An ARTICLE on Expectation Gap in Auditing Profession

AN ARTICLE ON

EXPECTAION GAP REGARDING AUDIT IN BANGLADESH: A COMPREHENSIVE STUDY

Department of Accounting & Information Systems

Faculty of Business Studies

University of Dhaka

Assigned by:

Ranjan Kumar Mitra

Lecturer

Department of A&IS


University of Dhaka

Submitted by:

Sl No. Name ID

01 Md. Mahadi Hasan 15120

02 Md. Enamul Haque 15121

03 Sushanta Chandra Mondal 15126

04 Md. Shamim Raihan 15132

05 Md. Rabbiul Hasan 15157

06 Piyas Chandra Das 15169

Department of Accounting & Information Systems


University of Dhaka

Date of Submission: 20 March, 2011

Table of contents

Sl no. Topics Page no.

01 Abstract 01

02 Introduction 01

03 Literature Review 02

04 Methodology 03

05 Data Analysis Findings 04-11

06 Recommendation 12

07 Conclusion 13

10 References 14

Abstract

The expectation gap is a serious concern for professionals Accountant through the world. Auditing expectation gap is the difference between what auditors actually do and what third parties expect. This paper/study aims at to investigate the existence of an audit expectation gap and to measure the magnitude of audit. Throughout the paper we will cover the evaluation of audit and causes of audit expectation gap. We will also covet the evidence of expectation gap in Bangladesh. For this purpose sample group were selected from different groups of people with different background.

Keywords: Audit, Expectation gap, Third parties

Introduction

Accounting and auditing are the most critical and integrated parts of any types of organization

globally who deals with monetary transactions. Accounting keeps all of the monetary

transactions as a means of providing information through financial reporting to end - user,

auditing authenticate the true and fair view of the information provided by the accountants

through its authentication based on professional code of ethics and regulation. In this process,

auditors work as a bridge to fill up the communication or information gap between entities,

management and end-users of published financial reports, through their authentication reliability

and correctness of financial reporting/statements. Moreover in this modern era, the recipients of

financial statements have become more sophisticated so they demand from an audit function then

only attestation of the financial reports. Furthermore in last decades there has been a great

number of accounting scandals throughout the world specially Enron, World com Parlmalat and

Famee Mac has drown much more attention regarding the auditing service. So our objective in

this study is to determine the expectation gap between auditors and the thirds parties especially

in the present context of Bangladesh.

Literature review

The concept of the expectation gap was firstly defined by Liggio in 1974, (p.27). According to

his concept expectation gap is the difference between (a) what the general people and financial

statement users the responsibilities of auditors to be (b) what auditors believe their responsibility

are? Porter (1993) gives a detail look on the component of expectation with structural Wags.

This study is not new in our country's several studies were conducted on this issue in our country

for example Chowdhury, RR and Innes (1998), Rehan Fowzia (2010), Siddiqui, Al-Amin and T

Nasreen(2004). J. Siddiqui, Amin,T Nasreen, 2004 they studied the existence of expectation gap

among the students those who completed one course on Auditing and other groups completed

two courses on Auditing. They mainly tried to find out the effect or rule of auditing education on

expectation gap. However the findings of these study where surprising, because the study found

that expectation gap is greater among the students those who completed two courses than the

students completed one courses. The overall results were like that auditing education did not

significantly reduce the expectation gap. However this study was very contradictory with some

other research put on by several integration researchers; for example Bailey et al (1983), Pierce

and Kilcommins (1996), Kilcommins studied 6 types of students Categories into 1st year, 2nd

year, having and not having auditing course. The findings of this study were as usual as students

having completed more courses on auditing have less expectation gap than those of others. This

very critical issue was also studied what the perspective of two countries that means comparison

of audit expectation gap between two countries. Mahadeves wamy and Salehi (2008), the study

was aimed at to find out the similarities and dissimilarities of audit expectation gap among

auditor and investor between two countries and finding magnitude of auditor responsibility. The

findings of this study were that there were not much more differences in the responsibility of

auditor of two countries.

