Audit Expectations Gap

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Within the current crisis of confidence in the public accounting profession after the Enron debacle and series of high profile failures of financial services firms, the issues about ‘audit expectation gap’ have never been more important. Though it would take an enormous amount of effort to address these issues, I will argue that tremendous amounts could be done in order to close the gap down. In this essay I will discuss some of these issues and in particular the strategies to reduce the gap.

Various definitions have been proposed for the audit expectation gap. Humphrey, Moizer and Turley (1992), suggest that the common element in the various definitions of the gap is that auditors are performing in a manner that is at variance with the beliefs and desires of others who are party to or interested in the audit.

The expectation gap may be decomposed into two components: the reasonableness gap and the performance gap. The former appears when people expect more of audit than it can give in practical terms, such as detecting all instances of fraud. The latter refers to the gap between what auditors can reasonably be expected to do and what they are perceived to do. ‘Performance gap’ can be further split into two – deficient standards gap and deficient performance gap. The ‘deficient standards gap’ refers to situations when the auditors are not required by the standards to report certain issues, whilst its counterpart refers to situations when auditors have not complied with the existing standards. This dissection is particularly important when I look at each of the problems separately later on and look for the respective solutions.

The beginning
Since the early 1970s, the auditing profession has been under increased pressure and scrutiny by government and users of audit reports. The phrase ‘ Audit Expectations Gap’ was first coined when the AICPA put the Cohen Commission together in 1974 to investigate whether the...
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