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The Audit Expectations Gap Essay

3027 words - 12 pages

Auditing has developed from what, in the twelfth century, was primarily a check of the accounting for stocks and revenues by authorised officers of the Exchequer of England, into a sophisticated professional assurance service performed by independent accountants for the interests of their clients and other users of financial information . But what motivates people to enlist the services of an auditor? In explaining why the demand for the auditor is so varied, the academic Wallace identified a three tier hypotheses of Stewardship, Information and Insurance. Thus viewing the audit in the modern day business arena, as offering protection of integrity to the Director, a conduit to information for users of financial statements and a degree of insurance to shareholders and creditors. Professor David Tweedie, delivering a paper at University College, felt that the needs of an audit to the user, encompassed an even greater range of requirements:"The public appear to require1) A burglar alarm system - (protection against fraud)....2) A radar station - (early warning of future insolvency)....3) A safety net - (general re-assurance of financial well-being)....4) An independent auditor - (safeguards for auditor independence)....5) Coherent communications - (understanding of audit reports)....He went on to say:"Given these concerns, it is clear that the basic tenets of an audit are being mis-understood."It is clear that users of the audit depend on the integrity and professionalism of auditors; but unexpected company collapses in recent years and scandals surrounding companies such as Enron, and more recently Fannie Mae, have resulted in public confidence in the profession being at its lowest ebb historically. The credibility of external auditors is increasingly being called into question, as evidenced by widespread press criticism and litigation against auditors. Research undertaken to identify the basis of this criticism shows that there is a gap between society's knowledge of company law and auditing standards, and the fundamental role of the auditor. The divergence between the two has become known as the 'Audit Expectations Gap'.Although the term was introduced by Liggio (1974) and further substantiated by the Cohen Commission in 1978, the concept has been around for well over a hundred years. (Royal British Bank (1859), Kingston Cotton Mill (1896)). In Leeds Estates 1887, Turner LJ implied that fraud-discovery might be seen as a responsibility of the auditor, a notion that has been nurtured, and often distorted, through to the present day .Dr David Godsell defines the expectations gap as the divergence in expectations between auditors and the users of the audit function, in respect of the objectives of the independent audit. Research undertaken by Porter suggests that users of the audit function can be broken down into two elements (see appendices) :A 'reasonableness gap' - this consists of the gap between what society expects of auditors and what...

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