By Vincent Tung st, Accountancy Dept, fam, utar introduction

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Understand the pressing issue faced by the auditing industry, ie “Audit Expectation Gap” in the nutshell

By Vincent Tung ST, Accountancy Dept, FAM, UTAR


The audit expectation gap is arguably one of the major issues confronting the profession in auditing industry over the recent years. This pressing issue has been in existence way back to 70s’ which was highlighted by Liggio (1974). Researchers have concluded that the audit expectation gap is an issue that remains as relevant today as ever. Expectation gap has been in the limelight over the last decade in view of the well-publicised corporate scandals in US particularly Enron Corporation and WorldCom. The credibility of auditor reports was questioned and thus the confidence of public to rely on the audited financial was badly eroded. In view of this , in 2002, US government has enacted Sarbanes Oxley Act ( SOX) with the objective of restoring the public confidence on relying the work of auditors.

What is audit expectation Gap?

The differences that exist between the public‘s expectations of the role and responsibilities of auditors and the auditor’s role and responsibilities as set forth in professional auditing standards such International standard of Auditing and legislation (Companies Act).In simple term, expectation gap exists when public and auditors hold different perceptions or beliefs pertaining the duties and responsibilities.

In some situations some of the public’s expectations are deemed unreasonable. For example, client might expect auditors to perform bank reconciliation on their behalf with the wrong understanding that this is part and parcel of audit work.

In 1993, porter through his empirical study, highlighted that, the expectation gap consists of two components namely: Reasonableness gap and Performance Gap

The performance gap could be due to the “deficient standard and deficient performance” in relation to the perceived duties and performance of the auditors and actual duties and performance of auditor as prescribed in the law and or professional standard.

What are the expectations of public?

  • User of financial statements, such as shareholders, potential investors, and creditors expect auditors to provide absolute assurance or guarantee that the audited financial statements are free from all misstatement concerning errors and frauds for them to assess the viability and solvency of the business. In reality auditors only provide reasonable assurance that the financial statements are free from material misstatement. In no circumstances, auditors could provide any form of guarantee partly due to the fact that audit procedures are done on sampling basis and auditors adopt professional judgement as essential part of the audit process. There is always a risk that the auditors’ judgement could be flawed.

  • Many people including the company’s management expect the auditor to prepare the accounts, deals with tax issues and keeps the books for them as part of the auditors’ duties and responsibilities but only few realise that the auditor has actual restricted role to play in providing these non assurance services. The restriction could be imposed by law for example S 201 of SOX 2002 and or professional guidelines/principles such as MIA-by law.

  • When entities fail through fraud or mismanagement, there is a tendency to blame the auditor for not having given adequate warning of the problems. Users perceive that the auditor main duty is to prevent and detect fraud. They failed to understand that the prevention and detection of fraud is the fiduciary duty of the board of directors. The auditing standard ISA 240 ® and the classic case Re Kingston Cotton Mill (1896) have clearly addressed this issue.

Steps to reduce or narrow the gap

  • Public Education.Financial statements users should be educated on the basic understanding of auditors’ report especially on those technical or jargon terms used such as material misstatement, reasonable assurance, qualified or unqualified opinion. Information on duties and responsibilities of auditors should be disseminated to the public via workshops, seminars or conferences. Perhaps professional bodies such as MIA and MICPA should initiate this move.

  • Review and revise the auditing standard. The relevant auditing standard concerning the duties and responsibilities of auditors should be reviewed and revised if necessary. For instance, ISA 240® has clearly addressed the issue of auditors’ duties in fraud detection.

  • Work scope. Increase the work scope of auditors to include other forms of non assurance services. One has to be aware that, providing any form of non assurances services might compromise the independence of auditors. This move should be considered carefully as the concept of independence is fundamental in auditing.

  • Quality control .Practice Review Committee (formed by MIA) and Audit Oversight Board (formed by Malaysia Government) could play an active role as a watchdog to ensure that the auditors discharge their duties and responsibilities without compromising the quality of the audit. The compliance of ISA 220 and ISQC I should be strictly enforced

  • Improved and expanded audit report. Review and revise the audit report to make it more users friendly. Plain English should be used to replace those jargon or technical terms. However aims to reduce the expectation gap through changes to the wording of audit reports, including the suggestion of a ‘plain English’ version, appear to remain unfulfilled

  • Letter of engagement. The auditors’ appointment letter should include the appropriate terms and conditions to reduce any misunderstanding between auditor and the client. The terms on the auditors’ responsibilities and duties should be clearly highlighted to the Board of Directors and if possible to the shareholders during the Annual General Meeting

  • Continuous Professional Development (CPD).Auditors are required to undergo appropriate formal training or workshop to enhance their competency level with the aim of reducing the performance gap. The requirement on the Continuous Professional Development should be strictly enforced by MIA and MICPA. The numbers of CPD hours and the contents of the training should also be evaluated to ensure sufficiency and practicality of the training.

  • Corporate Law Reform. In 2003, Corporate Law Reform Committee (CLRC) in Malaysia was established. The CLRC undertook a review of Malaysian Companies Act and made certain recommendations for amendments to be made.


Essentially people expect more from an auditor than his actual role can supply, hence the expectation gap. One might take the view that audit expectation gap could never be closed. The ever demanding public would not be able to satisfy whatever role played by the auditors ranging from a watchdog, to financial gatekeeper and eventually they expect auditor to be an active whistleblowers. If the gap cannot be narrowed, it will result in frustrations among public and auditors. This has significantly contributed to the increase in legal suit against the auditors over the last decade. Image of auditing industry could be tarnished if no fruitful efforts are taken by the profession and authorities to narrow the gap. To certain extent, move to reduce the gap is very much political in nature.One might perceive that it is no longer glamour to be part of the auditing industry


Liggio, C.D.(1974) “ The expectation gap: the accountant’s Waterloo”, Journal of Contemporary Business, Vol 3, Spring,pp.27-44

Porter, B.(1193),”An empirical study of expectation-performance gap” Accounting and Business Research, Vol.24, Winter,pp.49-68.

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