Audit Expectation Gap

Essay by macnizgoldUniversity, Master'sA+, May 2010

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Definition and structure of the audit expectation gap

In today's growing world of business, we see organizations reaching heights and falling dramatically. In last 100 years, the size of the companies has grown multiple folds and so is their list of stakeholders, especially investors. A huge investment in the past years is seen on the corporate governance activities to ensure a good image of the company. Auditing being a legal obligation for the companies now, ensure that the financial reports of the company are without any material misstatement and frauds. Reports presented by the auditors work as an assurance for the investors and other stake holders. However, in recent years, while many corporate scandals and collapses, that were associated with auditors' fraud and negligence, have been unveiled, the auditors' legal liabilities became the bone of contention in almost every country. Auditing being an expensive activity is performed till a limited extent, best possible ways are implemented to avoid any chance of leaving the problems in the financial reports, but despite everything, things go wrong and probably would continue to be the same way.

We will find laws in every country to safeguard the interest of an auditor and the stakeholder as well. In this relation, there is seen an increase in the number of lawsuits filed against the auditors in the recent times. This gives us an indication that the investors are not satisfied with the way auditing firms are operating and or they are not producing the desired results. The atmosphere around and the job profile creates a necessity for the auditor to know its legal duties, so that they can discharge their duties properly. On the other hand, in case of the investor or other stakeholders relying on the audit reports, we will see a lot of misperceptions...