Advice related to Audit Expectation Gap and Audit Independence and its Safeguards

This memo intends to provide certain advices to the audit engagement partner of Bletchington on the above-mentioned two aspects of auditing. The Expectation Gap and Audit Independence Threats and Safeguards are discussed in detail.

Running head: AUDITING
Audit
Name of the Student
Name of the University
Author’s Note

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MEMO
To: William Albanese
From: Audit Manager of SBF
Date: 31/08/2019
Subject: Advice related to Audit Expectation Gap and Audit Independence and its Safeguards
It is the responsibility of the auditors to take into consideration certain aspects at the time to
conduct the audit operations of the clients. Audit expectation gap and Threat to audit
independence are two of those aspects that have major impact on the audit operations. These
two concepts of auditing should be taken into accounting in the audit engagement program of
Bletchington Limited (Bletchington). This memo intends to provide certain advices to the
audit engagement partner of Bletchington on the above-mentioned two aspects of auditing.
The Expectation Gap – The definition of audit expectation gap can be provided as the
difference between the actual responsibility of the auditors and what various users of the
financial statements think about the responsibility of the auditors. In the presence of the audit
expectation gap, there is not any matching between the results of the audit operation and the
expectations of various users of the financial statements (Gertsson et al., 2017). In this
context it needs to be mentioned that Bletchington has certain users of their financial reports
given the nature of their business where they only deal with the countries with recognized
demographically elected government. Thus, the governments of these countries require the
financial statements of Bletchington for understanding the financial performance and
position. This aspect make the governments of these countries as a special user of
Bletchington’s financial reports. In addition, the other users of Bletchington’s financial
statements are the employees, management, lenders, suppliers and others.

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These users of the financial statements of Bletchington have certain expectations from the
audit engagement partner of SBF. In case there is not any alignment between these
expectations of these users and the performance of the auditors, there is the occurrence of
expectation gap. It implies that the unrealistic demands or expectations of the users of the
financial statements regarding the responsibility of the auditors provide fuel in audit
expectation gap. While performing the audit of Bletchington, the audit engagement partner of
SBF can also face these unrealistic expectations of the users of the financial statements
(Maroun, 2015).
The users of the financial statements expect that the auditors will provide complete assurance
about the financial statements of Bletchington where the actual responsibility of the auditors
is to provide the clients with reasonable assurance. As per the users of the financial
statements, the auditors must guarantee the future feasibility of the audit client, but in reality,
it is not the responsibility of the auditors to provide guaranteed future feasibility of the clients
(Cohen, Krishnamoorthy & Wright, 2017).
Each time the users of the financial statements expect that the auditors will issue unqualified
audit opinion by mentioning that all the accounts of the clients are completely accurate, but
the auditors only issue unqualified audit opinion when they have reasonable assurance that
the clients’ accounts are correct after conducting the necessary audit procedures (Dowling,
Knechel & Moroney, 2018). Moreover, it is expected by the users that the auditors will detect
each fraud in the financial statement where the auditors are not responsible for providing the
guarantee that there is not any fraud in the financial reports, but it’s the auditor’s
responsibility to undertake the required steps in order to find frauds in the financial
statements. The users expect that the auditor’s responsibility is to check every transaction of
the business, but in reality, the auditors are responsible for sample testing of the transactions

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(Dowling, Knechel & Moroney, 2018). These aspects must be considered by the audit
engagement partner of SBF in the audit of Bletchington.
Audit Independence Threats and Safeguards – Auditor’s indepdence states that the auditors
must maintain indepdence from the parties that have financial or other interest in the audit
client (Clout, Chapple & Gandhi, 2013). There are certain situations or aspects within
Bletchington that can majorly contribute towards the audit independence threat. It is the
responsibility of the audit engagement partner of SBF to identify these aspects so that
necessary safeguards can be applied. The audit independence threat of Bletchington and the
required safeguards for these threats are mentioned below:
Threats Explanation on Threats Safeguards for the Threats
Self-interest Threat APES 110, Paragraph 100.12 (a)
mentions that the auditors must not
have any financial or non-financial
information on the audit client as
these interests affect the
professional judgments of the
auditors in negative manner which
develops the self-interest threat of
audit independence. For example, it
is mentioned in APES 110,
Paragraph 200.4 that major reliance
of the audit firm on the audit fees of
a particular audit client can
influence the audit judgement
which can develop self-interest
The main safeguard against
this threat is the appointment
of an external reviewer who
will have the required legal
authority for the purpose of
reviewing the produced audit
report and information by the
auditors so that any kind of
lack of audit objectivity can
be recognized (apesb.org.au,
2019).

