PRESENTATION OUTLINE

1.0

Introduction
1.1
Accounting Vs Auditing

2.0

Part I
2.1
2.2

Evolution Of Audit Concept

Causes Of Audit Expectation Gap

3.0

Part II
3.1
Evidence Of Audit Expectation
Gap: By Countries

4.0

Part III
4.1
Conclusion & Recommendation

5.0

Q&A

INTRODUCTION ACCOUNTING VS AUDITING

ACCOUNTING
1.Keep track of transactions
2. Information provisioning through
financial reporting to end -users

1. Authenticates the correctness of

record
keeping
and
appropriateness of information
2.Authentication
based
on
professional code of ethics and
regulation

PART I- EVOLUTION OF AUDIT

CONCEPT

Year 1853

Beginning Audit
- Latin word audire
- To hear and hearere

Year 1990s

Now

-Fraud
detection

- Determine
fairness of
in financial
reporting

- Separation of
ownership &
management
coupled with the
complexity of
companies with
several financial
scandals

Part I- evolution of audit concept (

Cond)
ANALYTICAL
REVIEW
Structural, temporal
and cross sectional
comparative
evolution
of
the
financial report to
assess its overall
soundness.

AUDIT WORK

SUBSTANTIVE
TESTING

Direct verification of the resources

and obligations of the firm in the
field, and requires costly checking
of physical plant, inventories,
creditors and debtors of the firm.
Consumed the bulk of auditing
budget.
Pressure from the competition,
auditors shifted from expensive
substantive
testing
towards
inexpensive analytical review.
Audit work now can be carried out
without leaving the office, with less
time, labour and costs.

PART I- EVOLUTION OF AUDIT CONCEPT (

COND)
Auditor hired by the
corporate managers and
directors.
The real clients of the
auditors, the investor never
see the auditor.
Only when corporation runs
into serious financial trouble,
fairness and quality of the
audit work will be question.
But more than 99% of the
time, no questions raised
about the quality of the
audit.

AUDIT EXPECTATION GAP

Users of FS EXPECT that the auditor should not only provide an
audit opinion, but also interpret the financial statements which
enable them to evaluate the strength & weaknesses of the
entity
Ex: investment purposes, illegal act, fraud detection through
audit procedure
However, this high expectation users create a GAP between
auditors and users expectations of the audit function

AUDIT EXPECTATION GAP

Due to the
occurrence of series
corporate failures,
financial scandals
and audit failure
show that lead to
wide criticism to
audit profession.

Expectation gap
arise from users
misunderstandings
of the role,
objectives and
limitation of an
audit, inadequate
audit standards and
deficient auditor
performance
capture the main
essence of its
causes.

AUDIT EXPECTATION GAP

The concept
Expectation gap means a difference in
expectation exist between a group with a
certain expertise and a group which relies upon
that expertise.

Raise issues
Central issues relates to its are fraud detection,
auditor independence, public interest reporting
and the meaning of audit reports.

AUDIT EXPECTATION GAP

Liggio 1974 :
A factor of the levels of expected performance as envisioned
by both the independent accountant and by the user of
financial statements. The difference between these levels of
expected performance is the expectation gap.

Cohen Commissions 1978 :

the audit expectation performance gap may be defined as

the gap between societys expectation of auditors and auditors

performance as perceived by society. The gap has two major
components : A Gap between what society expects auditors to achieve and
what they can reasonably be expected to accomplish
(designated the reasonableness gap)
A Gap between what society can reasonably expect auditors to
accomplish and what they are perceived to achieve
(designated the performance gap)

AUDIT EXPECTATION GAP

The Components

AUDIT EXPECTATION GAP: AN

EMPIRICAL EVIDENCE

PART 2
Evidence Of Audit Expectation Gap
; By Countries

UNITED STATES
AUTHOR

SAMPLE

OBJECTIVE

Baron et al.,
(1977)

1) Auditors
2) users of
accounting
reports
(financial
analysts,
bank loan
officers and
corporate
financial
managers)

examined the extent of auditors

detection responsibilities with
respect to material errors,
irregularities and illegal acts

