In the complex world of auditing, the respective roles of auditors and auditees alike are often misunderstood – here we explain ‘The Audit Expectation Gap’.
The audit profession has been thrust into the spotlight in recent times following the collapse of household names such as BHS and Carillion, with many posing the question, ‘how could the auditors let it happen?’
Perceptions of the auditor’s responsibilities may have become clearer following the introduction of the extended audit report but there is still more work to be done in this area. We find that all too often the expectations of the profession differ from the expectation of the entity requiring the audit.
Jennings et al defined the expectation gap as “the difference between the public expectations about the responsibilities and duties of the auditing profession and what the auditing profession actually provides.”
We consider the ‘expectation gap’ by examining the facts and highlighting what is fiction.
FACT: Auditors will give an opinion on whether they believe the financial statements prepared under current legislation, present a true and fair view to the stakeholders.
FACT: Auditors will report their findings on the directors’ choice of going concern basis used in the financial statement.
FACT: Auditors will declare whether in their opinion the financial statements have been prepared in accordance with UK. Generally Accepted Accounting Practice (UKGAAP) and the Companies Act 2006.
FICTION: It is the auditor’s responsibility to detect fraud within a company.
FACT: Not anymore… Fraud detection has not been the principal objective of audit since the 1920’s!
Fraud Risk is assessed at the planning stage and our tests are designed so as to give a reasonable expectation that such issues will be detected. It is the responsibility of the management of an entity however, to prevent and detect irregularities and fraud internally.
FICTION: An auditor will detect all material instances of fraud – a 1994 study by MA Geiger found that 70% of investors expected absolute assurance of this statement *.
FACT: Auditors are required to plan and perform the audit in a way that will reduce to an acceptably low level, the risk of misstatements in the financial statements as a result of error or fraud.
This does not mean however that all instances of fraud will be identified by the audit process, and it cannot be relied on to do so. Transactions are tested on a sample basis – not every transaction is tested. We’re probing but we’re not quite Poirot!
It is important to us that our team of auditors has strong relationships with our clients, and that they ask the right questions and management are trusting and open in their responses. At the end of the day, the responsibility for preventing and detecting fraud lies with the directors within their respective companies as they are charged with governance, but we understand that they may be nervous about disclosure of anything which could unsettle their investors and we help them put it into context.
A key purpose of the statutory audit after all is to provide an independent opinion on the truth and fairness of the financial statements to shareholders, without prejudice, even if investor confidence may be influenced by the opinion given.
* Investors’ views of audit assurance: recent evidence of the expectation gap, Marc J Epstein and Marshall A Geiger, 1994 https://scholarship.richmond.edu/accounting-facultypublications/18/