AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 1
Running head: AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP
An Empirical Study of Audit Expectation Gap: The Case of
Lithuania
By
Vitalija Bogdanovičiūtė
Master student,
MSc in Finance and International Business
Department of Business Studies
Aarhus School of Business, University of Aarhus
Supervisor Dominyka Sakalauskaitė
May, 2011
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 2
Abstract
Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company. By George Washington
This study analyses the extent of an audit expectation gap among auditors and users of audited financial statements in terms of audit responsibility and reliability, objective, duties in detecting and reporting frauds and irregularities, and liability to the third parties in the Lithuanian business environment. The following four propositions are developed in order to be able to address the research question: 1) responsibility and reliability of audited financial statements differ substantially among auditors and users; 2) objective of auditing differ substantially among auditors and users; 3) auditor’s duties in detecting and reporting frauds and irregularities differ substantially among auditors and users; 4) auditor’s liability to the third parties in relations to auditors’ negligence and audit failure differs substantially among auditors and users. In order to explore the topic a survey is created based on methods used in Fadzly and Ahmad (2004), Lin and Chen (2004), Porter (1993) and Monroe and Woodcliff (1994). The results confirm that audit expectation gap exist in Lithuanian business environment, especially in the areas related to auditors reliability and responsibly, fraud detection and liability to third parties. Nevertheless, the results also show that auditors themselves have different perception regarding fraud prevention and detection, assurance and usefulness of the audited financial statements. This may be attributable to increased attention from the government and regulatory bodies regarding the role and supervision of auditors in order to regain investors trust and confidence after the corporate scandals and financial crisis.
Keywords: audit, expectation gap, attest function, fraud
Data availability: Please contact the author concerning the data availability
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 3
Table of contents
1 Introduction ..................................................................................................................... 5
2 Audit, fraud and expectation gap .................................................................................... 8
2.1 Audit function, objectives and development ........................................................... 8
2.1.1 Development of auditing practise ..................................................................... 8
2.1.2 Standards and legislation ................................................................................ 12
2.2 Fraud as audit function .......................................................................................... 15
2.2.1 Definition of fraud .......................................................................................... 16
2.2.2 Audit role in the area of fraud ........................................................................ 21
2.3 Audit expectation gap ............................................................................................ 23
2.3.1 Development of audit expectation gap ........................................................... 24
2.3.2 Audit expectation gap: Global evidence ......................................................... 26
3 Audit function and audit expectation gap in Lithuania ................................................. 32
3.1 Audit practice development in Lithuania ............................................................... 32
3.2 Role of Auditors and other institutions .................................................................. 35
4 Research of the extent of audit expectation gap in Lithuania ....................................... 39
4.1 Study propositions ................................................................................................. 39
4.2 Research methodology ........................................................................................... 41
4.2.1 Pretesting of the Questionnaire ...................................................................... 42
4.2.2 Data Analysis .................................................................................................. 43
4.3 Results .................................................................................................................... 43
4.3.1 Proposition 1 ................................................................................................... 44
4.3.2 Proposition 2 ................................................................................................... 48
4.3.3 Proposition 3 ................................................................................................... 50
4.3.4 Proposition 4 ................................................................................................... 52
5 Discussion and conclusion ............................................................................................ 53
5.1 Limitations ............................................................................................................. 56
6 Appendices .................................................................................................................... 57
7 References ..................................................................................................................... 68
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 4
Abbreviations
ACFE - Association of Certified Fraud Examiners
EU – European Union
EUR - Euro
E&Y - Big-Four audit Firm Ernst & Young
FASB - The Financial Accounting Standards Board
FCIS - Financial Crime Investigation Service
FEE - General Assembly of European Federation of Accountants
GAAP - Generally accepted accounting principles
GDP – Gross domestic product
IASB - The International Accounting Standards Board
IFAC - International Federation of Accountants
IFRS - International Financial Reporting Standards
ISA – International Standards on Auditing
KPMG - Big-Four audit Firm KPMG
LCA - Lithuanian Chamber of Auditors
MSL - minimum subsistence level amounts
OLAF - European Anti-Fraud Office
PWC – Big-Four audit Firm PricewaterhouseCoopers
SPSS - computer program used for statistical analysis
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 5
1 Introduction
Fraud1 has been one of the most problematic and prevalent issues for business
worldwide for a long time; however, there has been much more attention and research
dedicated to the topic after the scandals such as Enron, WorldCom and others. The 5th
Global Economic Crime Survey performed by PwC (2009) reports that fraud remains a
pervasive business risk and almost every firm is subject to occupational fraud in their daily
business, leading to huge losses for business and society. Increase in occupational fraud and
number of corporate scandals had an important impact on understanding and analysing
fraud and in turn on audit and its regulation.
Prior studies on fraud investigation, detection and prevention indicate that the
deepening economic recession leads to even greater levels of fraud (PwC, 2009). The
mentioned findings and losses incurred by corporate scandals resulted in the increasing
public attention paid to auditors, who were expected to attest the accountability and
accuracy of the company’s financial statement. As mentioned in Salehi and Rostami (2009)
many users misunderstand the nature of the attest function of audit, as ‘users believe that an
unqualified opinion means that the entity has foolproof financial reporting’. Users’
expectations go beyond the responsibility required by the professional regulations and
standards, presenting subject of misconceptions especially in terms of auditors being able to
provide absolute assurance about the accuracy of financial statements and in turn create a
gap between auditors’ and users’ expectations of the audit functions. Additionally, if the
company appears to face serious financial difficulties without any warning, public usually
perceives that auditors are the ones to be made accountable for any losses experienced
(Koh&Woo, 1998). This go beyond the regulatory requirements which have been changed
over time, however currently claim that the main responsibility for fraud related items rest
with the management of the company (IFAC: IAASB, 2009a)
Fraud detection was considered the primary objective of audit process until
approximately the middle of 20th century. Later, however, the main objective changed
1 As a legal concept, fraud is broad and covers a wide range of activities. This study focuses on the category of fraud, known as occupational fraud, which is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2010). ACFE identifies three primary categories of occupation fraud: 1) asset misappropriation; 2) corruption; and 3) fraudulent financial statements. This study focuses on the two categories of occupational fraud — asset misappropriation and fraudulent financial statements, as only these two types of misstatement are relevant to the auditors (ISA No. 240, paragraph 2).
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 6
from fraud detection to ‘verification of financial statements’ (Chandler, Edwards &
Anderson, 1993). Such shift in audit objectives and responsibilities created dissatisfaction
of companies’ stakeholders, including shareholders, current and potential investors,
creditors, etc.
Recently much attention paid to control issues and systems in order to narrow the
audit expectation gap, however, the actual level of fraud and financial damages has not
decreased (KPMG, 2009). The reason for this may be difficult and challenging audit
processes, as new rules and regulations require auditors to enhance the effort in terms of
fraud prevention and detection. A major issue of fraud detection is related to the difficulty
of identifying the fraud soon after it occurs. Quite often fraud is well hidden from auditors,
investors and other stakeholders and might only be discovered by chance (Plesis &
Koornhof, 2002). Besides, new rules and regulations followed by auditors when performing
audit contain terms like “reasonable”, “material”, “professional scepticism”, whose
meaning differ from auditor to auditor (Zikmund, 2008; personal communication March 3,
2011).
European Commission believes that mapping out society’s expectations of the role
and duties of auditors is crucial in taking steps to meet the expectations with auditors’
performance and fighting fraudulent activities (European Commission, 2010b). A few
studies have examined the audited expectation gap in Europe. However, to the best of my
knowledge no research has been done to examine directly the audit expectation gap in
Lithuania. In Lithuania, however, if such a gap does exist it might be presented as a result
of different situations and beliefs. Thus, the main task of this study is to investigate the
extent of an audit expectation gap among auditors and users of audited financial statements
in terms of audit responsibility and reliability, objective, duties in detecting and reporting
frauds and irregularities, and liability to the third parties in the Lithuanian business
environment. Therefore, four propositions are developed in order to be able to test the
hypothesis of existence of audit expectation gap among auditors and users.
The paper is based on the survey which presents the analysis of factors that form the
different expectations between the society and auditors and is designed and developed upon
the methods used in Fadzly and Ahmad(2004), Lin and Chen (2004), Porter (1993) and
Monroe and Woodcliff (1994). The research also highlights problems attributable to the
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 7
existing audit expectation gap and identifies possible topics for further research. Due to a
void in research in this area in Lithuania, these findings are important to stakeholders in the
financial reporting process, including auditors, the society, investors, creditors, accounting
academics, and other parties involved in audit regulation and rule making.
The paper is structured in the following way. The next part gives an historical
overview of audit process, its functions and objectives, including background on fraud
detection and audit expectation gap. The third section introduces literature review and
empirical evidence of the audit expectation gap in different parts of the world. The forth
section describes the audit and fraud detection process in Lithuania and introduces the
model used to test the extent of audit expectation gap in Lithuania. The last section
provides research implications and conclusions, including suggestions for further research.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 8
2 Audit, fraud and expectation gap
Any enterprise worldwide relies on two very important and integral components –
accounting and auditing. The former one tracks all transactions of the firm and provides
information via financial reporting, while audit is performed to indicate the correctness of
this track and to ascertain the validity and reliability of information. The purpose of audit is
‘to enhance the degree of confidence of intended users in the financial statements <…> by
expression of an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework’ (IAASB, 2010a).
The role of auditors in the financial statement has been and continues to be an
important issue for the auditing profession. According to Leung, Coram, Cooper, Cosserat
and Gill (2004) auditing practice has undergone various important evolution stages. During
the early 1990s, the detection of fraud was the primary purpose of external financial audit
(Rezaee&Riley, 2010). With time, Lee and Ali (2008b) claims that auditing practice
became more related to ‘enhancing role’, with special focus on integrity and credibility of
the information provided in financial statements; while Boynton, Jonson and Kell (2005)
declare that, besides enchasing credibility of financial statements, auditors nowadays are
providing other services such as reporting on irregularities, identifying business risks, and
management consulting on internal controls. In other words, auditors suppose to bridge the
communication between the managers of the company and final users of published
financial reports through authentication, reliability and correctness of financial reporting
(Salehi&Rostami, 2009).