FINDINGS

Both groups have significantly

different
beliefs
and
preferences on the extent of
auditors responsibilities for
detecting
and
disclosing
to establish whether there are irregularities and illegal acts
any
differences
in
the
perceptions regarding auditors users held auditors to be more
detection and disclosure duties responsible for detecting and
between the auditors and users disclosing irregularities and
of accounting reports
illegal acts than the auditors
believed themselves to be

AUSTRALIA
AUTHOR
Low (1980)

1)
2)

SAMPLE

OBJECTIVE

FINDINGS

Auditors
nonauditor

Examine the extent of auditors

detection
and
disclosure
responsibilities concerning errors,
irregularities and illegal acts

both
groups
differed
significantly
in
their
perceptions of the extent of
auditors
detection
and
disclosure responsibilities and
that an expectation gap
existed between the two
groups
consistent with that of Beck
(1974) - shareholders had
higher expectations of auditors
than what most auditors would
consider reasonable.

SINGAPORE

AUTHOR
Low et al.,
(1988)

SAMPLE
1)
2)

Auditors
financial
Analysts

OBJECTIVE

FINDINGS

examined the extent of the

expectation
gap
between
auditors and financial analysts
on the objectives of a
company audit.

both groups perceived the

traditional objective of the
audit (i.e. expressing an
opinion
on
financial
statements) as one of the
primary audit objectives.
FA perceived an audit as
setting a seal on the
accuracy of the financial
accounts of the company.
fraud
prevention
and
detection responsibilities are
more demanding than those
that the auditors believed
they
themselves
should
possess

SINGAPORE
AUTHOR
Best et al.,
(1999)

SAMPLE
1)
2)
3)

Auditors
Bankers
Investors

OBJECTIVE

FINDINGS

examined evidence in support of moderate gap exists

the long form audit report for
audit
expectation
gap
in a significant area of gap
Singapore
concerns the auditors are
responsible for detecting all
fraud
investors believe auditors have
some responsibility for ensuring
an entity has sound internal
controls

Hian (2000)

1)
2)

Auditors
Non
auditors

to
examine
if
an
audit audit expectation gap exists
expectation gap with respect to
the objectives of a company The non-auditors place a
audit
significantly greater demand
on audits

UNITED KINGDOM
AUTHOR

SAMPLE

OBJECTIVE

FINDINGS

Humphrey et
al., (1993)

1) Auditors
2) Users of
financial
statement

examined the expectation gap

by ascertaining the perceptions
of
individuals
of
audit
expectations issues through the
use of a questionnaire survey
comprising a series of mini-cases

significant difference between

auditors and the respondents
in their views on the nature of
auditing.
Confirmed that an audit
expectation gap exists eg
the nature of the audit
function and the perceived
performance of auditors.

The critical components of the

expectation gap:
auditors fraud detection role,
the
extent
of
auditors
responsibilities to third parties,
the nature of balance sheet
valuations, the strength of and
continuing threats to auditors
independence, and aspects
of the conduct of audit work

AUTHOR
Cameron
(1993)

SAMPLE
1) public
accounta
nts
2) small
business
and
associated
third
parties
(bankers,
business
consultant
and
enterprise
agencies)

NEW ZEALAND
OBJECTIVE
explored
the
relationship
between public accountants
and their small business clients in
New Zealand

FINDINGS
the three groups expected
auditors to:
1) provide compliance services,
give
accounting-related advice
2) show concern for clients
financial health
3) actively seek out client
problems and give general
business advice.
Auditors were not expected to
actively seeking out client
problems.
Result: the actual performance
of chartered accountants was
generally perceived to fall
below the expected levels.

SAUDI ARABIA
AUTHOR
Hudaib,M (2002)
An empirical
Investigation of
Audit Perceptions
Gap in Saudi
Arabia
www.ex.ac.uk/rbp
/research
/discussion papers
AccFin/AccFin2002
.

