AUDITING ASSIGNMENT: Audit Expectation Gap, Internal Controls

This assignment provides a comprehensive analysis of the audit expectation gap, exploring the difference between public expectations of auditors and their actual performance. The report examines the audit process, risk evaluation, and the methods used to collect audit evidence, including substantive and analytical procedures. It highlights the relevance of corporate governance, ethical considerations, and the significance of effective internal controls, including preventive, detective, and corrective measures. The assignment uses examples to illustrate the gap and references relevant regulations and standards, such as those from PCAOB and IAASB, to explain how this gap affects financial reporting and stakeholder decision-making. The report underscores the importance of audit in providing assurance on financial statements and the need to address information gaps to improve user understanding and trust.

AUDITING
ASSIGNMENT

1
By student name
Professor
University
Date: 07 March 2018.
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Executive Summary
In the given assignment, a report needs to be prepared on the Audit expectation gap alongwith the
examples, which may be real or illustrative. A critical and thorough analytical evaluation of the Audit
process, the risk evaluation, the reporting of the same in the audit report and the methods and
techniques being employed to collect the audit evidences and drawing the conclusions there upon has
been shown in the assignment. Relevant legislations, laws and regulations with respect to corporate
governance and ethics has also been highlighted alongwith the relevance and purpose of having
effective internal control.
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Contents
Introduction.................................................................................................................................................4
What is Audit Expectation Gap....................................................................................................................4
Example.......................................................................................................................................................4
Other insights – Purpose, Process, Risk, technique, audit evidences..........................................................5
Internal control – Purpose, types and effectiveness....................................................................................6
References...................................................................................................................................................7
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Introduction
Audit may be defined as independent examination or checking of the books of accounts of the entity,
whether profit making or non, public or private, with the intention to comment thereupon that whether
the same is giving true and fair view of the affairs of business. Off late, there has been widespread
debates all over the world over issues of audit expectation gap (Alexander, 2016).
What is Audit Expectation Gap
There has been several definitions which have been given in the past. It is basically the difference
between what the public and users of the financial statements expects to be the auditors responsibility
and what the auditors do themselves perceive in Spain. Different definitions were also given by Liggio in
1974, Monroe and Woodliffi in 1993 and Jennings and Portal as well. Portal rightly defined the
expectation performance gap is nothing but what are the expectations of the society from the auditors
and what the actual performance of the auditors is (Chron, 2017).
Example
Regulators, law makers and the setters of the standards usually propose for the change or revision in the
existing accounting standards following a given event which triggers risks to the community. Recently,
financial crisis and the corporate frauds and scams in Spain was the reason behind the trigger point for
them to revisit the audit report and the standards. (IOSCO 2009, PCOAB 2011, IAASB 2011). From the
below graph it can be seen that output is negative in Spain and the main reason behind the same in
financial crisis in major parts of the country.
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Narrowing the audit expectation gap has primarily been the motive of PCAOB in the prior changes to the
Audit Report (ISA 700), whereas now the focus has shifted to narrow the gap in terms of the information
disclosure and resolve the issues raised by the financial statements user. It has been clearly stated in the
IAASB consultation paper in 2011 that where expectation gap is the “difference between the
expectations of the user from auditor and financial statements and what actually audit does”
information gap is the difference between “what information the users believe should be a part of the
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audit report and financial statements to enable them the informed decision on investment and what is
actually being available in audited financial statements and as part of public information (DeZoort &
Harrison, 2016).”
Other insights – Purpose, Process, Risk, technique, audit evidences
Audit is conducted with a primary view that the assurance can be drawn on the operations conducted by
the entity and what is being presented in the financial statements. Auditors give reasonable assurance
of the same based on which the investors and other stakeholders take different types of decisions. The
process is continuous and it involves following all the rules and regulations, standards and corporate
laws. The major risk is that the auditors are not supposed to check the fraud and misstatements being
made in the books of accounts however, in the course of audit, if they come across any such situation,
they need to report the same in the audit report (Defond & Lennox, 2017). There are various techiniques
and processes for collecting the audit evidences. This includes substantive and analytical procedures.
Substantive procedures include vouching of the incomes and expenses and verification of assets and
liabilities being shown in the balance sheet. Analytical audit procedures include various types of analysis
like ratio and trend analysis, variance analysis over the period, etc. All this can be used to gather the
audit evidences.
Internal control – Purpose, types and effectiveness
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Internal control may be defined as the processes and policies being followed in the company to get its
work done which gives reasonable assurance of achieving objectives by being compliant to laws and
regulations. The main purpose is stronger the internal control, lesser the risks of errors and frauds.
Strong internal control also ensures greater transparency (Bizfluent, 2017).
Its effectiveness can be checked by practicing 3 types of internal control, basically, preventive control,
detective control and corrective control. Preventive control helps in preventing loss of assets like having
password and security cameras, segregation of duties, background check of employees. Detective
control help in identying the risks which cannot be prevented by preventive control. This helps in
safeguarding of assets like bank reconciliation statements, physical verification of inventory and fixed
assets, etc. and surprise cash check (Kangarluie & Aalizadeh, 2017). Corrective control aims to correct
the deficiencies and errors being detected, these are aimed at putting a system in place like new
software, training for the employees, data backups for critical data, insurance to safeguard assets from
calamity, etc.
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References
Alexander, F., 2016. The Changing Face of Accountability.
The Journal of Higher Education, 71(4), pp.
411-431.
Bizfluent, 2017.
Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Chron, 2017.
five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?.Journal of Accounting Research, 55(3), pp. 591-627.
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud
within organization.
Journal of Business Ethics, pp. 1-18.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing.
Accounting, 3(1), pp. 19-22.
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