2.1 Audit function, objectives and development
2.1.1 Development of auditing practise
External auditing plays an important role in bridging the effectiveness and efficient
functioning of business environment by adding credibility to financial statements
(Rezaee&Riley, 2010). Such assurance is needed to stakeholders of the company, usually
including not only shareholders but other parties as well (e.g. tax authorities, banks,
regulators, suppliers, customers and employees). Audits are not required by law but are
obligatory in many EU member states, as they help to decrease the costs of information
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 9
asymmetry by increasing the possibility that a material misstatement is detected by audit
procedures (European Commission, 2010b).
It is said that auditing is a social function, and the role of auditors is subject to shift
in accordance with the needs and demands of society (Porter, Simon&Hatherly, 2005). The
objective and techniques of auditors have changed significantly over time and can be
divided into several phases (Lee&Ali, 2008b).
Auditing until 1840. Auditing can be found as early as in the ancient civilisations of
China, Egypt and Greece. Lee and Ali (2008b) reports that all auditing objectives prior
1840 were similar to ancient civilisation, where a special audit officers had to make sure
that enterprises properly accounted for revenue and expenditure transactions. Interestingly
that even the name of the person hired to exanimate the transactions and prevent fraudulent
actions was derived from the Latin world “audire”, meaning to hear (Lee&Ali, 2008b). In
the period before 1840, auditors were obligated to perform detailed verification of every
transaction, where auditing procedures did not include any concept of testing or sampling.
In other words, during this period the main audit objective was to verify the honesty of
persons charged with fiscal responsibilities.
Auditing between 1840s-1920s. Industrial revolution established new grounds for
auditing practises (Chandler et al, 1993). The establishment of large factories and machine-
based production relied on the extensive amount of capital. As the market was poorly
regulated and highly speculative, investors were ‘in dire need of protection’ (Porter et al.,
2005) and this stimulated the emergence of the auditing profession and main procedures.
Some research (Brown, 1962, Queenan, 1946) states that during this period, auditors were
performing total checking of transactions with littler attention paid to internal controls.
Additionally, the concepts of materiality and sampling techniques were established as
auditors were not able anymore to verify all transactions conducted by the large
corporations and enterprises. According to Porter et al. (2005) analysis, during the years
1840-1920 the main responsibilities of the auditors were not exactly identified and their
focused on to detect fraud as well as verification of balance sheet to present the proper
company’s solvency (or insolvency). As to Chandler et al (1993) there are evidence that
auditors working with in large industries (such as banking, insurance and railway)
continued see balance sheet verification as the main objective of audit. For other
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 10
companies, which remained relatively small in that period, the objective and role of
auditors was perceived as fraud detection. Such predominant auditors’ role of fraud
detection resulted mainly because users of audited financial statements appreciated the
doubtless investment opportunity. In addition, the emphasis on fraud appeared from high
level of corporate bankruptcies experienced during the 1860s and 1870s, when ‘first hand
experienced of the causes and effects of poor or fraudulent management <…> coloured
their (auditors) attitude towards other aspects of their work’ (Chandler et al, 1993).
Above described disagreements imply the different views regarding fraud
prevention and detection as the primary auditor’s role during the engagement until
approximately middle of 20th century. However, after the McKesson & Robbins’ fraud
scandal in 1938 practitioners agreed that fraud prevention and detection should not be
considered as the primary auditor’s objective (Albrecht et al., 2001, Scott and Frye, 1997).
Different users and auditors perceptions related to fraud prevention and detection
encouraged the AICPA to issue several valuable additions to auditing standards, including
SAS No. 53 in 1988 (The Auditor’s Responsibility to Detect and Report Errors and
Irregularities), SAS No. 82 in 1997 (Considering of Fraud in a Financial Statement Audit),
and finally SAS No. 99 in 2002 (Considering Fraud in a Financial Statement Audit)
(AICPA, 1988, AICPA, 1997, AICPA, 2002). International Standards on Auditing also
included similar requirements, known as (ISA) No.240, The Auditors Responsibility to
Consider Fraud in an Audit of Financial Statements (IFAC: IAASB, 2007).
Auditing between 1920s-1960. The rapid development of the capital market and the
economic growth of the USA caused the shift in the role and objective of audit. According
to Porter et al. (2005), such development created the need to convince the participants in
the financial market about the financial statements provides true and fair picture of the
company’s financial position. Therefore, auditors were asked to provide credibility to the
financial statements prepared by company managers for their shareholders (Lee&Ali,
2008b). In other words, the auditors needed to assess the truth and fairness of the
companies’ financial statements rather than prevent and detect fraud and error (Lee&Ali,
2008b). Porter et al. (2005) states that audit focused mainly on the following
characteristics:
• Company’s internal controls
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 11
• Sampling techniques
• Audit evidence through internal and external sources
• Emphasis on the truth and fairness of financial statements.
Auditing between 1960-1990s. This period was marked with significant shifts in the
technology and economic development; however, auditors continued to play an important
role. The key role was to enhance the credibility of financial information used in the capital
market (Leung et al. 2004), leading to the fact that the role of auditors stayed similar to the
previous period. Porter et al. (2005) identifies that auditing practice continued to focus on
advanced computing auditing tools to improve audit procedures. Besides, everyone focused
audit evidence examination and usage of risk-based auditing to focus on areas most likely
to contain errors. In addition, so called one-stop shops emerged (Leung et al. 2004),
meaning that besides auditing services auditors started advising audit clients for a number
of services.
Auditing from 1990 to present. The overall audit objective remained the same over
time. The main purpose of audit is to express an opinion on whether the information
presented in the financial statements reflects the true and fair picture of the financial
position of the organisation at a given date. An audit is the independent examination of and
expression of opinion on company’s the financial statements by an appointed auditor in
compliance with any relevant statutory obligation. An auditor may express qualified
(accounts do not present a true and fair view) or unqualified (no significant concerns)
opinion (European Commission, 2010b). Statutory obligation, known as a duty imposed by
the law, is important to users of audited financial statements as they want to be sure that an
auditor has checked whether the company follows the laws and policies and keeps the
adequate records. Valuable addition to regulation and requirements has been corporate
scandals and failures, including Enron and WorldCom scandals, which has led to
discussions and debates considering the changes in the audit practice. According to Leung
et al. (2004) few dramatic implications might come into the force: it is expected that
auditors are refocusing on public interest, changing the audit relationship, ensuring the
integrity of financial reports, separating of non-audit functions and other advisory services.
In addition to this, the audit methods are expected to focus more on risk attention, fraud
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 12
awareness, objectivity and independence, in order to satisfy the needs of users of audited
financial statements (Lee&Ali, 2008b).
Currently, the market of audit practice is highly concentrated, with the leading
players been called Big-Four Audit firms2. It is estimated that the total market share of Big-
Four Audit firms account for more than 90% in terms of revenues or fees received from all
listed companies (European Commission, 2010b). Such strong concentration creates
barriers for non Big Four companies to compete in the market due to the lack of recognition
and reputational endorsement. Besides, European Commission (2010b) reports that ‘such
concentration might entail an accumulation of systematic risk and the collapse of a
‘systematic firm’’. Therefore, more attention is paid to the regulation of audit practise.
2.1.2 Standards and legislation
Quality of financial information, reliability, and transparency are the key factors of
the efficient capital markets. A collapse of big corporations such as Lehman Brothers,
WorldCom and Enron together with the extent of fraud activities resulted in concerns about
the value-adding activities of public companies' corporate ethics and governance.
Therefore, extensive reforms in various countries are directly addressed to examine the role
and responsibility of external auditor in fraud detection (Leung et al., 2004). The lack of
public trust and investor confidence in corporate world and its financial reports has
continued to adversely affect the vibrancy of the capital market forcing business leaders to
change their culture, behaviour, and attitudes to restore public confidence and trust in
business (European Commission, 2010b, European Anti-Fraud Office, 2010). To fight such
situation, large accounting firms first of all separated their consulting services from
auditing ones and announced about strict rules and measures taken to improve
independence and audit quality (European Commission, 2010b). Additionally, accounting
bodies, governments, stock exchange commissions and academics took different actions
including reforms of the legislation and standards to strengthen the audit practice (Leung et
al., 2004). One of the most important changes in auditing practice is known as The
Sarbanes-Oxley Act, which was implemented in the USA after the fall of Enron. The Act,
containing 11 sections ranging from additional corporate board responsibilities to criminal
2 Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers and KPMG
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 13
penalties, includes the issues such as auditor independence, corporate governance, internal
control assessment, and enhanced financial disclosure (Sarbanes-Oxley Act of 2002).
According to the Act, there is a special Board assign to observe and check audit firms, their
procedures and the enforcement of accounting standards. There are, however, other
documents and governmental bodies which strongly regulates audit and its practise.
The International Auditing and Assurance Standards Board (IAASB) is ‘an
independent standard-setting body that develops auditing and assurance standards and
guidance for use by all professional accountants under a shared standard-setting process’
(IAASB, 2010b). The board generally meets four times a year and develops its standards
and practice statements. It is said that impact of financial crisis has been strongly felt
around the world, including auditing practise. According to IAASB, ‘the crisis has
amplified financial reporting challenges and has led to heightened attention on the role of
the audit and the broader accounting profession and <…> it [IAASB] has an important
responsibility to ensure that its work remains relevant as debates in this area evolve’
(IAASB, 2010b). As of today, IAASB has issued International Standards on Auditing
(ISAs) that deal with the independent auditor's responsibilities when conducting an audit of
financial statements.
ISAs contain objectives, requirements, application and other explanatory material,
which have to be fully understood by the auditor in order to recognize the objectives and to
apply the requirements properly. Note that IAASB completed the Clarity Project in March
2009, with the aim to promote greater understanding and consistency of application of the
ISAs (IAASB, 2010b). As a result IAASB released a set of 36 clarified ISA and the
clarified International Standard on Quality Control (ISQC) 1, which regalement functions
and standards of auditing practice. Interestingly, that even before the final release of
clarified ISAs and ISQC, there were 126 jurisdictions around the world, which had adopted
ISAs or used them as a basis for the national standards (IAASB, 2010b). ISAs covers the
independent auditor's overall responsibilities when conducting an audit of financial
statements in accordance with ISAs (ISA 200), as well as quality control (ISA 220), proper
audit documentation (ISA 230), responsibilities relating to fraud (ISA 240), materiality
(ISA320), sampling (ISA 530), related parties (ISA 550) and others (the list of ISAs is
provided in Table 10 in Appendix). Note that auditors in some countries are following
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 14
national auditing standards, yet in many cases they are based on ISA’s. For example, the
European Court of Auditors (2011) reports that auditors within the EU are obligated to
respect and follow the Court Audit Policy and Standards, ECA Audit Manuals and all audit
procedures adopted by the ECA. European Court of Auditors in turn is performing audits in
accordance with the IFAC and INTOSAI International Auditing Standards and Codes of
Ethics, which are based on ISAs (European Court of auditors, 2011).
