Audit Expectation Gap according to Potters - Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: INTRODUCTION According to Potters (1998), Audit expectation gap is the difference between what society or user of financial accounts expects auditors to achieve in audit process with what the auditors are supposed to perform as their responsibility set out by audit standards in company’s act. Expectation gap exists because of public ignorance on understanding the role of auditors in auditing company financial reports. For example, most of the users think it is auditor’s responsibility to prevent fraud in the company or prepare financial reports of the company. This above misconception of auditors’ responsibility brings about expectation gap between what society expects auditors to do and their actual responsibility. According to ASCPA and ICAA (1994), gap that exists between external auditors understands of their role and duty and the expectations of various users of the financial statements and the general public regarding the process and the outcome of the external audit. I.e. the expectation by users of financial statements that auditor should detect and prevent error and fraud as a duty while it is not his duty but of the directors. The users may conceive the auditor’s role as including; protecting the company against fraud and irregularities, providing early warning of future insolvency i.e. certifying the company as a going concern, providing useful general assurance of the financial wellbeing of the company and its continued profitability. In addition, most users of financial statements believe that the auditor prepares the statements and should, therefore, be in a position to explain the performance results of the company. Consequently, some other users of the financial statements do not understand the audit opinion issued. According to company act, company management is required to maintain proper books of accounts with full disclosure in order to fully explain company financial performance and position. The directors are supposed to approve the financial statements that they are true and reasonably prepared accepting full responsibility for its preparation. The company act brings out the role of auditors to be acting as a watchdog of the shareholders and other stakeholders of the company. Their role in this position includes reporting financial performance and position of the company to shareholders, ensuring audit report is prepared on time in order to be presented at annual general meeting and expressing either qualified or unqualified opinion on truth and fairness of the financial statement (O'Regan, 2003). Apart from responsibilities stipulated in the Company Act, auditors are supposed to fully comply with the International Audit standards. For example following guidelines set in the International Audit Guidelines (IAGs) which form part of inspection standards used in Australia. This report entails a survey of the society on what they know about audit responsibility in auditing company financial reports, carrying out analysis on their feedback and recommendation on how to reduce audit expectation gap in Australia. SURVEY ON AUDIT EXPECTATION BY SOCIETY The study was carried out on individual who have little knowledge of accounting practice. The survey exempted accountants, auditors or accounting students who have completed units past 100 levels from participating. They were exempted because they have full knowledge of the responsibilities of auditors and management thus not giving the expected results on a public misconception of Auditors responsibility. The table below shows response from survey conducted; Respondent Occupation Perception of audited financial statements 1  Doctor  It is summary of company undertaking for a whole year in order to determine profit or loss. He further suggested that auditor is the one responsible in preparation of the financial statements such as statement of financial position and statement of financial performance. 2  Teacher  Auditors are supposed to check each item of financial statement in order to identify errors and correct them. Therefore, audited financial statements are supposed to be error free. In case of any error in the audited financial report auditors should be liable for not disclosing or failing to detect the error. 3  Social worker  Auditors are shareholders watchdog since they ensure that management does not defraud them either by embezzlement of funds or non-disclosure of all information on company performance. 4  Pilot Audited financial statement do not make sense since auditors are always preparing them basing on guidance given by management. Therefore, Auditors can be bribed or provided with altered information by management in order to conceal fraud or inefficiencies. Audited or non-audited reports are the same but corporate governance of a company brings the difference. 5 Government official  Auditing financial statement is summary of the day-to-day financial transaction of the company. For example consolidation of daily sales and expenses in order to prepare statement of financial performance. Individuals with no information about auditing and financial statement includes, Non-respondents Occupation 1  Teacher 2  Flight attendant 3  Driver 4 Police 5 Teacher 6 Civil Engineer The above survey was carried out randomly within my neighborhood on eleven respondents. Five respondents had something to explain on auditing and financial statement. On the other hand, six respondents didn’t have any clue on what auditing and financial statement entails. RESULTS ANALYSIS According to doctor’s reaction, we can note that he presumes that audited financial report is a summary of the financial transaction at the end of a financial year. The explanation of the doctor’s understanding is incorrect since it is not the work of the auditor to summarize or consolidate financial statement. Management is responsible for the preparation of financial statement while the auditor is to check on the truth and fairness of the already prepared financial statement. Auditor is supposed to issue an opinion regarding preparation either qualified when there are contentious issues in preparation or problem ongoing concern of the business or disqualified report when there is no problem in preparation and going concern of the business. The company act stipulates fully the responsibility of the directors and management team that is separate from the responsibility of the auditors. Therefore, such claims made by the doctor shows that there are audit expectation gap in the society due to lack of enough public knowledge of who is responsible for