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threat of audit independence
(apesb.org.au, 2019). This is crucial
in case of Bletchington due to the
fact that the firm is a major client of
SBF in terms of the fee revenue.
For this reason, it is obvious that
SBF has certain reliance on
Bletchington and thus, it will not
want to lose this big client. The
audit judgement can be affected
with this leading to the self-interest
threat.
Self-review Threat APES 110, Paragraph 100.12 (b)
states that it is needed for the
auditor to undertake correct
evaluation of the prior judgments
that another member made and to
consider this while making their
own professional judgment and the
absence of these actions can arise
the self-review threat of audit
independence. As an example, it is
mentioned in APES 110, Paragraph
200.5 that there can be the
development of significant level of
The required safeguard for
reducing this threat is to
implement effective
corporate governance system
along with the effective
committee responsible for
monitoring the internal audit
activities (Fiolleau et al.,
2013).

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self-interest threat when an auditor
is responsible for designing or
implementing an accounting system
along with the evaluation of the
same system (apesb.org.au, 2019).
The occurrence of this same aspect
can be seen in Bletchington
because the same internal audit
team which was involved in the
implementation process of the
costing system is responsible for
evaluating its performance as well
as effectiveness for the financial
reporting process. This is a
potential situation that can develop
self-review threat of audit
independence (Endaya & Hanefah,
2013).
Familiarity Threat According to APES 110, Paragraph
100.12 (d), familiarity threat arises
because of the presence of long or
close relationship of an audit
engagement partner with the audit
client because it can make the
auditor too considerate about the
For the reduction of this
threat, the safeguard is the
appointment of an external
reviewer who will have the
required legal authority for
the purpose of reviewing the
produced audit report and

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acceptance of this work. For
example, it is mentioned in APES
110, Paragraph 200.7 that there can
be the occurrence of familiarity
threat of audit indepdence in case
the client has an officer or director
or an employee who can influence
the audit judgment who used to be
the engagement partner of the audit
firm (apesb.org.au, 2019). The
same case can be seen in
Bletchington because of the fact
that Kev Kevanna is the internal
audit department head of the
company who used to serve SBF as
an audit engagement partner. This
can develop significant level of
familiarity threat of audit
independence (Broberg et al.,
2018).
information by the internal
audit department (Bortolon et
al., 2013).

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References
Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 1
Aug 2019, from
https://www.apesb.org.au/uploads/standards/apesb_standards/standardc1.pdf
Bortolon, P. M., Sarlo Neto, A., & Santos, T. B. (2013). Audit costs and corporate
governance. Revista Contabilidade & Finanças, 24(61), 27-36.
Broberg, P., Umans, T., Skog, P., & Theodorsson, E. (2018). Auditors’ professional and
organizational identities and commercialization in audit firms. Accounting, Auditing
& Accountability Journal, 31(2), 374-399.
Cohen, J., Krishnamoorthy, G., & Wright, A. (2017). Enterprise Risk Management and the
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and External Auditors. Contemporary Accounting Research, 34(2), 1178-1209.
Dowling, C., Knechel, W. R., & Moroney, R. (2018). Public Oversight of Audit Firms: The
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Endaya, K. A., & Hanefah, M. M. (2013). Internal audit effectiveness: An approach
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Gertsson, N., Sylvander, J., Broberg, P., & Friberg, J. (2017). Exploring audit assistants’
decision to leave the audit profession. Managerial Auditing Journal, 32(9), 879-898.

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J. Clout, V., Chapple, L., & Gandhi, N. (2013). The impact of auditor independence
regulations on established and emerging firms. Accounting Research Journal, 26(2),
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Maroun, W. (2015, March). Reportable irregularities and audit quality: Insights from South
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