Differently from some large countries (e.g. the US), the research among EU
stakeholders in 2009 indicated the overall support of an adoption of the clarified ISAs and
ISQCs at EU level (European Commission, 2010b, p.10). Currently, the majority of the EU
Member States have adopted or are in process of adopting ISAs. Significant support for
such action is that major international auditing firms are also applying these standards.
Such market harmonization is believed to contribute to ‘harmonised and qualitative audits
which in turn support the quality and credibility of the financial statements’ (European
Commission, 2010b, p.10). The EU governmental bodies stress the importance of the
governance and independence of the audit firms. According to the Directive on Statutory
Audit (2006/43/EC) it is important to ensure that auditors are following principles of
professional ethics and independence. These principles oversee different considerations of
auditing firms, including ‘appointment and remuneration of auditors, mandatory rotation,
non audit services, fee structure, publication of financial statements, organisational
requirements, revisiting ownership rules and the partnership model, group audits (European
Commission, 2010b).
Standards and regulation of audit also sets guidelines for accounting practice, which
is also strictly regulated and is subject to convergence of financial reporting standards.
There are different financial reporting standards, however, the latest statistics indicates that
over 120 nations and reporting jurisdictions permit or require International Financial
Reporting Standards (hereinafter IFRS) for domestic listed companies (AICPA, 2011).
Note that IFRS framework is based on ISAs and relevant ethical requirements, which
enable auditors forming the opinion on whether the financial statements are presented
fairly, in all material respects, and give a true and fair view.
A global survey conducted by the International Federation of Accountants in 2007
also highlights the importance of the convergence of financial reporting standards: a
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 15
majority of accounting leaders perceives a single set of international standards as an
important factor for the economic growth (IFAC, 2009). As a consequence, the IFRS
Foundation indicates that the number of countries that require or allow the use of IFRS for
the preparation of financial statements has been growing continuously. Some examples
includes the USA, where the growing acceptance of IFRS results from the convergence
with GAAP; Australia, New Zealand and Israel, where IFRS has been adopted as national
standards; Canada, which will adopt IFRS, in full, effective 2011 (IFAC, 2009). IAASB,
auditors and users of audited financial statements are expected to benefit from the
convergence of financial reporting standards into a single set of international standards.
Described development of audit’s roles and objectives lead to the presumption that
the primary auditors’ role has been shifting over time mainly due to the external events.
Moreover, based on current standards and legislation there are signs that public expectation
differs from auditors view especially in terms of responsibilities and obligations related to
fraud detection. Therefore, the next part presents the analysis of fraud as a function of audit.
2.2 Fraud as audit function
Fraud for a long time has been one of the key elements in the discussion regarding
the role and objective of auditors. As to the previous section, the main role of the auditors
was to detect and to prevent fraud in the company’s, however, the economic growth and
development of capital market resulted in the shift of the role of auditors. Fraud was left
aside when concept of materiality and fairness was introduced. Currently, a new trend has
been observed. ‘The reliability of auditing functions and the professionalism of the auditing
profession was, however, called into question after some spectacular and well publicised
corporations (for example Enron and WorldCom in the US) collapsed shortly after an
unqualified (in other words: “clean”) audit report had been issued’(Lee, Ali&Kandasamy,
2008c). Therefore, the society raises the question what the fraud is and whose responsibility
is to detect fraud and to prevent from it?
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 16
2.2.1 Definition of fraud
As a legal concept, fraud is a broad concept and covers a wide range of activities.
Due to the full FASB and IASB convergence effort, this study focuses on the category of
fraud, known as occupational fraud, which is defined as ‘the use of one’s occupation for
personal enrichment through the deliberate misuse or misapplication of the employing
organization’s resources or assets’ (ACFE, 2010). The definition of occupational fraud is
very wide, encompassing a number of activities covering any misconduct by employees at
every organizational level. Thus in order to understand the roots of how and when fraud can
be observed, one can rely on the simple occupational fraud and abuse classification system
(see Figure 1 below), there fraud is be divided into three main groups (ACFE, 2010):
• Corruption - wrongful use of influence and power to achieve a benefit
contrary to their duty to their organization;
• Asset misappropriation - theft or misuse of assets;
• Fraudulent statements - Falsification of financial statements and/or other
organizational documents.
Fraud has been one of the most problematic and prevalent issues for business
worldwide for a long time; however, there has been much more attention and research
dedicated to the topic after the sandals such as Enron, WorldCom and others. The 5th
Global Economic Crime Survey performed by PwC (2009) reports that fraud remains a
pervasive business risk and almost every firm is subject to occupational fraud in their daily
business, leading to huge losses for business and society. To understand the huge risks that
exist due to economic crime it is important to look at the scale of the global financial
marketplace. It has been estimated that on each and every day around EUR 2.8 trillion is
moved across the globe. For comparison, in 2009 the Gross Domestic Product (GDP) of
Lithuania was EUR 27 billion and the GDP of Germany was EUR 2.4 trillion. This implies
that an amount moving around the world’s financial systems on a daily basis is far larger
that the GDP of Lithuania and about the same size as the Germany GDP. Report to the
Nation on Occupational Fraud and Abuse published by ACFE (2010) indicates that
constantly increasing fraudulent activities corresponded into the potential total fraud loss of
more than EUR 2.03 trillion in 2009, which equalled to around 5% total global GDP or the
GDP of the United Kingdom.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 17
Figure 1: Occupational Fraud and Abuse Classification system
Source: Adopted from Association of Certified Fraud Examiners (2010) Occupational Fraud and Abuse Classification System presented above provides a
picture of the main items included in the system. Yet, it is important to understand what
hides behind each item.
Corruption. Corruption is related to the abuse of trust and responsibility, especially
of those who are being in-charge tried or succeeded to benefit himself or herself.
Corruption, according to ACFE, can be divided into several items, including conflicts of
interest, bribery, illegal gratuities and economic extortion (ACFE 2010). Illegal payments
as such usually had a motive behind and at some point the person having the ultimate
authority on the decisions is most likely subject for the corruption (Wells, 2003). To deal
with this issue is not so easy, as ‘bribes and grease payments to foreign officials used to be
considered standard operating procedure for many global enterprises’ (Keefe, 2011). Yet
the growing intolerance for corruption is expected to succeed after the enforcement of
Foreign Corrupt Practices Act beyond the economic arena (Keefe, 2011). The most
common type of corruption is explained in the table below.
Asset Misappropriation
Cash Non-cash
Fraudulent Statements
Non-financial Financial
Asset/Revenue Overstatement
Employment Credentials
Internal Documents
External Documents
Asset/Revenue Understatement
Corruption
Conflicts of Interest
Economic Extortion
Bribery
Illegal Gratuities
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 18
Table 1: Type of corruption
Type of corruption Definition Example Conflicts of interest Situations where undisclosed
personal or economic conditions may affect financial results of the enterprise
Agreement between the representative of the company and supplier on the purchasing price, higher than the market price
Bribery Bribes used to achieve the desired outcome, related to legal acts, business solutions or similar
Manipulation of prices in the cashier or the disclosure of sensitive information for the payment agreed in advance.
Illegal gratuities Situation where the person give/accepts grease payments for the desired outcome, related to legal acts, business solutions or similar
During the negotiation process opponents pay for the holiday expenses for one of the most important party on the other side in order to have better negation position.
Economic extortion Situation where power, fear or economic conditions are used to reach the desired outcome
The person threatens to sign the important agreement if his/her condition is not met.
Source: Adopted from Mosquera & Scifo (2004) and Association of Certified Fraud Examiners (2010)
Asset misappropriation. Asset misappropriations include the misuse or theft of
assets belonging to a company and, according to the ACFE, the majority of internal fraud
schemes involve an asset misappropriation element (ACFE, 2010). Besides, it is estimated
that asset misappropriation is the most common type of occupational fraud, accounting for
78% of all fraud cases. Asset misappropriation can be cash and non-cash based. Cash based
asset misappropriation can be divided into several sub-sections. Two of them known as
skimming and cash larceny include falsification of cash receipts (revenues or accounts
receivables for example). The remaining five sub-sections categorised as fraudulent
disbursements are the most common ones affecting the cash the entity has on hand (ACFE,
2010). Therefore, Table 2 below presents examples and explanations of fraudulent
disbursements.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 19
Table 2: Cash based asset misappropriation (Fraudulent Disbursements)
Type Definition Example
Billing Schemes Situations may include shell company, non-accomplice vendor or personal purchases
Employee may create shell company and bill the employer for the falsificated services
Payroll Schemes Situations may include ghost employees, commission schemes, workers compensation, or falsified wages
Employee may hire unreal person as the new employee of the company or may falsified the hours worked
Expense Reimbursement Schemes
Situations may include mischaracterized expenses, overstated expenses, fictitious expenses, or multiple reimbursements
Employee may pay falsified bills from the company account
Check Tampering Situations may include forged maker, forged endorsement, altered payee, concealed checks, or authorized maker
Employee steals empty checks and fills them in afterwards in such a way receiving money in his/her bank account
Register Disbursements
Situations may include false voids or false refunds
Employee may speculate the information in the register and appropriate money into his/her account
Source: Adopted from Mosquera & Scifo (2004) and Association of Certified Fraud Examiners (2010)
Non-cash based asset misappropriations covers the theft or misuse of non-cash
assets, including items such as non-current assets, inventory, investments, intellectual
property and other, however the loss of such type of asset misappropriations are estimated
to be of smaller loss (ACFE, 2010).
Table 3: Non-cash based asset misappropriation
Type Definition Example Inventory Situations may include stealing or not
appropriate use of non-cash asset of the company, including inventory, equipment and others
Employee may steal the asset from inventory or use them for personal need
Information Situations may include stealing or disclosure of company’s confidential information or trade secrets.
