Auditing Report: Expectation Gap, Independence Threats and Safeguards

This report examines the audit expectation gap and auditor independence within the context of auditing financial statements. It begins by defining the audit expectation gap, which arises from the difference between auditors' responsibilities and the expectations of financial statement users, and illustrates this gap with examples related to Bletchington Limited. The report then addresses the threats to auditor independence, including self-interest, self-review, and familiarity threats, as outlined in APES 110. For each threat, the report provides detailed explanations and discusses necessary safeguards, such as the appointment of outside assessors and strengthening corporate governance. The report emphasizes the importance of maintaining auditor independence to ensure the integrity and reliability of audit outcomes. The report provides a comprehensive overview of these critical aspects of auditing, offering valuable insights and practical solutions for auditors and stakeholders.

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
Date: 02.09.2019
Subject: Advice on Audit Expectation Gap and Audit Independence
At the time of auditing of the financial statements, there are certain factors that need the
attention of the auditors because of their ability to influence the audit outcome. Among all
these aspects, two crucial factors are the expectation gap and auditor independence. These
two aspects can create significant threat in the whole audit process. This memo aims at
advising the audit engagement partner on these two aspects.
The Expectation Gap
There are many situations where a difference or gap can be observed between the actual
responsibility of the auditors and what the users of the financial statements consider the
responsibility of the auditors; this particular difference or gap between the perception of the
users of the financial statements and auditors is called the Audit Expectation Gap (La Rosa &
Caserio, 2013). It is visible in the case of Bletchington Limited (Bletchington) that the
business of the company only occurs with those countries where there are recognized as well
as demographically elected government and thus, these countries are the customers of
Bletchington. These countries can be considered as the special users of the financial
statements of Bletchington in the presence of the aspect that these countries need to gain
understanding about the financial standing and performance of Bletchington which can be
obtained from the firm’s financial reports.

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It is natural that the users of the financial statements expect certain things from the auditors,
but the presence of audit expectation gap creates a barrier between the auditors and the users
of the financial statements that leads to the misalignment between the expectation of the users
and the responsibility of the auditors. Unrealistic demand or expectation of the users of the
financial statements is the main reason for the development of expectation gap (Aronmwan,
Ashafoke & Mgbame, 2013). It is common for the audit engagement partner of SBF to face
this challenge while performing the audit of Bletchington. Some examples of these audit
expectations gaps are shown below.
According to the expectation of the users, complete assurance on the client must be provided
from the auditors after the completion of audit engagement. In reality, the auditors are only
responsible for providing reasonable assurance about the client and this difference leads to
the expectation gap (Alzeban & Gwilliam, 2014). The users also think that the auditors are
responsible for providing guarantee on the fact that the client will be operating well in the
near future. In reality, it is not mentioned anywhere that the auditors will provide guarantee
on feasibility. One crucial aspect is that the auditors are responsible for the issue of
unmodified opinion each time stating the fact that all the accounts of the clients are
completely accurate. In reality, the auditors do not have such responsibility to provide
unmodified opinion each time, but they have the responsibility of providing reasonable
assurance only after taking the needed audit steps and only then unmodified audit opinion can
be provided (Alzeban, 2015). Another unrealistic expectation of the users is the detection of
every fraud in the financial statements of the audit client. In reality, it is not mentioned
anywhere about this reasonability, but the auditors must take the necessary steps to uncover
ant fraud in the financial statements of the clients. Lastly, another unrealistic expectation of
the users regarding the auditor’s responsibility is the checking of every financial transaction
by the auditors. In reality, the responsibility of the auditors is to undertake sample testing of

