Activity Based Risk Evaluation Model of Auditing

HOME >> BASIC CONCEPTS >> AUDIT OBJECTIVE >> CREDIBILITY >> EXPECTATIONS GAP

Expectations gap

The expectation gap ^[fn] is the gap between the auditors' actual standard of performance and the various public expectations of auditors' performance (as opposed to their required standard of performance). Many members of the public expect that:

• auditors should accept prime responsibility for the financial statements,
• auditors 'certify’ financial statements,
• a 'clean’ opinion guarantees the accuracy of financial statements,
• auditors perform a 100% check,
• auditors should give early warning about the possibility of business failure, and
• auditors are supposed to detect fraud.

Such public expectations of auditors, which go beyond the actual standard of performance by auditors, have led to the term 'expectation gap’.

According to the auditing profession, the reality is that:

• management, as preparers of the financial statements, is primarily responsible for their content, even though management may request the auditors to prepare them;
• an audit only provides reasonable assurance that financial statements are free of material misstatement. (See The CPA Journal entitled The Past and Future of Reasonable Assurance);
• an audit is no guarantee of solvency or financial performance;
• auditors are only required to test selected transactions - it does not make economic sense, in to-days world, to check all transactions; and
• although auditors plan and conduct an audit engagement with an attitude of professional skepticism recognizing that circumstances such as fraud may exist that will cause the financial statements to be materially misstated, an audit does not guarantee that fraud will be detected.

Components of the expectation gap

The expectation gap may be decomposed initially into two components: the requirements gap and the feasibility gap.

Requirements gap. This is the gap between auditors' actual standard of performance and the performance required of them by the current standards of society. The required standard of performance is the standard of performance set out in both professional standards and statutes, the latter being subject to interpretation through courts of law. The requirements gap may be further divided into:

• Performance gap: The requirements gap is the gap between the actual standard of performance and the standard of performance determined by reference to professional standards and statutes.
• Standards gap: This is the gap between the standard of performance as determined by reference to professional standards and statutes, on the one hand, and society's required standard of performance on the other. Society's required standard of performance, as stated above, is the standard of performance set out in the statutes and professional standards augmented by the decisions handed down in the courts of law.

Feasibility gap. The feasibility gap is the gap between society's required standard of performance and various public expectations (the expected standard of performance). The examples given in the opening paragraphs of this section, including expectations that auditors are responsible for the preparation of the financial statements that auditors 'certify’ financial statements, and the failure to recognize the limitations of an audit ^[fn], fall into the feasibility gap.

Narrowing the gap

It is in the interests of both the public at large and the auditing profession that the expectation gap be narrowed as much as is practicable ^[fn]. This may be achieved by individually considering each component of the gap.

Performance gap. The performance gap is caused by the failure to conform with statutory requirements and professional standards. This gap can be narrowed by closer monitoring of auditors’ performance and by improving the professional education of practitioners. Performance monitoring includes peer review (the review of work policies, procedures and work performed in an auditing firm by a member of another auditing firm) and quality reviews or the systematic evaluation and review of the practices and procedures performed within an auditing firm by a committee or task force established within the firm. Finally, improved or more extensive disciplinary procedures assists in promoting greater compliance with statutory and professional requirements.

Standards gap.The standards gap exists where statutes and the professional standards fail to properly reflect the appropriate standard of performance deemed appropriate by the courts of law. This gap may only be narrowed by establishing professional standards and legislation that anticipates the feasible demands of society, as handed down in common law decisions. As this would require both a voluntary extension of auditors' duties and an extraordinary degree of foresight, this gap is unlikely ever to be completely eliminated.

Feasibility gap. The feasibility gap is caused by society’s increasing, and often unrealistic, demands for accountability. One way in which the gap may be narrowed is by improving public education in order to demonstrate to the public that existing professional standards and legislative requirements are adequate. Alternatively, auditors may either accede to society's more reasonable demands or improve the manner in which they communicate their findings to financial statement users. The accounting profession has adopted this approach in the past on a number of occasions and in a number of countries when a revised professional standard was released requiring the content of the standard audit report to be expanded in order to better explain the objectives and limitations of an audit to readers of the report. (However, see The CPA Journal editorial entitled The Audit Opinion.)

Copyright, Australian Educational Research Pty Ltd. Any person accessing this site agrees to the Terms of Use.