What is Expectation gap in auditing?

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Auditing expectation gap or simply expectation gap is the term used to signify the difference in expectations of users of financial statements and auditor’s expectation concerning audited financial statements. Although its about expectations but still its scope and meanings have been defined in number of ways. Difference in expectation can arise on the performance i.e. the level of performance what users expect from auditor and how auditor actually performed.

Expectation gap can also be explained as the difference between the effectiveness of audit engagement what users believe and what auditor believes. Expectation gap in related to audit can also be explained as the difference between expectation of user and auditor himself on the responsibilities of the auditor. It can also refer to difference in understanding regarding nature of audit engagement i.e. what users believe audit is and what audit actually is.

Auditor is required to reduce audit risk to an acceptably low level to attain reasonable assurance. But what is reasonable? This can be different in the eyes of auditor and in the eyes of users of financial statements and this creates expectation gap.

In short it is all about what auditor expects and what others expects from the auditor. For last few years this gap has been debated number of times at different forums and stakeholders have agreed on reducing this gap as most of the time it has been bone of contention between client, auditor and other users of financial statements.

On careful analysis of this gap one of the reason that was critical in widening the gap is lack of understanding of different connected factors. And this is not only a lacking on part of users of financial statements but also the auditor sometimes. If efforts are invested in these areas then expectations can be bridged to great extent. For example:

  • users must understand why auditor can only provide reasonable assurance and not the absolute assurance and what are inherent limitations of the audit
  • users must understand that general purpose financial statements are meant for general needs of users and even if they have been audited in a best way possible but it does not mean audited financial statements can help in any decision making situation
  • users must realize that auditor’s work is relative to circumstances that require use of judgment which may be wrong. Although auditor works diligently but it does not always mean if judgment is wrong then auditor is guilty of ignorance rather it will be assessed based on what auditor could possibly do and what he actually did.
  • Although auditor and management is required to produce financial statements in a way that are easy to understand but users are also expected to have certain degree of relevant knowledge on how to use and interpret financial statements. Financial statements are not for everyone to read and act upon.
  • For auditors to understand users’ expectations they must arrange workshops or seminars so that users at least feel that they have been heard. Auditor must not rule out everything on the basis of lack of knowledge on part of users.
  • Auditor must make audit reports easy to understand for the masses and avoid to great extent any technical jargon that can impair ordinary person’s understanding who lack skillful insight of financial statements.
  • Auditor is already providing less than absolute assurance so he must not leave any effort undone to maintain reasonable level of assurance by complying with the requirements of relevant auditing standards. For example, proper planning, appropriate understanding of entity to design further audit procedures, maintaining skeptic attitude, reducing sampling risk to appropriate level etc.

One of the biggest reasons that has highlighted this gap is auditor’s responsibility to detect fraud. When it comes to fraud, users require auditor to act as investigator and auditor is expected to unearth even the most sophisticated fraud events. However, users do not agree on explanation that auditor is not responsible to detect fraud it is management as they feel auditor’s role is much more than just a confirmation of management’s assertions. This area is still developing and audit as a profession is facing great challenges in this regard.

4 COMMENTS

  1. Comment:what make u think that auditors are useless money makers…? 2m auditor’s play a very vital role in d society which has Mk impact in many government and private sectors financial statement true and fair because without an auditor many organization will never know whether there business is solvent or insolvent…

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