Methodology

To conduct this study we have collected data from both the primary and secondary sources. For

primary sources we have prepared a questionnaires consisting of 20 questions. First part contains

personal information of respondents and second part contains some statements where an

expectation gap prevails. For finding out the expectation gap we have assigned the base point

according to the established criteria given in BAS. The highest rank is 5 and the lowest rank is 0

for no opinion. We have surveyed among 100 people consisting of investor, business background

and non-business background, auditor/articles student etc.

For secondary data sources we have go through several journals, research papers, and articles of

different research published in different times. We have also taken help from different websites.

For coming to a decision we have not chosen any special groups but we have conducted this

survey in every class related people.

However in order to conducting the study we have taken the following scale to measure the level

of expectation gap among different relevant parties. The scale is as follows:

Strongly Agree=1, Moderately Agree=2, Agree=3, Disagree=4, Strongly Disagree=5, & No

Opinion=0

The above scale has been taken according to BSA (Bangladesh Auditing Standards).

Data analysis and Findings

For better understanding we will discuss our findings in five segments. In first segment we will

discuss our findings regarding expectation gap of non-commerce student, in second segment we

will discuss our findings regarding commerce student, in third segment we will show our

findings regarding auditor and finally in fourth segment we will show our findings for general

investor and in fifth segment we will show our findings combinedly on all of the people we have

taken as sample and surveyed.

Segment 1: Expectation gap on non-commerce student

For non-commerce student our findings are as follow: Table 1

Statements Base

scorea

Averageb Gapa -b

The Auditor can give Absolute Assurance 5 1.09 3.91

The Auditor checks every single the transection 5 1.04 3.96

The Auditor is responsible for detecting all frauds 5 .67 4.33

The Auditor is appointed by Government 5 1.64 3.36

The Auditor ensures internal control of an

organization.

5 3.33 1.67

The Auditor is responsible for maintaining accounting

records

5 3.09 1.91

The Auditor is responsible for preventing fraud 5 .33 4.57

The Auditor is unbiased and objectives 1 1.67 -.67

The degree of assurance given by the Auditor is

clearly indicated in the audit report

1 1.33 -.33

The Audited Financial statements provide an

assurance regarding the performance of audited firm

5 1.87 3.13

The Auditor is responsible for both Audit failure &

Audit Risk

5 .39 4.61

The auditor is responsible for preparing Financial

Statements

5 1.88 3.12

Conduct of 100 percent examination in audit proceed 5 1.02 3.98

Right procedures followed before authenticating

financial statements

1 2.07 -1.07

Giving assurance that company is in good financial

health

5 1.67 3.33

Reporting all detected frauds and thefts to the relevant

authority

5 1.34 3.66

The auditor will Safeguard the assets of the company 5 1.33 3.67

The above table shows that in every cases the non commerce student have huge expectaion gap.

However expectation gap is more in some cases for example most of the non commerce student

think that the auditor will give absulate or 100% assurances and auditors cheack every single

tranjaction. We see a huge gap in case of the statements auditor is responsible for detecting all

fraud. Even they think that auditors is appointed by government. They make the auditor

responsible to prevent fraud as they have no idea about the audit risk and audit failure so they

think that auditor is responsinble for both audit failure and audit risk. From the above table we

can say that non commerce student have expectation gap but this gap is more or less it will be

decided after evaluating the all of the cases for the different respondendent groups.

Segment 2: Expectation gap on commerce student

Table 2

Statements Base

scorea

Averageb

Gapa -

b



The Auditor is responsible for detecting all frauds 5 1.96 3.04

The Auditor is appointed by Government 5 4.82 .18

The Auditor ensures internal control of an organization. 5 3.71 1.29

The Auditor is responsible for maintaining accounting records

5 3.79 1.21

The Auditor is responsible for preventing fraud 5 2.43 2.57


The degree of assurance given by the Auditor is clearly indicated in the audit report

1 2.21 2.79

The Audited Financial statements provide an assurance regarding the performance of audited firm

5 2.57 2.43

The Auditor is responsible for both Audit failure & Audit Risk

5 2.5 2.5

The auditor is responsible for preparing Financial Statements

5 3.5 1.5


Right procedures followed before authenticating financial statements

1 2.64 -1.64

Giving assurance that company is in good financial health

5 3.21 1.79

Reporting all detected frauds and thefts to the relevant authority

5 2.5 1.5


Here in the above table we see among commerce student expectation gap is prevails but the gap

is much more less than the non commerce bacground student. but the gap is not near to zero or

bellow one this is happened because among commerce student all of the student have not

completed the auditing cource some of them completed one cource on auditing some completed

two cources on auditing. But in the statements the auditor is responsible for preventing fraud the

gap is much more than any other sector of gap.