Employee may sell company’s sensitive information to the competitor
Shares or obligations Situations may include stealing of companies shares, obligations or other securities
Employee may fraudulently transfer the shares of the company into a personal account
Source: Adopted from Mosquera & Scifo (2004) and Association of Certified Fraud Examiners (2010)
Fraudulent Statements. This type of fraud is related to the financial statements
which may be falsified. According to Table 4, fraudulent statements can be classified into
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 20
financial and non-financial ones. The later one is mainly related to the misuse of
employment credentials, internal and external documents. However, currently severe losses
have been created by exploiting financial types of fraudulent statements. The examples
include the bankruptcy of Enron and the fraudulent accounting of WorldCom in order to
reduce tax payables, increase revenues, share price and etc. The table below provides detail
information on types of fraudulent statements based on financial actions.
Table 4: Fraudulent statements: financial
Type Definition Example Timing Differences Situations may include false accounting
for revenues and expenses in terms of the actual period they were achieved
The company may record the revenues in the year 201X while the expenses will be included into the accounts in the year 201X+1
Fictitious Revenues Situations may include falsified sale of goods and services
The sale of inventory to the clients which do not exist or the real client invoicing while the good and services are not delivered (the sales are credited back during the next period)
Concealed Liabilities and Expenses
Situations may include false accounting for expenses and liabilities
Financial statements may exclude important expenses/liabilities or the expenses required to achieve the current level of sales are capitalized.
Improper Disclosures Situations may arise when management decides not to disclose important information
Financial statements may not include information about off-balance sheet or contingent liabilities, which may significantly affect the financial position of the company
Improper Asset Valuations
Situations may arise when the asset of the company is not values properly
The accounting may include incorrect way of depreciation of assets, inventory may be written off incorrectly or trade receivables may be falsified
Source: Adopted from Mosquera & Scifo (2004) and Association of Certified Fraud Examiners (2010)
It is important to measure the costs of occupational fraud, yet the costs can be, at
best, an estimate to present the ‘pandemic and destructive nature of white-collar crime’
(ACFE, 2010). Despite the recent attention to control issues and systems, the actual level of
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 21
fraud and financial damages has not decreased (KPMG, 2009). One reason for this trend
may be insufficient emphasis on fraud prevention and detection. Studies also show that the
deepening economic recession could lead to even greater levels of fraud (PwC, 2009). A
major issue of fraud detection is related to the difficulty of identifying the fraud soon after
it occurs. Quite often it is well hidden from auditors, investors and other stakeholders and
might only be discovered by chance (Plesis & Koornhof, 2002). Auditors, for example, find
it complicated and increasingly difficult to detect fraud with analytical procedures
requested by audit standards for at several reasons. When performing their tasks, auditors
mainly rely on management explanations not challenging or testing the explanations about
the business development (Hirst & Koonce 1996). Additionally, auditors simply lack a
sufficient understanding of certain business, thus it is difficult for them to recognized
unusual trends and ratios within the financial statements in one or another business
(Erickson et al. 2000). Even though traditional analytical procedures may lead to the
success in identifying fraud, however, this success is highly limited as financial statement
data tend to have to high rates of misclassification (Hogan et al. 2006, Erickson et al. 2000).
On the other hand, the society views such explanations in a different way. Therefore, the
auditors anyway are expected to play an important role in fraud detection and prevention.
2.2.2 Audit role in the area of fraud
European Commission (2010a) reports that the methods of detection of fraud vary
between Member States. Nevertheless, in 2009 the vast majority of cases (75%) were
detected by means of either primary national inspections or post-clearance control audits.
Primary inspections are used in particular in Denmark, Slovenia, Romania, Malta and
Greece, while the remaining Member States mostly uses ‘ex-post controls’ to detect
irregularities (European Commission, 2010a). ‘Ex-post controls’ refers to audit of the
accounts, commission inspections, inspections by anti-fraud services, inspection visits,
national post-clearance audits and tax audits.
According to Lord Justice Lopes (2004), ‘An auditor is not bound to be a detective,
or … to approach his work with suspicion, or with a foregone conclusion that there is
something wrong. He is a watchdog, not a bloodhound’. However, there are a number of
discussions regarding fraud, especially in terms of the extent of auditor responsibility for
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 22
the fraud prevention and detection. Following the development of auditing practice and
new standards to be issued, auditor responsibility for fraud detection has remained a low
priority (Jones, 2009). Following the standards defining auditing practise in terms of fraud
detection one has understand the scope and objective of ISA 240. This ISA deals with the
auditor’s responsibilities relating to fraud in an audit of financial statements, which presents
the real picture of the role of auditors in terms of fraud detection.
According to ISA 240, there are two types of intentional misstatements are relevant
to the auditor, namely misstatements resulting from fraudulent financial reporting and
misstatements resulting from misappropriation of assets (IFAC: IAASB, 2009a). Note that
the main factor which allows distinguishing between fraud and error is the underlying
action, intentional or unintentional, which finally results in a misstatement of the financial
statements (IFAC: IAASB, 2009a). Auditors following ISA guidelines are expected to deal
with the mentioned types, however, ISA 240 makes it clear that the main responsibility for
the prevention and detection of fraud rest with the management:
The primary responsibility for the prevention and detection of fraud rests with both
those charged with governance of the entity and management. It is important that
management, with the oversight of those charged with governance, place a strong
emphasis on fraud prevention, which may reduce opportunities for fraud to take
place, and fraud deterrence, which could persuade individuals not to commit fraud
because of the likelihood of detection and punishment (IFAC: IAASB, 2009a).
The auditor while conducting an audit, on the other hand, is responsible for
‘obtaining reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error’ (IFAC: IAASB, 2009a). This
implies the fact that an external audit on the financial statements does not indicate that
financial statements are entirely free from misstatements. According to the European
Commission (2010b), unqualified auditors opinion means that the financial statements give
a true and fair view in accordance with the relevant financial reporting framework. In other
words, auditors provide ‘reasonable assurance3’ about financial statements as a whole being
free from material misstatement caused by fraud or error (European Commission, 2010b).
3 Reasonable assurance means high but not absolute level of assurance
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 23
ISAs also indicate the actions of the auditors in case of risks of material
misstatements due to fraud. If significant risks of material misstatements due to fraud are
identified, the auditor shall ‘determine whether there is a responsibility to report the
occurrence or suspicion to a party outside the entity’ (IFAC: IAASB, 2009a). Note that
most of the audit engagements are confidential and the conflict between the client and
auditor may arise; however, the auditor’s legal responsibility may overcome the
professional duty to maintain client’s confidentiality (IFAC: IAASB, 2009a). According to
the European Commission (2010b), statutory audits, however, have changed their focus
from verification of revenues, costs, assets and liabilities to a ‘risk-based approach’. In
other words, auditors are more concern about the reasonable assurance in terms of
applicable financial reporting framework rather than providing true and fair view of the
financial statements.
Occupational fraud has a large impact on the audit and its reputation from the users’
perspective. The mentioned actions taken by the regulatory bodies to react to the corporate
scandals imply the significance of mapping out auditors and society’s expectations towards
role and responsibilities of auditors work. However, the number of research indicates that
this aim is hard to achieve and thus there exists rather extensive audit expectation gap in the
certain parts of the world. Therefore, the next part provides the analysis of development and
empirical evidence of audit expectation gap.
2.3 Audit expectation gap
Public expectations on deficient performance and duties of auditors sometimes go
behind the reality and legal framework (Porter, 1993; Porter & Gowthorpe, 2004; Lee,
Gloeck & Palaniappan, 2007). There are several reasons for that. Firstly, any investor,
creditor or generally speaking the public, expects that entities, where they invested money,
are held fully accountable for the use of that money. Managerial bodies of course handle
the prime responsibility for ensuring that money is used with absolute integrity and spent
wisely. Audit is a supplementary instrument to trace accountability, uncover irregularities
in financial matters, and establish public confidence that money is being properly spent.
Additionally, external auditors may have a direct and positive influence on the way
organisations and people discharge their responsibilities. From the users’ perspective
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 24
auditors working within public bodies may help to promote better management and
decision-taking, and thus a more effective use of taxpayers’ resources (Mackevicius, 2001).
However, just a few users of audited financial statements realize that the reality is different.
Representative from one of Big-Four Audit firm reveals that the audit profession has
consistently failed to explain itself properly (personal communication, March 3, 2011). The
ultimate responsibility in any case stays with management, mainly because only a
reasonable amount of testing is performed during audit procedures. Therefore, even if the
audit profession explains itself properly, the immediate next questions from the general
public would be why auditors charge money for such services and whether these services
are needed at all? These questions would arise as the society does not (or does not want to)
understand that in order to perform a wider role than it is done currently, audit companies
would need to have a permanent presence in public companies and to function as some kind
of public representative safeguarding society's interests, which would cost a lot (personal
communication, March 3, 2011). But nobody would be willing to pay for it.
In view of the contributing factors and expectations it is not surprising that that
auditors and public have different expectation of the audit function and deliverables. Those
different views create audit expectation gap, which, unless significant actions are taken to
decrease this gap, enlarges with time.
2.3.1 Development of audit expectation gap
Historically, Humphey and Tyrley (1992) claims that some hints of expectation gap
can be found back in 19th century together with the introduction of companies auditing,
while Liggio research paper The expectation gap: The Accountant Waterloo (1974) brought
the term ‘Audit expectation gap’ into the audit literature. According to Liggio (1974), the
expectation gap concept presents the difference between the expected performance “as
envisioned by the independent accountant and users of the financial statements.”
Meanwhile, the Cohen Commission (1978) in the US referred the expectation gap
introduced by Liggio (1974) as the different view between (a) what the society names as
auditors’ responsibilities and (b) what auditors believe their responsibilities are.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 25
Porter (1993) criticized the definition of Liggio (1974) and Cohen Commission
(1978) as being too narrow. Thus she presented the more extensive way of analyzing the
gap, which included two main components: reasonableness gap and performance gap (see
the figure 2).
Figure 2: Audit expectation gap
Source: Adopted from Porter (1993)
Note: * - Duties defined by the law and professional promulgations ** - Duties which are cost beneficial for auditors to perform
The model has been extensively used to test the existence and uncover the causes of
audit expectation gap in number of countries. According to the model, performance gap
refers to the different perception between “what society can reasonably expect auditors to
accomplish and what they are perceived to achieve” (Porter, 1993, p 50). This later
component then is divided further and are presented by deficient standards (“a gap between
the duties which can reasonably be expected of auditors and auditors’ existing duties as
defined by the law and professional promulgations”) and the deficient performance (“a gap
Auditors’ Existing Duties*
Auditors’ Perceived
Performance Audit Expectation-Performance
Society’s Expectation of Auditors
Performance gap Reasonableness gap
Deficient Performance
Unreasonable Expectations
Deficient Standards
Duties Reasonably Expected of Auditors**
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 26
between the expected standard of performance of auditors’ existing duties and auditors’
perceived performance, as expected and perceived by society) (Porter, 1993, p.50).
