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Audit expectation gap (Ruhnke and Schmidt, 2014)


Audit expectation gap (Ruhnke and Schmidt, 2014)

Flowchart with AEG at the top, down you can find 'Three types of failures" which are 1. 'Failure of the public' 2. 'Failure of the auditor' 3. 'Failure of the standard setters'

  1. Failure of the public: public fails to utilise information available regarding auditor’s responsibilities
  2. Failure of the auditor: lack of auditor independence & how this impacts the reputation of auditors
  3. Failure of the standard setter: standards are ambiguous, inconsistent or unclear.

Changing role of the audit:

  • Audit role in society is influenced by changing socio-economic, technological, and legal factors.
  • Public may not keep up to date with the changing role of the statutory audit and as a result may develop unreasonable expectations of auditors.
  • Non-audit engagement services further exacerbate the problem.

Provision of non-audit engagement services:

  • leads to conflicting interests and auditors compromising their independence resulting in deficient performance.

Difficulty in evaluating audit quality:

  • Public’s only way to evaluate audit quality is subsequent failure of companies given a clean audit opinion.
  • Public assumes that the auditor has performed deficiently. However, this may not be the case. 
  • Auditor may have fulfilled the requirements of auditing standards. Rather the company failed due to poor management planning. 

Reactive nature of regulators:

  • Standard-setters typically only improve audit standards after crisis
  • Also, the self-regulatory nature of the audit profession creates minimal incentive for regulators to set standards for audit quality beyond the minimum level which the public would expect. Thus, audit standards are deficient.

Over to you

Can you think of any examples when you have seen ‘Failure of the public’ or ‘Failure of the auditor’? Share it with your peers in the comment section.

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