SAMPLE

FINDINGS

1) mail questionnaires the ideology and legal structure in the

2) semi-structured
Saudi environment SIGNIFICANTLY
interviews
affect audit perceptions gap.

MALAYSIA
AUTHOR
Fadzly, M.Z.,
and Ahmad,
Z (2004)
Audit
Expectation
Gap: The
case of
Malaysia
Managerial
Auditing
Journal,
Volume 19,
No. 7, pp.
897-915.

METHOD

SAMPLE

1) respondents opinions 1) 100 undergraduate

and beliefs about
students
audit functions
2) controlled experiment
was used on investors
to find the effect of
reading material on
respondents
expectations.

FINDINGS
NO SIGNIFICANT differences in
students
and
auditors
expectations.
wider expectation gap on the
issue
of
the
auditors
responsibility
and
lesser
expectation gap with respect
to reliability and usefulness of
audit.

REPUBLIC OF CHINA
AUTHOR
`Jun, Z. Lin (2004)
Auditors
Responsibility
and
Independence:
Evidence from
China
Research in
Accounting
Regulation, Vol.
17.

SAMPLE
1)
2)

Questionnaires
24.80%
respond from
audit
beneficiaries
(investors,
creditors,
government
officials,
business
management,
and
academics)
and
public
practitioners

OBJECTIVE

FINDINGS

investigated the rise

of expectation gap
and related
auditing issues
under business and
auditing
environment

the independent audit function would enhance the

truthfulness and reliability of financial statements and play
a positive role in the Chinese economy
Declining government controls in the economy, made
independent audits provided by public accountants to
have much more important in the Chinese economy.
There was an expectation gap with respect to objectives
of auditing function, auditors obligation to detect and
reporting frauds or irregularities, and third-party liability of
auditors and the impact of government sponsorship on
the credibility of audit services

Auditors and audit beneficiaries were dissatisfied with the

present status of auditor independence in China.
Result :- that much must be done to improve public
accounting practices in China to bridge the expectation
gap

EGYPT
AUTHOR
Dixon, R., M.
Woodhead,
and Sohliman,
M (2006)
An
Investigation
of the
Expectation
Gap in Egypt
Managerial
Auditing
Journal, Vol.
21, No. 3,pp.
293-302.

SAMPLE
1) Questionnaire
-demographic
factors
-16 statements
under 3 factors
(responsibility,
reliability and
decision usefulness)

OBJECTIVES

FINDINGS

the
existence
of
an
expectation gap in the
nature
of
the
audit
function, the perceived
performance of auditors,
their duties and role, their
independence and the
non-audit services.

wider expectation gap on the

issue of the auditors responsibility
and lesser expectation gap with
respect
to
reliability
and
usefulness of audit.

BANGLADESH
AUTHOR

SAMPLE

Siddiqui, J., and

Nasreen, T (2004)

1) professional
accountants
2) university
accounting
students

Audit
Expectations
Gap in
Bangladesh:
Perceptual
Differences
Between
Accounting
Professionals and
Students
http://sssm.com/
abstract=557542.

METHODOLOGY
Questionnaires
i. audit responsibility,
ii. audit reliability
iii. decision usefulness of
audited financial statements.

FINDINGS
the existence of a much wider
expectation
gap
between
auditors and other societal
groups in Bangladesh, as these
clusters possess lesser knowledge
in auditing than the students of
accounting.

CONCLUSION
Auditor should NOT ONLY provide an audit opinion, but also
INTERPRET THE FINANCIAL STATEMENTS in such a manner that they
could evaluate whether to invest in the entity or not.
to perform some of the audit procedures while performing the
attest function like penetrating into company affairs, engaging
in management surveillance and detecting illegal acts and/or
fraud on the part of management.
High expectations from user and gap arises because: OVER-EXPECTATIONS -regarding the functions of an auditor
LACK OF KNOWLEDGE about auditors role and responsibilities

RECOMMENDATION
Continued and strengthened monitoring of auditors
performance
Improving the quality control in audit firms
Enhancing the education of auditing practitioners

Educating Society about the audit function and work of auditor

to narrow the reasonableness gap