Auditing And The Audit Expectations Gap Accounting Essay

Category: Accounting

Audit expectations gap essentially the difference between what the public considers to be the responsibility of the auditor and consider the auditors of their responsibilities and duties to be. There is concern that the Auditor-General and held different beliefs about the duties and responsibilities of Auditors and the messages conveyed by audit reports. It seems that public misperceptions are the main cause of the crisis facing the legal responsibility of the accounting profession. The importance of this expectation gap, it is not surprising, that previous research on the problem of high expectations. The aim of this paper is to review the literature on the audit expectations gap as follows five titles:

Expectation gap:

* identify and discuss the factors that contribute to the expectations gap.

*suggest ways that can bridge this gap.

Professional indemnity insurance:

* Insurance to explain the terms' compensation professional 'and' insurance to ensure accuracy.

* Discuss the pros and cons of compulsory coverage.

Audit expectations gap is the main issue facing the review process Profession?

Yes, because look at the expectations gap audit to be one of the key issues facing the auditing profession, and the company expects users of audit reports and the report to detect fraud and material irregularities, among other issues. In contrast, in the profession say that users misunderstand the duty of auditors, and fraud detection and reporting is not an audit central government. Papadakis (2003) says that ignores the auditing profession in the face of looming danger, the debate about its ability to achieve what it wants in the market, and thus we expect from users all over the world auditors to detect fraud and to search actively for it.. If the educated users of financial statements and the general public to believe that the auditor's role embraces detect and prevent fraud, particularly with regard to items of material, and fraud and error detection for the role of an audit can be relatively objective. The can not ensure absolute objectivity since the "physical" and "the importance of article" is a self-concepts that require clarification further practices by the Board of Audit. Also return to the primary role to detect and prevent because there are welcome at the present time, measures are not sufficient to keep the Auditor responsible for the negative consequences of his actions.

Elements of the Expectations Gap:

The reasonableness gap is caused because the society expects more from an auditor than they can practically deliver. In example, people believe that the auditor’s job includes looking at all transactions and balances of different projects assigned to any given company. That is not what really happens. In fact auditors only look at samples of transactions and balances since it will be unreasonable to examine all transactions and balances of a given project in a large company. This element of the expectations gap is considered as a subjective element which can be made more objective by studying this element and applying the necessary actions that could reduce the gap created by this element. The performance gap is the gap between what the society reasonably expects of auditors and what they are perceived to deliver and it can be sub-divided into two components. The first component is the deficient standards gap (50%) and the second one is the deficient performance gap (16%). The difference between the two components is that the deficient standards gap is defined as the gap between the responsibilities and duties that the auditors can be reasonably expected to perform and the responsibilities that the business and law asks them to perform while the deficient performance gap is defined as the gap between the standard of performance of the duties expected to be carried by the auditors and the auditors actual performance of these duties. There are two possible reasons that believe to be causing the deficient performance gap and they are lack of competence and lack of practitioner independence. The lack of competence comprises of lack of care, knowledge and experience while the lack of practitioner independence comprises of programming, investigative and reporting independence.

Why do we need auditors?

Auditors perform different responsibilities in different organizations, such as universities, hospitals, local authorities. In organizations the need for auditors is very important and there are three theories that explain the need for auditors, despite the organization they work for, namely: the information hypothesis, the agency theory and the insurance hypothesis. According to the information hypothesis, the audit produces more dependable information and so it will be easier for decision makers when it comes to making big decisions concerning the financial work. The agency theory says that auditors are needed since the people who provide the resources cannot depend on the companies' mangers to use their resources appropriately. The agency theory comprises several ideas such as both mangers and clients try to increase their personal income, a financial report is needed in order to give a full review of the company's deals and projects which will benefit both mangers and agents, professional external auditors are the best people for monitoring the financial statements, agents have found that mangers trust the financial reports more if they were confirmed by an independent party, groups of individuals with logical thinking have different information. the insurance hypothesis suggests that auditors are needed because they use the audited information to provide people with an insurance since they can correct the mistakes made by careless auditors. In fact, correcting the mistakes made by auditors is the same as correcting mistakes made by an insurance company.