Reasonableness gap is known as the difference between ‘what society expects
auditors to achieve and what they can reasonably be expected to accomplish’ (Porter, 1993,
p. 50). In other word, it is related to the complication and misunderstanding of nature,
purpose and capacities of an audit function as observed by the society. Humphrey (1997)
report that audit expectation gap exists mainly because of the subjective nature of terms and
concepts in auditing such as the true and fair view, reasonable, materiality, adequacy,
reliability and relevance which are not defined precisely in the Accounting and Auditing
Standards but are left for the auditors’ judgment. Lee and Ali (2008b) add that it is also
influenced by the dynamic objective of auditing and role of auditors, where contextual
factors such as socio-economic environments, critical historical events, courts or even
technological developments play an important role.
2.3.2 Audit expectation gap: Global evidence
Jedidi and Chrystelle (2009) reports that the basis for the research of audit
expectation gap in different part of the world can be found in the early works of Lee, Beck,
and Liggio, who investigated the role and responsibilities of auditors as perceived by the
users of audited financial statements. Afterwards, many others investigated the existence of
an audit expectations gap, identified its causes and made suggestions how to minimize it.
Despite a variety of research instruments used to identify audit expectation gap in different
countries, the survey or questionnaire dominated. Countries such as the US, the UK and
Canada have prevailed other countries in terms of research for audit expectation gap as this
topic was considered to an important issue for auditors especially after a number of
corporate failures (Jedidi&Chrystelle, 2009).
The financial crisis and number of collapse resulted in the new wave of questions
addressing the role and responsibilities of auditors, especially the ones to the stakeholders
of the company. Auditors have been criticized heavily on disclaiming responsibility for the
detection of fraud (Humphrey, Turley&Moizer, 1993) and interested parties (e.g. investors,
shareholders, creditors, government agency) had strong doubts about the auditors’ role in
term of audit client failure (Hassink et al, 2001). Over the period for more than 30 years up
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 27
to 2006, it became clear that mapping out the expectations is important especially in terms
of fraud detection. The users of audited financial statements expect much more from
auditors as compared to the legal acts regulating auditors work. Besides, public expects
auditors not only to provide audit opinion but also interpret the financial data of the
company in such a way that people are able to make a decision whether it is a good idea to
invest into one or another company (Salehi&Rostami, 2009).
Prior studies of the audit expectation gap presents different perceptions between
auditors’ and society’s view regarding the roles, objectives and responsibilities. In context
of the US, the research started as early as late 1970s. Auditor’s responsibilities to detect
material errors, irregularities and illegal acts are examined by Barton, Johnson, Searfoss,
and Smith (1977). The results indicate that auditors and users of financial statements had
different perceptions on the extent of auditors’ responsibilities. Such conclusions results
from miscommunications between the auditors and users, where the later devoted more
responsibility for the auditors to detect and disclose errors and irregularities. By analyzing
the extent of audit expectation gap in various dimension of the audit attest function,
McEnroe and Martens (2001) surveyed auditors and investors. The results indicate that
auditors and investors tend to agree about the meaning and importance of the specific
terminology, however, opinion differs with respect to actions to be done prior issuing
unqualified opinion. Investors expects that unqualified opinion is not issued unless 1) every
item of importance to investors and creditors has been reported or disclosed, 2) auditors
have been ‘public watchdogs’, 3) the internal controls are effective, 4) the financial
statements are free of misstatements resulting from management fraud, 5) the financial
statements are free of misstatements intended to hide employee fraud, 6) the firm has not
engaged in illegal operations (McEnroe&Martens., 2001)
The examination of the development of audit objectives in Britain during the period
1840-1940 by Chandler et al. (1993) reveals that external events tend to change public
perceptions towards auditor’s role thus creating the roots for audit expectation gap to
enlarge. Humphrey el at (1993) reports that chartered accountants, corporate finance
directors, investment analysts, bank lending officers and financial journalists possess
different view regarding the nature of audit and perceived performance of auditors. In
addition, the main contribution towards existing audit gap was mainly related to auditors’
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 28
roles and responsibilities in terms of fraud detection, liabilities to the third parties,
independence and methodology issues.
Similar findings were identified in less developed countries as well. In Malaysia for
example, Fadzly and Ahmad (2004) reports that general public opinion differs significantly
from the auditors regarding the auditors’ role and actions performed during the
engagement. Research findings were similar evidence provided by Porter (1993) who
investigate audit expectation gap in the UK and Porter and Gowthorpe (2004) who tested
the extent and development of audit expectation gap in the UK and New Zealand. Besides
the empirical evidence that audit expectation gap exist in Malaysia, analysis by Fadzly and
Ahmad (2004) also indicated that public expects more than auditors are obliged to do
unless they have proper education. The effect of education on perception of the meaning of
audit reports and responsibilities has been tested by a number of studies, most of which
concluded that expectation gap between auditors and students who have completed audit
courses exists but is of the lesser extent (Lee&Ali, 2008a). Research in China for example
was carried out by Lin and Chen (2004) who showed that the most important contributing
factors expanding audit expectation gap were different perceptions of audit objectives,
obligations regarding fraud detection and reporting as well as independence and liability.
Current research by Hassink et al (2009) also showed that, despite action taken to
narrow audit expectation gap, the business managers and bankers have higher expectations
of the duty of auditors than auditors considered their duties to be. Besides, they have
unreasonable expectations concerning auditor responsibilities to detect non-material fraud
or fraud from collusion. One may argue that audit expectation gap presents ‘diverse views
about audit function’ (Lee&Ali, 2008b). However, the majority of researchers name the
same contributing factors to the audit expectation gap, including complicated nature of an
audit function, conflicting role of auditors, hindsight evaluation of auditors’ performance,
time lag in responding to changing expectations, and self-regulation process of the audit
profession (Lee&Ali, 2008b). All this contributed to the mismatch between the expected
and actual performance, where it is said auditors ‘may fall short of the expected
performance’ (Salehi&Rostami, 2009). It is empirically tested and supported by a number
of studies in different countries. For example, the evidences of deficient performance of
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 29
auditors, or in other words underperformance, are identified in the research by Porter
(1993), Porter and Gowthorpe (2004), and Lee, et al. (2007) (see Table 5).
Table 5: Deficient performance of auditors
Porter (1993) Porter and Gowthorpe (2004) Lee, et al. (2007)
• Detect theft of corporate assets by non-managerial employees.
• Detect theft of corporate assets by company directors/senior management.
• Disclose in the audit report deliberate distortion of financial information.
• Disclose in the audit report misappropriation of company assets by company directors/senior management.
• Detect illegal acts by company officials which directly affect the company’s accounts.
• Express doubts in the audit report about the company’s continued existence.
• Disclose in the audit report illegal acts which directly affect company’s accounts
• Disclose in the audit report doubt about auditee’s continued existence.
• Detect theft of a material amount of the auditee’s assets by its directors/ senior management
• Detect theft of a material amount of the auditee’s asset by non-managerial employees.
• In the absence of regulated industry duty, report to an appropriate authority illegal acts by auditee officials.
• Detect illegal act by audit officials which directly impact on the auditee’s financial statements.
• Disclose in the audit report deliberate distortion of the auditee’s financial statements.
• In absence of a regulated industry duty, report to an appropriate authority, embezzlement of auditee’s assets by directors/senior management.
• Detect deliberate distortion of the figures in the company’s financial statements
• Report privately to a regulatory authority: • Theft has been committed by non-managerial employees. • Company directors/senior management has misappropriated company assets. • Information presented in the financial statements has been deliberately distorted. • Suspicious circumstances are encountered in the audit suggesting that theft or deliberate distortion of financial information may have occurred in the company
• Disclose in the published auditor’s report: • Company director/senior management have misappropriated company assets. • Information presented in the financial statements has been deliberately distorted.
• Illegal acts committed by the company’s management which directly impact on the company’s accounts.
Source: Adopted from Porter (1993), Porter and Gowthorpe (2004), and Lee, et al. (2007)
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 30
The table above, presenting the evidence of deficient performance of auditors,
signals about the potential problem that may be caused with a limited incentive to provide a
service at a level of quality that exceeds the minimum level that the public will accept.
Reasonableness gap, on the other hand, is based on the misconception of the nature,
purpose and capacities of auditing practice (Salehi&Rostami, 2009). This gap is believed to
be based on unreasonable expectations, which should be distinguished from reasonable
ones. Lee and Ali (2008b) claim that it is important to assure that enough attention is paid
to the reasonable expectations while unreasonable ones should be eliminated. Porter (1993),
Porter and Gowthorpe (2004) and Lee, et al. (2007) have revealed the duties which are
considered to be unreasonable expectations of auditors and has to be eliminated from the
public expectations (see table 6).
Table 6: Unreasonable expectations on the duties of auditors
Porter (1993) Porter and Gowthorpe (2004) Lee, et al. (2007)
• Guarantee financial statements are accurate and auditee company is solvent
• Report breaches to tax laws to IRD and theft of corporate assets by non-managerial employees to a regulatory authority
• Disclose in report theft of corporate assets by non-managerial employees and illegal acts which do not directly impact on company’s accounts
• Detect illegal acts by company officials which do not directly impact on company’s accounts
• Examine & report on fairness of non-financial information, efficiency & effectiveness of company’s management and verify every transaction of audited company
• Guarantee financial statements are accurate
• Guarantee auditee is financially sound
• Report breaches of tax law to Inland Revenue Department
• In the absence of regulated industry duty to do so, report to an appropriate authority, theft of auditee’s assets by non-managerial employees
• Disclose in the audit report theft of auditee’s assets by non-managerial employees
• Detect illegal acts by auditee’s official which only indirectly impact on the auditee’s financial statements
• Disclose in the audit report illegal acts by auditee’s officials
• Examine and report on reliability of financial information presented in auditee’s annual report
• Examine and report on the efficiency and effectiveness of auditee’s management and administrations
• Prepare the company’s financial statements. Guarantee the complete accuracy of audited financial statements
• Verify every accounting transaction.
• Prevent fraud and errors in the company.
• Detect all fraud and errors in the company.
