The Audit Expectation Gap

The Audit Expectation GapIntroductionThe scrutinize arithmetic mean hurly burly is critical to the scrutinizeing profession beca using up the greater the unfulfilled outlooks from the public, the lower is the credibility, earning potential and prestige associated with the work of attenders. The aim of this paper is to uncover the ca physical exercises of an canvas arithmetic mean gap. It is revealed that the founding of an audit expectation gap is collectable to complicated nature of an audit function conflicting utilization of hearers retrospective evaluation of auditors performance time interim in responding to changing expectation and self-regulation do of the auditing profession. For decades the auditing profession has been troubled with high levels of litigations and accusations. Such a problem has reached an unprecedented level as a result of the spectacular f entirely of well-publicized corporations like Enron and WorldCom ( doorkeeper Gowthorpe, 2004). Porter ( 1993) argues that the recent increase in criticism of and litigations against auditors is due to the failure of auditors to meet societys expectations. The failure of living up to societal expectations have implicated the notion of audit expectation gap. The expectations gap is the difference between what users of financial statements, the global public perceives an audit to be and what the audit profession claim is expected of them in conducting an audit. In this respect, it is important to distinguish between the audit professions expectations of an audit on one hand, and the auditors perception of the audit on the other hand. Apart from users of financial statements and the general public, an auditor may also perceive a somewhat different interpretation or worse still, fail to comply with the standards set by the audit profession.If users of financial statements and the general public were educated to think that the auditors role embraces the contracting and prevention of fraud , especially in relation to material items, the fraud and error celebrateion role of an audit could be relatively objective. However, the Auditing Practices Board cannot guarantee absolute objectivity since materiality and material significance are subjective concepts, which require boost clarification. A return to the primary role of celebrateion and prevention would also be welcomed since there are at present, not sufficient measures to hold the auditor liable for negative consequences of his actions. Some sources of academic literature assume that the meaning of an audit is not objective/fixed whilst other sources such as confine of audit reports assume that the meaning of an audit is fixed. In relation to the latter assumption, there is the belief that the expectations gap could be significantly reduced if not achievable to eliminate.Auditing is increasingly difficult and challenging, with new rules and regulations encouraging, if not requiring, auditors to enhance their efforts to detect fraud during an audit. Unfortunately, these rules and regulations contain terms like reasonable, material, professional scepticism, and insighting, whose meanings vary in the minds of different auditors.The expectation gap reflects a perceived difference between what one is expected to accomplish by others and what one personally believes he must accomplish. For example, the airline application now expects a significant portion of flights to be delayed during the busy summer months. Passengers do not subscribe to this same belief, so when their flights are delayed, this exposes an expectation gap.Auditors face similar challenges when it comes to detecting fraud in an audit. In many instances, they are not sure how much effort must be do to uncover red let ups for fraud. More important, they do not always take the appropriate steps to uncover fraud once a red flag surfaces during an audit. Clients, judges, shareholders, and other parties, however, expect auditor s to take steps to detect fraud during the audit. They are often displeased when fraud goes undetected and is later uncovered by a tip or accident. The resulting investigation or financial statement restatement constructs negative consequences for the company and its employees.The reasons an auditor may fail to identify red flags during an audit hold the questOver reliance on client representationsLack of sensation or recognition of an observable condition indicating fraudLack of experience individual(prenominal) relationships with clientsFailure to brainstorm potential fraud schemes and scenarios andA desire not to know.The expectation gap is driven by two variables the auditors ability to detect fraud, and the auditors efforts to detect fraud. An auditor may possess the skills to detect fraud, but might choose to take shortcuts or disregard obvious signs of potential fraud. Or, an auditor might use a variety of techniques, but lack the experience to effectively uncover red fla gs. Both scenarios exit broaden the expectation gap.An auditor must beget the requisite skills to detect fraud and obtain sufficient knowledge of the rules and regulations in order to better understand what is required during an audit. Statement on Auditing Standards (SAS) 99, Consideration of dissimulator in a Financial Statement Audit, requires auditors to obtain reasonable assurance that material fraud is not present. The Institute of Internal Auditors (IIA) standard 1210.A2 requires auditors to possess sufficient knowledge to identify indicators of fraud. Whatever the words reasonable and sufficient mean to auditors will not matter if they fail to detect fraud. The definitions of reasonable and sufficient will be determined by their manager, client, senior management, or the judge or jury in a lawsuit.Developing Fraud Detection SkillsFraud examiners desire on the following toolsKnowledge of specific fraud schemes and scenariosKnowledge of applicable laws and regulationsExcel lent communication skills andStrong interviewing skills.While auditors cannot be expected to develop these skills to the level of a fraud examiner, they should try to become more proficient done training, hands-on experience, reading the professional literature, brainstorming, and using fraud detection skills during the audit.Training and awareness All auditors should possess basic knowledge of fraud schemes in order to better position themselves to detect red flags during an audit. Auditors can start by maturation a basic understanding of fraud schemes and scenarios, as well as the reasons why people commit fraud. Organizations such as the IIA, the National Association of demonstrate Valuation Analysts (NACVA), and the Association of Certified Fraud Examiners (ACFE) offer training that provides a basic understanding of the various schemes relating to financial statement fraud, asset misappropriation, and