Auditors Responsibilities and Expectation Gap

Auditors Responsibilities and Expectation Gap are discussed below in detail. Users of audited financial statements expect to:

  • Perform the audit with technical competence, integrity, independence, and objectivity.
  • Search for and detect material misstatements, whether intentional or unintentional.
  • Prevent the issuance of misleading financial statements.

Some users have concluded that these expectations are not being met, leading to what has become known as the expectation gap.

The expectation gap relates largely to three troublesome areas: (1) detecting and reporting on errors and irregularities, especially fraud, (2) detecting and reporting on illegal client acts and (3) reporting whether there is uncertainty about the ability of an entity to continue as a going concern.

Errors and Irregularities

The primary factor that distinguishes errors from irregularities is whether the underlying cause of a misstatement is intentional or unintentional. The term errors refer to unintentional misstatements or omissions in the financial statements, whereas the term irregularities refer to intentional misstatements or omissions in the financial statements.

When the auditor concludes that the financial statements are materially misstated due to an error or irregularity, the financial statements are not prepared in conformity with GAAP. Accordingly the auditor should insist that the financial statements be revised by management. When this is done, the auditor should issue a standard auditor audit report and express an unqualified opinion.

However, when the financial statements are not revised, the auditor should express a qualified opinion or an adverse opinion because of the departure from GAAP and disclose the reasons therefore in the audit report. 

Illegal Client Acts

When an illegal act having a material effect on the financial statement are not properly accounted for or disclosed, the auditor should express a qualified opinion or an adverse opinion because the financial statements are not prepared in conformity with GAAP.

If the auditor is unable to obtain sufficient evidence about an illegal act, there is a scope limitation and the auditor should express a qualified opinion or disclaim an opinion on the financial Statement.

If the client refuses to accept the auditor’s report, the auditor should withdraw from the engagement and indicate the reasons to the audit committee in writing. 

auditors_responsibilities_and_expectation_gap

Auditors Responsibilities and Expectation Gap

Doubts to Continue as a Going Concern

An auditor is not responsible for predicting future conditions or events. However, SAS 59 The Auditor’s Consideration of an Entity’s Ability to continue as a Going Concern, provides that the auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time.

When the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern during this time period, the auditor should state this conclusion in the audit report:

  • If the management’s disclosures in the financial statements concerning the entity’s ability to continue as a going concern are considered adequate by the auditor, an unqualified opinion should be expressed and an explanatory paragraph should be added following the opinion paragraph describing the uncertainty with reference to management’s disclosures.
  • If the management’s disclosures in the financial statements are considered inadequate by the auditor, there is a departure from GAAP and the auditor should express either a qualified opinion or an adverse opinion and explain the reasons there for in an explanatory paragraph preceding the opinion paragraph.

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