• Plan the accounting and internal control system
Source: the table adopted from Porter (1993), Porter and Gowthorpe (2004), and Lee, et al. (2007)
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 31
Described existence and development of the audit expectation gap imply that users
of audited financial statements from different regions misunderstand the primary auditors’
role and thus possess different expectation on auditors. There are minor differences among
users in different part of the world; however, most of the users possess higher expectation
related to fraud prevention and detection as well as legal auditors’ liability from the
stakeholders’ perspective. Sometimes the gap is based on unreasonable expectations, which
should be distinguished in order to possess success when narrowing it. In Lithuania if such
gap does exists there may be different contributing factors. Thus the next section presents
the historical development of the audit function in Lithuania, which is the basis for the
analysis of the existence of audit expectation gap in Lithuania.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 32
3 Audit function and audit expectation gap in Lithuania
3.1 Audit practice development in Lithuania
Prior to 1991 Lithuania was a part of the Soviet Union. After the regain of
independence, the lack of control and weak legislation system forced Lithuanian
government to focus on creation of own legislation system and its enforcement. Thus, the
grounds for Lithuanian audit practice are found in early 1990s, when the Association of
Lithuanian Accountants and Auditors was established (Mackevicius, 2001). This institution
was engaged in the creation of Auditing Practice Standards in Lithuania, which
unfortunately was not approved by the government.
Despite the lack of applicable legislation and legal grounds, auditing practice was
expanding in Lithuania, mainly with the entrance of the international network of audit firms
in Lithuania (Mackevicius, 2001). To mention a few, Arthur Andersen & Co as well as
KPMG, Price Waterhouse, Coopers and Lybrand were established during the period 1992-
1994. This in turn forced the creation of Lithuanian auditing firms. In addition, the growth
of private sector pushed the greater request for audit. The need for audit was fuelled by
growth of commercial enterprises, dishonest businessmen, and low qualification of
accountants working in private enterprises (Mackevicius, 2001).
Lithuanian Auditors Association established in 1997 was responsible for creating
legal grounds for auditing practice, supervise auditing standards creation projects and
recommend improvements, ensure and develop the professional auditors’ skills and
increase public recognition (LAA, 2011). It is important to note that Lithuanian auditing
system was based on the ‘bottom-up’ approach, meaning that it was created and
improvements were suggested by the public organizations engaged in audit practices with
limited governmental support. The government, however, paid an important role by issuing
the Republic of Lithuania Law on Audit in June 1999 (Lithuanian Parliament, 1999). This
document determined the establishment of the Lithuanian Chamber of Auditors (hereinafter
LCA), which in turn had to supervise of the activities of audit enterprises, issue, suspend
and terminate the auditor’s certificates, handle the register of audit enterprises and perform
other functions (Mackevicius, 2001). After the Law on Audit came into the force, it was
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 33
important to create the proper audit methodology, thus LCA approved 11 National Auditing
Standards (hereinafter NAS) and Auditors’ Professional Code of Ethics in June 2000.
Today, LCA as a public legal entity unifying all certified auditors of Lithuania shall
act in conformity with the Constitution of the Republic of Lithuania, Civil Code of the
Republic of Lithuania, the Law on Audit, the Law of Associations of the Republic of
Lithuania other legal acts of the Lithuania and European Union (hereinafter EU) and the
present Statute of LCA (LCA, 2010). Besides, it supervises the activities of auditors and
audit companies in Lithuania, develops the audit methodology and recommendations for
the Lithuanian auditors, translates ISAs, the Code of Ethics and other documents issued by
the International Federation of Accountants (hereinafter IFAC). According to statistics, on
1st May 2011 the LCA unified 399 certified auditors and 188 audit firms of Lithuania
(LCA, 2011). Approximately 62 % of these certified auditors worked in public practice,
providing a wide range of services to clients. Other 38 % work in various areas such as
industrial, governmental and educational institutions. Note that in 2003 LCA became an
associated member of IFAC and in 2004 the General Assembly of European Federation of
Accountants (hereinafter FEE) approved the LCA membership as a member correspondent.
In 2008 LCA became a true member of IFAC and FEE (LCA, 2010).
Mackevicius (2001) notes that there are three key elements which guarantee stable
and reliable auditing system. These elements are legal, methodological and control
frameworks. In Lithuania legal framework is based on the Law on Audit and by the
Auditors’ Professional Code of Ethics. These two documents regulates the main areas of
audit practice, defines the independence, responsibility, relations with clients. Even though
it took almost 10 years to prepare those legal documents, it is expected that properly
prepared they have to influence positively most of the areas, including audit practice,
quality, responsibility, trust, and stimulate the qualification improvement. Methodological
framework is based on the NAS, which establish the base for audit methodology and
regulate auditors’ actions in different audit engagement stages. Back in 2000, ISAs with
some minor adjustments were translated into Lithuanian language and named NAS
(Mackevicius, 2001). Besides NAS, other methodological material is important for auditors
and users of audited financial statements, including explanation of the Law on Auditing and
Auditors’ Professional Code of Ethics, the dictionary of audit terms and concepts
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 34
(Mackevicius, 2001). Audit control framework ensures flexible and effective regulation and
control of auditing practice. This is endured by active supervision of LCA which analysis
and propose possible improvements to existing auditing standards as well as control of
regulatory bodies, including General Assembly of European Federation of Accountants. In
Lithuania all three frameworks are based on the EU eight directives, Green Papers, ISAs
and other legal documents. According to the Law on Audit, audits starting from 1 January
2009 and later shall apply ISAs and the Code of Ethics of Professional Accountants issued
by IFAC (LCA, 2010).
As of today, the auditing function is mainly required to ensure the compliance with
government business legislations/regulations in order to maintain the truthfulness and
legitimacy of accounting records in individual business entities (Lee&Ali, 2008b;
Lin&Chen, 2004). According to Lithuanian regulations, all joint-stock companies are
entitled to perform audit of financial statements. The same is applicable for the limited
liability companies if two out of the following three requirements are fulfilled:
1. Revenues for the financial year are larger than EUR 2.9 million
2. The total book value of assets is larger than EUR 1.45 million
3. The average number of employees is higher than 50 (Lithuanian Parliament,
2000a)
The development of the Law on Audit in Lithuania may be presented in the
following steps: the first Law on Audit in Lithuania was issued in 1999, after several
amendments the New Law on Audit came into force on 1 September 2008 and mainly
implemented the following legal acts of the EU (LCA, 2011):
• 78/660/EEC: fourth Council Directive of 25 July 1978,
• 83/349/EEC: seventh Council Directive of 13 June 1983,
• Directive 2003/51/EC of the European Parliament and of the Council of 18
June 2003,
• Directive 2006/43/EC of the European Parliament and of the Council of 17
May 2006
Described development of audit’s roles and objectives in Lithuania allows
presuming that audit practice is rather young and still developing in Lithuania to keep with
the recent updates and changes in audit rules and regulations (Mackevicius, 2001). In order
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 35
to guarantee stable and reliable attest function for the stakeholders, government as well as
other public institutions have similar aims and work in line with auditors in order to
eliminate all potential occupational fraud.
3.2 Role of Auditors and other institutions
According to the Lithuanian Law on Audit, an auditor is a person who passed
auditing exams, has auditor’s certificate and is a member of LCA (Lithuanian Parliament,
1999). High and demanding requirements for qualification determine several features
which are the key elements to be a successful auditor. To mention a few, a good auditor has
to be honest, objective, professional, independent, prudent and cautious, polite, tactic,
diligent and possess good analytical skills (LCA, 2010). Yet the most important feature is
responsibility, mainly because the auditor is seen as a ‘watchdog’ of the company which
has to increase the level of assurance provided by the company to the stakeholders
(Mackevicius, 2001). The responsibility can be divided into three groups: specific, ethical
and informal responsibility (Lee, 1986, Dunn 1996). Specific responsibility relates auditor
to the shareholders of the company; ethical responsibility provides boundaries for being
liability for the profession and society; while informal responsibility builds the bridge
between the auditor and the user of the audited financial statements.
Auditors’ responsibility becomes one of the key issues in the developed countries.
According to European Commission (2010b) and European Anti-Fraud Office (2010), the
question considering if auditors should have limited liability is getting more attention,
especially in the light of increasing number of occupational fraud. The users of audited
financial statements are expected auditors to do more, especially in detecting and
preventing frauds. Therefore, the redrafted ISA 240 is a good example of the results of such
concerns. According to Jones (2009), ISA 240 (redrafted), effective from 15 December
2009, concludes that ‘audit role as that of a “watchdog, not a bloodhound” is no longer
valid in the context of the requirements of the redrafted and revised ISAs’. This results
mainly because redrafted ISAs deny the traditional ‘passive philosophy’ towards auditor
responsibility for fraud detection and mark a significant shift away from a ‘monitoring’ role
and towards the requirement for a very keen ‘sense of smell’ (Jones, 2009).
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 36
Since audits are not mandatory for all companies in Lithuania (with exception to
joint stock companies and some limited liability companies which meet the requirements of
the Law on Audit), the governmental control of the entities is limited as compared to the
countries such as Denmark, Australia and other where auditing at some point is almost
mandatory to all market players.
Even though Lithuanian government sets strict guidelines on audit requirements,
there are ways and examples when companies were not following the rules. According to
the representative of the Big-Four audit firm, enterprises are sometimes manipulating
financial data, especially if accounting figures (e.g. revenues, asset book value of number
of employees) are close to the level to be entitled to perform the audit (personal
communication, April 12, 2011). On the other hand, Lithuanian regulation system has
many underdeveloped issues which correspond to misconduct in terms of legislation. For
example, the Centre of Registers, a legal entity collecting financial statements of all legal
entities in Lithuania; fails to check if all companies are presenting the correct data.
Sometimes management of the company hires a person or firm with doubtful reputation and
qualification to review, sign and express the auditor’s opinion on the financial statements of
the company. Afterwards, these financial statements are presented to the Centre of
Registers, which due to the lack of time does not review all documents (personal
communication, April 12, 2011).
Law on Company (Lithuanian Parliament, 2000a) states that the head of the entity is
liable for the drawing up of an entity’s financial statements and timely submission thereof.
Legal documents also foresee liability and punishment on deceptive of negligent
accounting, forgery of documents and other violation of accounting rules. These documents
are the Law on the Approval and Entry into Force of the Criminal Code (Lithuanian
Parliament, 2000b) and the Code of the Violation of the Administrative Rights (Lithuanian
Parliament, 1985). According to the summary of the Criminal Code and Code of the
Violation of the Administrative rights, the fines range from as little as warning to up to
EUR 12,000, including confiscation of falsified or illegally obtained goods and services.