Segment 3: Expectation gap on investor

Table 3

Statements Base

scorea

Averageb Gapa -

b

The Auditor can give Absolute Assurance 5 1.41 3.59 The Auditor checks every single the transection 5 .63 4.37 The Auditor is responsible for detecting all frauds 5 1.54 3.46



organization.

5 1.63 3.37


records

5 1.64 3.36

The Auditor is responsible for preventing fraud 5 .86 4.14




1 1.55 -.55



5 .49 4.51

The Auditor is responsible for both Audit failure &

Audit Risk

5 1.78 3.22

The auditor is responsible for preparing Financial

Statements

5 2.04 2.96

Conduct of 100 percent examination in audit proceed 5 .39 4.61

Right procedures followed before authenticating 1 1.47 -.47

financial statements

Giving assurance that company is in good financial

health

5 1.92 3.08

Reporting all detected frauds and thefts to the relevant

authority

5 1.82 3.18


Above table shows the expectation gap among the investor. The result is really a worring matter

for our country. Most of the cases the investor have no knowldge regarding the auditing and

there is huge expectation gap among the general investors. in most of the cases investors think

auditors checks every single tranjaction and the auditor provide an assurance regarding the

performance of the of the audited clients. Investor also think auditors do 100% examination of

the audited organization.

Segment 4: Expectation gap on Articleship student

Table 4

Statements Base Averageb Gapa -b

scorea

The Auditor can give Absolute Assurance 5 4.54 .46

The Auditor checks every single the transection 5 4.69 .31

The Auditor is responsible for detecting all frauds 5 4.62 .38

The Auditor is appointed by Government 5 4.15 .85


organization.

5 4.31 .69


records

5 4.31 .69

The Auditor is responsible for preventing fraud 5 4.38 .62




1 1.09 -.09



5 3.99 1.01

The Auditor is responsible for both Audit failure & Audit Risk

5 4.92 .08

The auditor is responsible for preparing Financial Statements

5 4.96 .04

Conduct of 100 percent examination in audit proceed 5 4.97 .03

Right procedures followed before authenticating financial statements

1 1.85 -.85

Giving assurance that company is in good financial health

5 3.94 1.06

Reporting all detected frauds and thefts to the relevant authority

5 3.77 1.23

The auditor will Safeguard the assets of the company 5 4.64 .36

Above table shows the result of our survey on expectation gap on articles student those who

have joined in different CA firm in our country. The findings of this survey are really surprising

because the articles student have expectation gap in some cases. Though the gap is not profound

it is almost near to 1 or 0. The reason for this might be the student of articles student might be on

the very beginning of their CA course in knowledge level. So they don’t have complete

knowledge of auditing.

Segment 4: Expectation gap on in all related third parties (Among 100

samples)

Table 5

Statements Base

scorea

Averageb Gapa -b



The Auditor is responsible for detecting all frauds 5 2.2 2.8


The Auditor ensures internal control of an organization. 5 3.25 1.75

The Auditor is responsible for maintaining accounting records 5 3.21 1.79

The Auditor is responsible for preventing fraud 5 2 3


The degree of assurance given by the Auditor is clearly

indicated in the audit report 1 1.54 -.54

The Audited Financial statements provide an assurance

regarding the performance of audited firm

5

2.23

2.77

The Auditor is responsible for both Audit failure & Audit Risk 5 2.4 2.6

The auditor is responsible for preparing Financial Statements 5 3.1 1.9


Right procedures followed before authenticating financial

statements

1

2.01

-1.01

Giving assurance that company is in good financial health 5 2.68 2.32

Reporting all detected frauds and thefts to the relevant authority 5 2.36 2.64


From the above table it very clear to us that expectation gap is very acute in our country. After

examining the all above table we see that expectation gap much higher among the non-commerce

student and general investor who don’t have any knowledge of auditing. Overall it was found

that auditing education significantly reduces the expectation gap (table 4). Our findings are

matched with some renowned researcher conducted study on it. For example Pierce &

