EXPECTATION GAP - Audit and Assurance

The audit profession has suffered from an expectation gap for almost 50 years. The earliest reference to it dates back to 1974, when Carl Liggio, the chief legal officer for Arthur Young (one of the firms that later merged to form EY), defined it as ‘the difference between the levels of expected performance as envisioned by the independent accountant and by the user of financial statements”.

ACCA defines the overall audit expectation gap as the difference between what the public thinks auditors do and what the public wants auditors to do.

The expectation gap has three components:

1)????Knowledge gap

The ‘knowledge gap’ is the difference between what the public thinks auditors do and what auditors do. This recognises that the public can sometimes misunderstand audits: for example, the extent to which auditors are responsible for preventing company failure or the restrictions on the auditor of an entity from selling non-audit services to that entity.

2)????Performance gap

The ‘performance gap’ focuses on areas where auditors do not do what auditing standards or regulations require. This could be because of insufficient focus on audit quality; the complexity of certain auditing standards; or differences in interpretation of auditing standards or regulatory requirements between practitioners and regulators.

Audit firms are required to establish systems and processes to ensure quality in their engagements. As part of these processes, audit regulators regularly review files of completed audit engagements to monitor that quality is being achieved.

3)????Evolution gap

The ‘evolution gap’ exists in the areas of the audit where there is a need for evolution, taking into consideration the general public’s demand, technological advances and how the overall audit process could be enhanced to add more value.

Addressing the knowledge and performance gaps is, however, an important step in determining what needs to evolve in the audit. This will help to avoid overregulation and inappropriate developments in auditing standards when the real problems could be a lack of knowledge or poor performance.