financial statement preparation and what the work of auditor or audited financial report. The gap is brought out by the misconception of the auditor’s responsibility from what he/she expected for by the auditing standards and regulation. Secondly, the teacher assumes that it is work of auditor to counter check all transaction for the year in order to identify and correct errors made by management in the preparation of the books of account. According to ISA 530, the auditor can carry out audit sampling by selecting few items financial statement or books of entry in order to check the level of materiality. The auditor can carry out substantive testing to detect the level of materiality too. Therefore, it is incorrect to say that auditors responsibility is to counter check each transaction entered in the financial statement of the company in order to produce an audit report. The auditor is only required to carry out the sufficient test and enough evidence to arrive at an opinion on true and fairness in the preparation of the financial statement by the management. Further, the teacher purports that in case auditor fails to detect the errors, he/she will be liable since it is the responsibility of the auditor. The assertion is incorrect since ISA 240 on ‘Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements’ stipulates the responsibility of auditor in detection and reporting error or fraud. The standard lays down the responsibility of the auditor to be seeking reasonable assurance that no material misstatement has occurred in preparation of financial statement. Therefore, they are supposed to plan their work adequately to detect reasonable errors or fraud. On the other hand, section puts forward that it is the responsibility of the management to identify and prevent errors and fraud by instituting sufficient internal control that is continuously monitored and reviewed. Therefore, the auditor cannot be held responsible for not detecting errors or fraud, but he/she is expected to carry out audit work in a reasonable manner in order to detect a material misstatement. Auditors are the watchdog of the shareholders of the company. Therefore, the social worker assertion is correct. The role of auditor as watchdog of the company can be illustrated by duties of auditors in company act which includes; opinion on true and fairness of financial statement prepared by management, disclosing any remuneration to directors which was omitted from financial statement, certification of the reports on prospectus that they are true and consistency of director’s report with that in the financial report. Auditor’s failure to deliver above duties can lead to legal suite and withdrawal of practicing license since he/she has failed to adhere to professional duties and responsibility accorded to an auditor. According to the pilot point of view, she does not trust either audited report or unaudited report due to cases of collusion between auditors and management. He further suggests that she can trust financial report depending on corporate governance of the company. Her assertions are correct, but she is approaching it from a different perspective that it might not be substantive. According to international auditing standards and company act, it is a requirement to determine the independence of the auditor before given audit assignment. Further, auditors are selected in annual general meeting thus transparent which guarantees shareholders auditors’ independence. Though true and fairness of the audited or unaudited financial statement depends on corporate governance structure, it is more dependent on auditor’s independence that is the role of shareholders not a board of governance. Lastly, government official assumes that it is the responsibility of the auditor to record and summarize day-to-day transaction of the company at the end of each financial year. The assertion is incorrect since according to company act, it is responsible for recording day-to-day transaction and preparation of summarized financial statement at the end of financial year. The recording and preparation should be in accordance with accounting policies and regulation that it must be consistent. The work of auditor is to check on the adherence to such standards and advise management accordingly and express opinion on true and fairness of the financial statement to the users or stakeholders to the company reports (Alleyne, & Howard, 2005). Conclusion In conclusion, we can note that audit expectation gap exists in Australia since one respondent got the role of auditor while four respondents had wrong information on auditors’ responsibility. Six respondents had no information on audit or financial statements. Therefore, it is important for responsible government and non-governmental agencies in Australia to enlighten public on issues concerning accounting and auditing in order to reduce audit expectation gap. In addition, expansion of the audited report should be adopted to include more information elaborating what auditors do and his/her responsibility on the same. ISA 700 on ‘Audit reports on financial statements’ requires auditors to have a paragraph explaining the nature and scope of the audit conducted and explain the respective responsibility of management and auditor in relation to preparation of the financial statements. Australia should also broaden areas covered by the auditor in respected to frauds. It is in accordance with ISA 240 on ‘fraud and error’, where it requires auditor to report to the users of the financial statements if there is material misstatements as a result of fraud and any other irregularities. The strategies above will help greatly in reducing audit expectation gap in Australian and improve perception and role of audit professional in the society. REFERENCE Alleyne, P. & Howard, M. (2005), “An exploratory study of auditors’ responsibility for fraud detection in Barbados”. Managerial Auditing Journal. 20(3):284-303. Australian Society of Certified Practising Accountants (ASCPA) and The Institute of Chartered Accountants in Australia (ICAA) (1994), A Research Study on Financial Reporting and Auditing - Bridging the Expectation Gap, Melbourne. Bierstaker, J., Abbott, L., & Parker, S. (2010). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on IIA’s Exposure Draft of 2010 International Standards for the Professional Practice of Internal Auditing. Current Issues In Auditing, 4(2), C1-C4. doi:10.2308/ciia.2010.4.2.c1 Porter B.A. (1988), “The Audit Expectation Gap”, Massey University New Zealand Discussion Paper No.72. O'Regan, D. (2003). International auditing. Hoboken, N.J.: J. Wiley & Sons. Read More