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Audit Expectation Gap Essay

2923 words - 12 pages

Definition and structure of the audit expectation gapIn today's growing world of business, we see organizations reaching heights and falling dramatically. In last 100 years, the size of the companies has grown multiple folds and so is their list of stakeholders, especially investors. A huge investment in the past years is seen on the corporate governance activities to ensure a good image of the company. Auditing being a legal obligation for the companies now, ensure that the financial reports of the company are without any material misstatement and frauds. Reports presented by the auditors work as an assurance for the investors and other stake holders. However, in recent years, while many ...view middle of the document...

Many out of these are way beyond the capabilities of a person as an auditor. And we will also find people who don't have basic knowledge of what legal duties auditors own them, and how they can protect their interest if the auditor fails to perform its job or breach its duties owned. The gap or the differences between the auditor's performance and what the people expect from them is called the EXPECTATION GAP.Although the existence of the audit expectation gap and its associated problems has been acknowledged for more than 100 years, it appears that Liggio (1974) was the first to apply the term "audit expectation gap" in the auditing literature. He defined the audit expectation gap as the difference between the levels of expected performance as envisioned by the user of a financial statement and by the independent accountant.Porter (1993) presented the problem in another way. Its structure of the gap name two major components, reasonable gap and performance gap.1 Reasonable Gap - the difference between "what the public expects auditors to achieve and what they can reasonably be expected to accomplish"2 Performance Gap - the difference between "what the public can reasonably expect auditors to accomplish and what auditors are perceived to achieve"Auditors' legal liabilities in Australia under the common lawIt is not easy for injured parties under the law of contract to sue the auditors Under the law of contract the existence of contract is only base for injured parties to file suits against auditors. There is only a contract among audited entity and auditors, no contract to be had between auditors and third parties, i.e. all the parties that uses the audited financial reports. This makes it extremely complicated for injured third parties to take legal action against auditors when they bear loss due to auditors' misrepresentation. Although tort of deceit does not need the existence of contract when injured parties take legal action against auditors for their fraudulent misrepresentation, the plaintiffs need to verify the intention of fraud or deceit that puts a significant proof burden on the innocent parties. For the time being, as most misrepresentations are caused by negligence, thus it makes litigations under tort of deceit furthermore tricky.Liabilities towards clientsAlthough the clients can sue auditors for infringing the contract, the express term of contract cannot include everything. In addition to this, the breach of the implied term of contract is not easy to test. Thus, i t is pretty useful for the audited companies to protect their own interest if they can sue auditors under tort of negligence, as the standard of auditors' legal duties under tort of negligence is not stagnant and evolves all the time .Auditors may not be exempt for negligent behavior because the directors or management were also negligent;Auditors must not only rely on others assertion, they have to carry out their own audit procedures;Auditors must test the clients'...

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