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the financial transactions (Ojala et al., 2014). These are the main areas of auditor’s
responsibility that can lead to the development of expectation gap.
Threat to Audit Independence and Necessary Safeguards
It is a crucial requirement for the auditors to maintain their indepdence from any parties
having interest in the audit client as this can harm the outcome of the whole audit program. In
case of Bletchington, it needs to be mentioned that certain aspects or situations in
Bletchington may contribute to the threat to audit independence. It is needed to apply the
required suitable safeguards for minimizing these threat to audit indepdence. These threats
are show below with the necessary safeguards.
Type of Threat Explanation on Threats Necessary Safeguards
Self-interest Threat
The auditors cannot have any
financial or non-financial interest in
the audit clients because
professional judgment or opinion
can be affected with this which
eventually can contribute towards
the occurrence of self-interest threat
of audit independence; and this is
mentioned in the Paragraph 100.12
(a) of APES 110 (apesb.org.au,
2019). At the same time, Paragraph
200.4 of APES 110 also contains
the fact that self-interest threat can
be occurred in case the audit firm is
In order to safeguard this
independence threat, it is
needed to ensure the
appointment of an outside
assessor with proper
authority and this assessor
will be responsible for the
assessment of the
information and report of the
external auditors. In addition,
corporate governance needs
to be strengthen (Abdul
Wahab, Zain & Abdul
Rahman, 2015).

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heavily dependent in the audit fees
of any audit client. This particular
aspect is applicable in case of
Bletchington and SBF due to the
fact that Bletchington is one of the
largest clients of SBF regarding
audit fees. This large amount of
audit fees create SBF’s dependency
on the fees of Bletchington which
can lead to the self-interest threat
(Tepalagul & Lin, 2015).
Self-review Threat
The responsibility of the auditors is
to ensure undertaking the review
and assessment of the previous
audit work done by the previous
audit engagement partner at the
time of the development of audit
opinion; and this is mentioned in
Paragraph 100.12 (b) of APES 110
(apesb.org.au, 2019). Failing to do
this can lead to the occurrence of
self-review threat of audit
independence. Moreover,
Paragraph 200.5 of APES 110
mentions that the same auditor who
In order to reduce this threat
to safe level, there must be
the presence of Audit
Committee within
Bletchington for assessing
the work of the internal audit
team. In addition, it is also
needed to strengthen the
corporate governance
mechanism (Tepalagul &
Lin, 2015).

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is responsible for the design and
implementation of an accounting
system cannot be responsible for
assessing the effectiveness of the
same because there can be
significant self-review threat. This
incident can be seen in
Bletchington where the internal
audit team was heavily involved in
the implementation process of the
off the shelf costing system along
with measuring effectiveness of the
same. For this reason, thus can
create self-review threat (Abdul
Wahab, Zain & Abdul Rahman,
2015).
Familiarity Threat
The auditors can be too concern
about their work because of the
presence of any long-standing
relationship with the audit client
and this can hamper the audit
judgement (apesb.org.au, 2019). As
per Paragraph 100.12 (d) of APES
110, familiarity threat can be
occurred due to the presence of this
For the reduction of this
threat, an outside assessor
needs to be appointed for the
assessment of the work of the
internal auditors. Moreover,
strengthening the corporate
governance mechanism is
another safeguard that can be
applied (Dart & Chandler,

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kind of relationship. Moreover, as
per Paragraph 200.7 of APES 110,
familiarly threat develops when an
officer or director of the audit client
having the power to significantly
influence the audit outcome has
recently served the audit
engagement firm. The above
situation can be seen in
Bletchington because the head of
the internal audit department of
Bletchington has served SBF in the
position of audit engagement
partner. Familiarity threat can be
developed from this situation (Ojo,
2015).
2013).

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References
Abdul Wahab, E. A., Mat Zain, M., & Abdul Rahman, R. (2015). Political connections: a
threat to auditor independence?. Journal of Accounting in Emerging Economies, 5(2),
222-246.
Alzeban, A. (2015). The impact of culture on the quality of internal audit: An empirical
study. Journal of Accounting, Auditing & Finance, 30(1), 57-77.
Alzeban, A., & Gwilliam, D. (2014). Factors affecting the internal audit effectiveness: A
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Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 2
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Ojo, M. (2015). Audits, audit quality and signalling mechanisms: concentrated ownership
structures. American Research Journal of Humanities and Social Sciences, 1(2).
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