors to review the effectiveness of controls to prevent material fraud, and to report material deficiencies.
(c) Control of the auditing profession
At a national level, legislation to control auditors varies. At an international level IFA produces ISA‘S and ethical guidance which influences good practice. However these pronouncements are not legally enforceable.

Audit failures are sometimes due to poor performance. Education (keeping up to date) should remedy this. Legal action and disciplinary proceedings serve as a warning.

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