Creating Confidence by decreasing the expectation Gap
Confidence of providers and users of capital are integral to economic success. Often in even the most modest models of finance, financiers will not lend to those who would borrow deprived of adequate information to convince the financier that the capital will be repaid. Based on the financiers interpretation of the risk associated with the return of capital, interest is set either deliberately or unintentionally. Sophisticated financial markets operate on the same basis. Whether it be stock traders, venture capitalists, Banks or, they wholly assess the risk to capital return, established by their assurance of the validity of information they have regarding the debtor and the debtors’ ability to return capital. Absent or inadequate information leads to greater risk and an elevated, conceivably unfeasible high, return(Pandey, 2009). External auditors perform audits in harmony with laws or accepted principles on the financial statements of corporations, government entities and is independent of the entity. Users of financial information depend on unbiased and independent audit reports. Nineteenth century auditors claimed it was their responsibility for fraud detection as an audit objective. Auditors’ responsibility as indicated by Razee & Riley (2010) was to report to stakeholders any dishonest undertakings which transpired affecting the correctness of the financial statements. Though, it was also contended that auditors should not be required to discover wholly fraud committed within the corporation, because auditors are not insurers or guarantors, but instead should be expected to conduct audits with reasonable skill (Ainapure & Ainapure , 2009). Roles and responsibilities of the Auditor have changed over the last twenty years due to growing complexity of laws and regulations coupled with a changing professional environment. This has led to misunderstandings and difference in expectations of the auditing function by the users of financial statements and the auditing profession creating an expectation gap. Further, the expectations that all fraud should be detected and complete assurance given by the auditor is unrealistic. However, the auditors’ role should include practices to decrease these expectation gaps. Roles of the Auditor have changed over the last twenty years. Initially in the nineteenth century the auditing profession claimed maintained an obligation to detect fraud as a purpose of the auditing function. During the early twentieth century it became widely accepted that the primary purpose of the auditing function was substantiation of correctness of accounts (Razee & Riley, 2010). The auditing profession asserted that the detection of fraud was in the domain of management’s responsibility to create appropriate internal controls to avoid fraud within their organization. Primarily this change in the role of the auditor was the consequence of the increasing volume, size, and complexities of corporations’ transactions presenting auditors with a near impossible task of analysing all transactions. Auditors’ changing role became one of sampling and the use of test procedures that could only offer reasonable assurance on the correctness of financial statements (Basu, 2009). Furthermore this meant that the auditing profession were not able to detect fraud that encompassed unrecorded transactions including theft and similar irregularities. In the last twenty years the auditing role has grown progressively more difficult with continual implementation of new laws and regulations. In this time the accounting profession has seen constant change including; major corporate collapses in the nineties and early twenty-first century, the establishment of Sarbanes Oxley act, development of the financial reporting program of the Australian Securities and Investments Commission , Australia introduced the Corporate Law Economic Reform Program, harmonization with...
Please join StudyMode to read the full document