Kilcommins, 1996, find that the people or student who have completed at least a single course on

auditing have significant reduction in the misunderstanding of audit regulation. We have

conducted our research work to identify the fundamental issues regarding the expectation gap in

auditing in Bangladesh. In this very stage ii can be easily understandable that the expectation gap

is more prone especially the people who have no or minimum idea of auditing and auditing

procedure. At the same time the educated users are less likely to demand the higher levels of

audit assurance (Epstein & Geiger, 1994). But the matters of regret that these two comments

(Pierce & Kilcommins, 1996, and Epstein & Geiger, 1994) are contradictory with the journal of

Al-Amin, Javed & Taslima, 2004. This phenomenon can easily describe as that the situation on

which the journal were written was different than that of now.

Recommendation

Throughout this very study we can come to conclusion regarding the key findings that is what

can we do for narrowing expectation gap. There are some ways out of the expectation gap these

are given bellow:

Expending the Audit Report:

To remove the Expectation gap we can expand the Audit report by the following steps.

By setting out a clear & precise responsibilities of auditors and directors

Clarify the Auditing procedure, like

Audit is based on sampling basis

The procedure has significant influence of judgments & estimates

Give reasonable assurance on financial statements

Identify only material misstatement.

Engagement Letter:

In the engagement we should make a clear indication regarding the role and responsibilities of

auditors, directors and the respective firm.

Audit Committees:

We can reduce the expectation gap of the respective users by establishing Audit committee in the

company structure. In the audit committee there will be two audit teams one is for internal

auditing another is for external auditing. This overall procedure shall be clear to the users by

giving proper disclosures regarding the separate duties and responsibilities of both two types of

auditors.

Conclution

This Study provides evidence about the nature of an audit expectation gap between

auditors and users in Bangladesh. The Study shows that the audit expectation gap

exists among almost all of the related parties including the person who have

auditing knowledge. However increased litigation and criticism of auditors has

express those auditors are facing a liability and credibility crisis (Russell 1986).

But the blame should not be placed entirely on the auditors as the nature and

objectives of auditing are thought differently between the public and auditors.

These differences in perceptions have created the audit expectation gap. This

differences or gap shall be addressed as soon as possible otherwise it might have

long term impact in our overall macro-economic variables. One of the key findings

of this study is that the people having no auditing knowledge have more

expectation gap than those of others who have auditing knowledge. The study also

reveals that educating the public about the objects of an audit, auditors’ role and

responsibilities will help to narrow the audit expectation gap. At last we can say

that audit expectation gap is the result of deficiencies in audit, auditor

independence, audit process, regulatory mechanism and society at large.

References

Chowdhury,R.R. and Innes, J.(1998),” A Qualitative Analysis of the Audit Expectations Gap

in the Public Sector of Bangladesh,” International Journal of Auditing, pp-247-266

Liggio, C.D. (1974), "The expectation gap: the accountant's waterloo", Journal of Contemporary

Business, Vol. 3 No.3, pp.27-44.

Nasreen Taslima (2006), “Audit Expectation Gap in Bangladesh: The Role of Auditing

Education in Narrowing the Gap”, DU Journal of marketing, Vol. No. 9, June, 2006.

Pierce, B., Kilcommins, M. (1996), "The audit expectations gap: the role of auditing education",

Dublin City University Business School Research Papers 1995-1996, No. 13,

Siddiqui, Amin and Nasreen(2004) The Presence of a reasonableness gap ? Student perceptions

regarding Audit & the role Audit Education in Bangladesh

Leif Højskov (1998) , The expectation gap between users' and auditors' materiality judgments in

Denmark

Salehi, Mansoury, Azary (2009) Audit Independence and Expectation Gap: Empirical Evidences

from Iran

Mahadevaswamy, Salehi(2008) Gap in Auditor Responsibilities: Comparison between India and

Iran Audit Expectation

M.Salehi a, V.Rostami(2009) AUDIT EXPECTATION GAP: INTERNATIONAL EVIDENCES

Bailey, K.E, J.H and Shield 1983, Effect of audit report wording changes on the perceieved

messages. Journal of auditing research, 355-70.

An ARTICLE on Expectation Gap in Auditing Profession

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