bribery and subversion schemes. Auditors who develop significant fraud-det ection skills can choose to pursue certifications such as the ACFEs Certified Fraud Examiner (CFE) and the NACVAs Certified Forensic Financial Analyst (CFFA). In addition, many colleges and universities now offer fraud detection and examination courses as part of their business, accounting, or audit programs. Some schools even offer more modernistic degrees in the field of rhetorical studies. This training typically ranges from a basic one-to-four-hour overview of fraud detection to a three-day comprehensive course, where auditors look for fraud by reviewing model studies, participating in-group sessions, and reviewing actual data.Brainstorming Brainstorming fraud risks are critical to a successful audit and identifying red flags for fraud. If nothing else, brainstorming will create a mindset for auditors to think like a fraudster, supporting the adage, to catch a crook, learn to think like one. Approximately 50% of all auditors brainstorm fraud risks prior to the start of an aud it. Of auditors who use brainstorming as a fraud detection tool, only about half make it a testis process where they document the schemes and identify techniques aimed at uncovering red flags. The other auditors conduct brainstorming on a more informal basis and curb to considering the risk for fraud without formally documenting this consideration.A more formal brainstorming process is necessary to fully benefit from this exercise. For example, auditors could use a spreadsheet and involve a team of at least three auditors. Preferably, the team should consist of a fraud examiner or an auditor see in fraud detection. next these guidelines will make brainstorming more effectiveMake it fun and interactive, with everyone participating.Present a fraud case study to stimulate responses.Involve an experienced fraud examiner.Identify previous company frauds in the discussion.Use a facilitator.After the brainstorming session, it is imperative to plan and perform the audit in conformism w ith the schemes and scenarios identified during the discussion. For example, if procurement fraud was identified as a high-risk area, the audit should include steps to identify red flags. These steps could include the followingUsing data analytics to identify suspicious vendorsReviewing vendor neglecting for the previous 12 months to identify suspicious patterns, including duplicate paymentsAnalysing vendors with post office box addresses to retrieve ghost vendor schemesComparing employee addresses to vendor addresses for possible matchesContacting vendors that bid unsuccessfully for contracts, to inquire about the bidding process andRunning a Benfords Law (which predicts the occurrence of digits in data) analysis on vendor invoices to identify suspicious patterns of invoice amounts.Interviewing skills Auditors should consider effective interviewing as a basic forensic tool to use during an audit. Auditors can benefit from developing a basic awareness of deception and when someone may be lying.Generally, people are cooperative, energetic, receptive, and supportive of an auditors efforts. The auditor should spend the first 15 minutes or so of any discussion with an interviewee building rapport. It is important to watch the persons mannerisms, body language, and overall demeanour. It is also important to heed to an individuals tone of voice, willingness to volunteer information, and style of answering questions. Once an auditor establishes a rapport with the interviewee, she can proceed to the line of questioning associated with the audit. It is at this point that an auditor needs to be aware of any change in verbal or nonverbal behavior.Reducing the GapThe above prescriptions for increasing an auditors ability to detect fraud are undeniably arduous. Fraud detection requires effort and the ability to work hand in hand. Ability is compound through experience, training, and effort. Effort is enhanced through solid audit plans, brainstorming, and ability. The ch allenge to reduce the expectation gap stands before all auditors, internal and external. While the profession has made great strides through legislation, regulation, and audit standards, it must apply this guidance within its own ranks, expending the effort and developing the ability to reduce this gap.Auditors cannot be held responsible for uncovering all types of fraud. Collusive frauds and other intricate schemes are very difficult to uncover. This does not, however, give auditors a blanket excuse to refrain from looking for fraud. Developing the right mindset, embedding forensic procedures, and asking about fraud all increase auditors chances of finding it.ConclusionThe auditing profession believes the increase in litigation against, and criticism of auditors can be traced to the audit expectation gap. The audit expectation gap is detrimental to the auditing profession as it has negative influences on the value of auditing and the reputation of auditors in the modern society. It is found that the existence of an audit expectation gap is due to complicated nature of an audit function conflicting role of auditors retrospective evaluation of auditors performance time lag in responding to changing expectation and self-regulation process of the auditing profession. Given such problematic factors that contribute to the existence of the expectation gap, it is neither the auditors nor users who should be blamed for the audit expectation gap crisis.ReferencesBoynton, W., Johnson, R. and Kell, W. (2005). Assurance and the integrity of financial reporting (8th ed.). New York John Wiley Son, Inc.Chandler RA, Edwards JR and Anderson M, (1993). Changing Perceptions Auditor 1840 1940, Accounting and Business Research Vol 23 AutumnDavidson, L. (1975). The role and responsibilities of the auditor Perspective, expectations and analysis. Unpublished background paper for the commission on auditors responsibilities.Gloeck, J.D. and Jager, H. (1993). The audit expectation ga p in the republic of South Africa, Working paper, School of Accountancy, University of Pretoria.Lee, T. H and Azham, Md. A. (2008). The evolving role of auditor Where do we go from here? Accountants Today, (3), 18-22.Leung, P., Coram, P., Cooper, B., Cosserat. G. and Gill. G.. (2004). Modern Auditing Assurance Service (2nd ed.). Australia John Wiley Sons.Miller, R.D. (1986). Governmental oversight of the role of the auditors. The CPA Journal, (9), 20-26.Porter, B. and Gowthorpe, C. (2004). Audit expectation-performance gap in the United Kingdom in 1999 and comparison with the Gap in New Zealand in 1989 and in 1999. The Institute of Chartered Accountants of Scotland Edinburgh.Shaked, A. and Sutton, J. (1982). Imperfect information, perceived look and the formation of professional groups. Journal of Economic Theory, 27, 170-181.