Expectation Gap

Expectation gap is the difference between public perception of an auditor’s role and responsibilities regarding audit engagements and what the auditor’s legal responsibilities actually are. Users of financial statements often believe that auditors are responsible for preventing and detecting all frauds and that they test transactions and balances more comprehensively than what actual practice is.

The expectation gap may be categorized into:

  • Performance Gap i.e. the difference between the level of work an auditor is required to do by the auditing standards and what public believes they ought to do.
  • Liability Gap i.e. the misperception regarding legal liability of the auditor.

The auditing process has certain limitations. For example, auditors employ sampling, thus testing a subset of transactions instead of testing all the records during a financial year. There is a chance that a sample chosen does not truly represent the population to which it relates. Another reason is that some of the evidence available to the auditor is persuasive but not conclusive. Therefore, an auditor’s opinion involves judgement and there is a rare possibility that the opinion given is false e.g. the opinion that financial statements are free from material misstatement, but they actually contain material misstatement.

Due to these limitations of the auditing process, it is impossible for the auditor to provide an absolute guarantee that financial statements portray the exact and precise circumstances of a company.

The expectation gap is often the reason an auditor may be sued by stakeholders such as investors because they suffered a loss by relying on audited financial statements.

Recently, there has been an effort by the auditing profession to educate users of the financial statements about the role and responsibilities of the auditor. Auditor’s report now lists out respective responsibilities of management and auditors of a company. For example, that responsibility to prevent and detect fraud mainly rests with management of the company whereas auditors are expected to detect only those frauds which materially impact financial statements.

Another approach to bridging the expectation gap is by engaging in open and clear communication with those charged with governance i.e. the directors of the company being audited. The auditing standards may also be made more comprehensive with improved methods to expand the scope of work done by auditors thus reducing the expectation gap related to performance.

by Irfanullah Jan, ACCA and last modified on

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