Although auditors have different responsibilities in different organizations, as mentioned before, the typical steps that are followed in any audit assignment are the same.

1 knowing and getting introduced to the industry, company and risk analysis which are called the preliminary stages.

2 auditors should become more familiar with the work system and transactions testing.

3 preparing for the final outcome which includes working through the company's plans for perpetration of accounts many times and performing the balance sheet date work.

4 working on analytical reviews and confirmation of accounts, liabilities and post-balance sheet events which results into the issue of the audit report and the perpetration of note of changes.

How to reduce the Expectations Gap

The need explained and role of auditors in different organizations, it can be seen that they are very important and it will be difficult to just let them go. So, there have to be some ways to make the society accept the role of audit and to reduce the expectations gap, mentioned before. it will not be very easy to reduce the expectations gap since the auditors' performance as perceived by the society is difficult to measure and changes frequently. One of the ways to reduce this gap is to introduce an expended audit report that educates users on the actual duty of auditors. The MacDonald Commission (1988) recommended that, along with the expended audit report, a statement of management's responsibilities for the financial statement should be included in the annual report and that audit committees should report annually to shareholders. Other possible ways are widening the role and responsibility of auditors in areas like fraud, illegal acts and strengthening the perceived independence of auditors. Another way of reducing the gap is the audit education by educating the society on the limitations of audit. The audit education could be useful for reducing the reasonableness gap but not for reducing the deficient standards gap and the deficient performance gap.

Several studies have been carried in different parts in the world to determine the effect of audit education in reducing the audit expectations gap. According to the MacDonald Commission, the audit education cannot be an effective way of reducing the gap since for most of the time the society's expectations are reasonable and achievable.

Recommendations: *2

Review to ensure

Fraud

Continuity

Internal Oversight

Audit reports

Perceptions of status report unconditional

Further proposals to change the audit

Reporting

Independence

The provision of management services is

References to manage the relationship

The impact of corporate governance mechanisms on the expectations gap in the audit environment

Corporate governance mechanisms work mainly to protect and ensure the rights of shareholders and all interested parties associated with the company's work through the provisions of censorship and control over the performance of the company's management and the auditor. Can be classified set of mechanisms used to two types of governance mechanisms, with respect to:

The first type of running the company the application of international accounting standards and the local strength and independence of the Audit Committee, and the degree of adoption of Directors of the Company on sophisticated information technology.

The second type observer accounts, who shall be through the lists and financial reports of the company and give his opinion regarding technical it, and include mechanisms to achieve control on the performance of the auditor, such changing compulsory auditor on a regular basis, the degree of independence of the auditor, compliance auditor application of international auditing standards and local , standards of quality control, and the extent to which the auditor for professional services consulting company subject to revision.

On the other hand, several studies have found a gap in expectations between the expectations of the audit environment, users of the auditor's report and what is actually provided by the auditor in his report, which led to a loss of confidence in the financial information contained in the auditor's report.

The problem with trying to study and test the effect of corporate governance mechanisms to narrow the expectations gap in an environment audit.

The Audit Responsibility

Is performed most of the audit work during the pre-award

Held to determine the fixed rates per hour (which includes

Work, and indirect costs, and profit). However, time and material, or work

Hours contracts have certain concerns require some post-award

Audit review. The following areas of contracts requiring the post-award

Audit:

• Other direct costs and materials - Under time and materials

Contracts and other direct costs (if allowed by the contract) and

Materials such costs were reimbursed according to the

Cost principles applicable. Therefore, some of the audit in these areas

Is necessary before final approval of the costs.

• Work - despite the time and materials contracts and working hour

Contracts for the employment rate fixed, and auditing is necessary in order

Ensure the following:

- Hours billed agree with the time the contractor registration Records.

- Description of categories of work in line with the position of employment used

To work. Should be made to ensure that special attention

That the contractor does not "switch" the qualifications of working

Invoices from a higher category of employment actually used.

• Faulty pricing - and what was fixed based on hours of work on the cost

And price data submitted by the contractor before the award (Relied on in the negotiations), the time and materials and labor hours

Contracts are subject to pricing flawed.