Accounting errors and fraud on the other hand, are not limited to fine. The penalty may
include public works, restriction of freedom or imprisonment for up to 3 years (see Table
11 and 12 in Appendix).
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 37
Such means to prevent occupational fraud seems to perform poorly in Lithuania.
Several studies have documented the increasing incidence and cost of fraud in firms in
Lithuania. The representative of the Big-Four Audit Firm highlights increasing fraudulent
activities in Lithuanian business environment especially during and right after the global
financial crisis (personal communication, March 3, 2011). The same trend is indicated by
the Ministry of the Interior of the Republic of Lithuania which recorded 49% growth in
fraudulent activities in 2009 (FCIS, 2010).
The society expects auditing firms to be one of the most important means to detect
and report fraud in developed countries (Mackevicius, 2011). In Lithuania, however, other
institutions also are investigating different cases of oppositional fraud. One of the most
important institutions is Financial Crime Investigation Service (hereinafter FCIS). The
main aim of FCIS is to protect the state financial system by disclosing criminal actions and
other violations of law. Following the goal to minimize criminal activities against the State
financial system, FCIS is implementing the National Programme of Crime Prevention and
Control, the National Programme of Combating Corruption. Additionally it prepares the
Development Strategy of the Public Relations (FCIS, 2010).
It is noticeable that FCIS focuses on the disclosure, investigation and prevention of
the criminal acts, related to money laundering, VAT embezzlement, illegal receipt, and use
of the funds for the financial support from the European Union and foreign countries. These
criminal acts make the great damage to the State Budget and form the negative image of the
state.
Table 7: FCIS investigation results, in million EUR
No / EUR’000 2004 2005 2006 2007 2008 2009 2010 Legal entities and private individual checked 1,245 1,162 780 542 542 503 386
Reported violations of law 1058 1636 2566 3745 5899 2938 1672 Detected violations of administrative law 535 456 275 200 163 184 142 Amount of Value Added Tax embezzlement 11,387 16,679 13,120 14,176 9,567 23,076 13,625 Amount of temporarily restrict property right 12,115 11,957 32,438 24,585 21,007 21,060 29,466
Source: Adopted from FCIS (2010)
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 38
According to the latest statistics, the highest number of illegal acts or violations of
law was reported in 2008 (there were almost 6 thousand cases were identified after
investigating 542 enterprises and individuals), while the year 2009 were marked with the
largest Value Added Tax embezzlement (more EUR 23 million). In 2010, the number of
violations of law and Value Added Tax embezzlement decreased significantly, yet it still
accounted for almost EUR 14 million (FCIS, 2010). Such statistics proves that Lithuanian
government faces serious problems which have to be solved in order to enjoy county’s
development and economic growth. One of those areas is improving of audit practice which
is expected to bring positive effect on and will help to minimize the level of occupational
fraud on the individual as well as public level (European Parliament, 2010).
The analysis indicates that occupational frau is not exception in Lithuania. The
more society hears about the occupational fraud, the more accurate it gets. Thus it is
expected that currently, especially after the global financial crisis and wave of corporate
scandals, any stakeholder (investor, creditors, employee, government, etc.) is more concern
about occupational fraud. For example, Algirdas Semeta, the Lithuanian economist and the
European Commissioner for Taxation and Customs Union, Audit and Anti-Fraud,
highlights the importance of independence, efficiency and effectiveness of the activity of
European Anti-Fraud Office (hereinafter OLAF) in fighting fraud and corruption in the EU
(European Parliament, 2010). Therefore, the next section presents the analysis performed
on the investigation of the extent of audit expectation gap in Lithuania.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 39
4 Research of the extent of audit expectation gap in Lithuania
The research emphasises the aspects of auditor’s responsibility, reliability and
usefulness of financial statements. Previously mentioned studies have prove that there is an
audit expectation gap in terms of fraudulent activities in well developed countries (e.g. the
US, the UK, the Netherlands) as well as in developing countries (Malaysia, China,
Bangladesh). In Lithuania, however, if such a gap does exist it might be presented as a
result of different situations and beliefs. Thus, the main task of this study is to investigate
the extent of an audit expectation gap among auditors and users of audited financial
statements in terms of audit responsibility and reliability, objective, duties in detecting and
reporting frauds and irregularities, and liability to the third parties in the Lithuanian
business environment. Therefore, four propositions are developed in order to be able to test
the hypothesis of existence of audit expectation gap among auditors and users.
4.1 Study propositions
The gap is the reflection of different understanding among auditors and the public
over the meaning of the nature, objectives and outcomes of the audit. These beliefs or
perceptions are determined by the role of auditing function in a given society and are tend
to change over time (Lee & Ali, 2008b). The restoration of auditing in Lithuania has only a
short history (Mackevicius, 2001). In the light of economic boom during 2000-2007, and
then economic turmoil in 2008-2010, it is believed that the reliability of accounting
information is crucial. Reliable information is believed to facilitate decision-making of the
users of audited financial statements, especially today when the welfare of a wide range of
society including bankers, investors, government is affected by the audit function. Auditors
on the other hand, following the legislation and legal acts, would stress ISA 500, which
‘explains what constitutes audit evidence in an audit of financial statements, and deals with
the auditor’s responsibility to design and perform audit procedures to obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion’ (IFAC: IAASB, 2009c). To say it differently, the number of interested
parties should recognize auditors more reasonable and reliable than they see themselves.
Hence, the first proposition is presented as:
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 40
Proposition 1: The perceptions concerning the responsibility and reliability of
audited financial statements differ substantially among auditors and users of financial
statements.
Looking further, it is important to determine if any significant differences in the
perceptions of audit objectives among users and auditors in Lithuania exist. Any significant
expectations or differences of the preferred audit objectives should be examined further, so
that these reasonable objectives reflect the needs of various interest groups. Thus the simple
question rises how the society perceives the audit objective? Are there any disagreement
between Lithuanian users of audited financial statements and auditors upon the audit
objectives? These questions are significant in order to appraise the value of public
accounting in Lithuania and leads to the second proposition:
Proposition 2: The perceptions concerning the objective of auditing differ
substantially among auditors and users of financial statements.
The majority of studies stress the main issue in audit expectation gap is the
obligation to detect and communicate errors, frauds, and irregularities in auditing practices
(McEnroe&Martens, 2001; Fadzly&Ahmad, 2004; Lin&Chen, 2004). Auditors had
traditionally been equipped with a wide range of legal rights and duties in order to facilitate
government control of business operations. Under government regulations, auditors had to
detect, stop, and report frauds, inefficiency, and irregularities in clients’ operations
(Lin&Chen, 2004). However, in recent years, it becomes more complicated to bear all
obligations for fraud detection due to increasing litigation exposure. On the other hand,
users of the audited financial statements may be reluctant to accept this view. Hence
another proposition specifically addresses the perceived auditor’s responsibility for fraud
detection and reporting in Lithuanian business environment.
Proposition 3: The perceptions concerning auditor’s duties in detecting and
reporting frauds and irregularities differ substantially among auditors and users of financial
statements.
As it was stated previously, many related parties such as present and potential
investors, creditors, and government authorities are interested in audited financial
statements, mainly because of the practice to rely upon audit results to evaluate business
performance and make a variety of decisions. General public sees auditors as an
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 41
independent body that may help to mitigate the risk related to the investment into the
company. Moreover, the public expects that auditors should be liable for losses suffered by
third parties owing to auditor negligence or audit failure (Fadzly&Ahmad, 2004, Monroe
and Woodcliff, 1994). However, it is important to remember that auditors and the manager
of the company are working under one engagement. This is true because the management
of the company chooses the auditors for the company review, thus both parties are evolved
under one contract. Thus the public expectations on the third party liability (auditors’
liability) are an important factor underlying the expectation gap (Fadzly&Ahmad, 2004,
Lin&Chen, 2004, Erickson et al, 2000).
Proposition 4: The perception concerning auditor’s liability to the third parties in
relations to auditors’ negligence and audit failure differs substantially among auditors and
users of financial statements
4.2 Research methodology
Quantitative analysis (a survey of auditors and users of audited financial statements)
was designed and developed based on the method used in Fadzly and Ahmad (2004), Lin
and Chen (2004), Porter (1993) and Monroe and Woodcliff (1994). It allows measuring the
perception and assessment of audit expectation gap and answers the research question and
provides evidence for the four propositions raised above. The questionnaire is constructed
as follows (see the full questionnaire in Table 13 in Appendix): the first block of questions
asks for the opinion on issues of audit role and objectives, auditors’ obligation for fraud
detection, and auditors’ legal responsibilities. The second section, namely the background
information, is also included into questionnaire to collect the demographic data of
respondents, such as education, job specification, work experience, gender, and age.
The semantic differential scale is used for the scenario evaluation. The seven-point
scale is chosen owing to the fact that this scale has the advantages of allowing neutrality of
the answer to the question (when choosing the middle number) and has enough gradation to
give meaningful data (Malhotra, 1993, p.268). The end-points of this scale are associated
with bipolar labels. In other words, each scale ends up by two bipolar adjectives, such as
“just” and “unjust”. Moreover, one can notice that reverse construction sometimes appear
on the left side of the scale and sometimes on the right (e.g. Statement 2, ‘The auditor is not
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 42
responsible…’). This helps to control the tendency of some respondents with very positive
or very negative attitudes and also for the ones who mark the right or left hand sides
without reading the labels. According to Malhotra, this scaling is very popular while
studying the advertising market (1993, p. 272).
4.2.1 Pretesting of the Questionnaire
The questionnaire was originally prepared in English and translated into Lithuanian
language for distribution in Lithuania. In order to launch the survey and to have the valid
data, we perform a pretesting of the questionnaire. The principal purpose of this pre-test is
to avoid ambiguity or misunderstanding of any item and to resolve any possible problems
with the selected scenarios. 12 randomly selected people were approached (8 auditors (4
men and 4 women) and 4 business people) of different age (from 18 to 50) and asked to fill
in the questionnaire. If the respondents had questions or misunderstood something,
additional information was provided in order to explain what exactly the point of interest
asking the particular question was. Afterwards, the discussion on how statements/questions
could be changed in order to be more comprehensible was held. After the pretesting was
finished and some minor modifications included into the questionnaire, the e-version of
questionnaire was launched. The data was gathered over the period of 2 months, starting
from 1 March 2011 to 1 May 2011.
To measure the extent of the audit expectation gap in Lithuania, the survey was
conducted among auditors and users of audited financial statements. The number of
research investigated the expectation gap among auditors and “sophisticated users”
(Humphrey et al., 1993, Monroe&Woodliff, 1994). Since there is no published study on the
expectation gap in Lithuania, this study seeks to expand the literature on the issue by
providing the evidence on the expectation gap in Lithuania between auditors and
‘sophisticated users’. Auditors from Big-Four Audit Firms and local Lithuanian audit
companies were selected to represent the opinion of audit profession, while bankers and
financial consultants were selected as the users of financial statements. These users were
selected for several reasons. First of all, it is important to note that bankers and financial
consultants are more informed about the auditing process and are more knowledgeable
about the duties of auditors as they day-to-day work is related to the audited financial
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 43
statements in one or another way (Humphrey et al., 1993). Secondly, these users are
expected to have a greater information asymmetry and thus in turn different expectations of
the role and responsibilities of the auditors (Hassink et al, 2009). Besides, greater efforts
from auditors might be expected due to lack of cost-benefit analysis, as these users do not
pay for auditing services (Hassink et al, 2009).
4.2.2 Data Analysis
To analyse the data, SPSS statistical software is used. To begin with, the sample is
analysed according to the main characteristics such as gender, age, experience, and area of
work. The frequency analysis allows seeing how representative our sample is compared to
Lithuania society. Afterwards, mean comparison is performed to measure the gap between
the auditors and users of audited financial statements. The significance of the gap is
measured using T-tests.
Tables 8 and 9 give the review of average scores and the level of significance of the
audit expectation gap (for more detail analysis of survey results please see Table 14, 15 and
16 in Appendix). Table 8 presents the opinion of the auditors, bankers and financial
consultants with respect to the two first propositions, namely 1) the perception concerning
the responsibility and reliability of audited financial statements and 2) the perception
concerning the objective of auditing. Table 9 shows the responses to the statements
regarding the auditors’ duties in fraud cases and liability to the third parties. More
precisely, Table 9 indicates whether there is difference among 3) the perceptions
concerning auditor’s duties in detecting and reporting frauds and irregularities and 4) the
perception concerning auditor’s liability to the third parties in relations to auditors’
negligence and audit failure.
4.3 Results
Online survey resulted in 152 responses. As stated in the methodology part, this
survey focuses on auditors and users of financial statements, representing respectively 47%
(71 auditor) and 53% (80 users) of all respondents.
The total population of Lithuania was 3.3 million as of 1 January 2010; however,
the target group is adjusted based on the age factor, assuming that inhabitants start working
after graduation until the retirement (Lithuanian Statistical Department, 2010). In order to
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 44
be confident with the sample size, the confidence interval of the sample is checked. The
number of respondents (152) shows that the maximum (assuming conservative 50%
response distribution) statistical error, at the 95% confidence level, would reach the level of
8.0 (Creative Research Systems, 2007).
To examine how representative the sample is a general description of quantitative
data gathered is analyzed. There are 152 respondents who filled the online survey, 67 of
them are men and 84 are women. The sample presents the comparable trend of the number
of men and women in the market. Distribution of men and women in the sample is 45% and
55% respectively. Total target population in Lithuania amounted to 2.3 million as of 1
January 2010 where men population corresponded to 46% while there were 54% women of
total group of people with the age between 21 and 65 (Lithuanian Statistical Department,
2010). Of the returned questionnaires, 40 came from financial consultants, 41 from bank
officers, and 71 from auditors. The majority of the survey respondents help post-graduate
degrees. About 22% of the respondents have work experience of more than 10 years, while
64% of the total respondents have been working in the sectors of interests from more than a
year up to 10 years. The age of respondents fluctuates between 22 and 55, with the mean
fluctuation around 32 years for the users of audited financial statements and 29 for the
auditors.
Work experience of auditors indicates the trend that auditors are not changing they
profession. Most of them, contrary, are industry focused and try to pursue their career
aspiration while practising auditing.
The following parts present the analysis of the perception of auditors and users
based on the four propositions identified before.
4.3.1 Proposition 1
The basis for audit expectation gap may rest in the standards gap components. This
means that society may expect auditors to be responsible for more than it is indicated in the
professional rules and standards which are used as a basis in audit engagement.
The analysis of the Lithuanian situation indicated that auditors and users relatively
agree that the auditors should be unbiased and objective (Statement 1) when performing the
engagements (means ranging from 1.268 to 2.000); however, there is significant difference
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 45
in the level of agreement. Note that the difference is mainly due to the bankers lesser
agreement on the statement of the auditors being unbiased and objective, which is probably
caused by scepticism of the reliability of financial statements. Further analysis of bankers
indicates that this scepticism increases with work experience (correlation of 0.03). In other
words, the longer a person works in the bank the less he or she relies and believes into
audited financial statements.
Significant differences between the auditors and users on the issue of internal
control structure of the company were identified (Statement 2). This is similar to the
finding of Best et al. (2001) and Fadzly and Ahmad (2004), where users of audited
financial statements expected auditors to be responsible for internal control system. Even if
auditors tend to claim that internal control system is management responsibility users
believe that this responsibility should be shared between auditors and the management. The
difference is mainly attributable to lesser agreement among bankers (mean of 5.073),
meaning that they expect auditors to be responsible for the soundness of the internal control
structure of the company. Interestingly, that auditors’ mean accounts for 3.563, which is
close to the midpoint. It may reflect that auditors are uncertain about their role in terms of
internal control. Such uncertainly may have occurred from the increasing pressure on
auditors to provide absolute assurance and protection against fraud and irregularities in all
cases (Fadzly&Ahmad, 2004). The general role and objectives of the audit is to ensure
fairness and completeness of the presentation of financial information. Looking from
auditing practice point of view, there is simultaneous effect. On the one side, auditors are
performing detail check of financial information, however, at the same time they are
sharing information with management.
Users tend to agree with auditors that an auditor should not take the accounting
policies used by the company for granted (Statement 3); however, users had higher
expectation towards the issue. Auditors’ mean accounts for 5.070, meaning that auditors are
likely to challenge and critically evaluate the accounting policies used by the company. If
any inconsistency is identified or expected, the auditing standards require taking certain
actions to apply the proper accounting policy, which eventually may result into qualified
audit opinion (IFAC: IAASB, 2009a). Expectations of financial consultants and bankers,
whose mean rates at 5.625 and 5.488 respectively, reveal a greater level of agreement that
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 46
any company has to use the proper accounting policy. If it is not the case, those companies
should be challenged by the auditors.
The results in Table 8 also confirm the findings of Fadzly&Ahmad (2004) that the
audit reports do not present the clear extent of assurance provided by the auditors
(Statement 4). As to Fadzly&Ahmad (2004), this is due to miscommunication between
users and auditors, which differently perceive auditor’s explanation of high but not absolute
level of assurance (IFAC: IAASB, 2004). In Lithuania, auditors and users relatively agree
that the level of assurance is clearly indicated in the audit report (means rate from 1.775 to
3.197); however, the analysis indicates the significant difference in the level of agreement.
Interestingly, auditors have the lowest level of agreement among all survey participants
(mean of 3.197 as compared to bankers’ mean of 2.756 and financial consultants’ mean of
1.775). This may imply that auditors again are uncertain about the extent of assurance
indicated in the audit report due to current increasing pressure on audit practice. According
to European Commission (2010b), continuous effort to explain the audit limitation to the
users of audited financial statements remains the most vulnerable issue to both parties
engaged (auditors and users) and does not bring the desired solution. Additionally, financial
instability in the last few years forced interested parties to take audit function more
seriously by to questioning and analyzing auditors’ role, scope and more importantly
contribution to increase financial stability. According to different institutions in the EU,
audit expectation gap is basically engendered due to the difficultly to understand the
reasonable, material soundness ad other audit limitations should be minimized and
addressed properly via a comprehensive debate (European Commission, 2010b). In this
context, the auditors may have been facing different believes and expectation on how the
profession will develop in the nearest future.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 47
TABLE 8: Audit expectation gap in terms of responsibility and reliability and objectives
Overall mean
Auditors Bankers Financial consultants
Overall users
GAP
Bankers vs. Financial consultants
Statements Mean (st. dev)
Mean (st. dev)
Mean (st. dev)
Mean (st. dev)
Mean difference
Statements regarding Proposition 2 1. The auditor should be unbiased and objective while performing the engagement
1.559
1.268 (0.585)
2.000* (0.894)
1.625* (0.705)
1.815* (0.823)
YES 0.375
2. The auditor is not responsible for the soundness of the internal control structure of the company
4.164
3.563 (2.353)
5.073* (1.490)
4.300 (1.572)
4.691* (1.570)
YES 0.773
3. The auditor should agree with the accounting policies used in the financial statements
5.329
5.070 (1.783)
5.488 (1.434)
5.625 (1.125)
5.556 (1.285)
NO -0.137
4. The extent of assurance given by the auditors is clearly indicated in the audit report
2.704
3.197 (2.394)
2.756 (1.758)
1.775* (0.733)
2.272* (1.432)
YES 0.981
5. The audited financial statements are useful for decision-making 2.487
2.169 (1.595)
3.341* (1.726)
2.525 (1.132)
2.938* (1.511)
YES 0.816
6. The audited financial statements provide an assurance regarding the performance of the entity
3.191
2.732 (1.146)
3.854* (1.606)
3.325 (1.492)
3.593* (1.563)
YES 0.529
7. The audited financial statements are useful in monitoring the company’s performance
2.480
2.127 (1.287)
3.195* (1.860)
2.775 (1.368)
2.988* (1.639)
YES 0.420
Statements regarding Proposition 2 8. An auditor conducting an audit is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error
2.211
2.437 (1.811)
2.171 (1.243)
1.850 (0.834)
2.012 (1.066)
NO 0.321
9. An audit is to ensure fairness and completeness of financial statement presentation
2.382
2.310 (1.272)
3.024* (1.557)
1.850 (0.700)
2.444 (1.342)
NO 1.174*
10. An audit is to prevent and deter frauds or irregularities, inefficiency and wastage in clients’ operations
3.342
3.634 (1.742)
2.488* (1.362)
2.600* (1.277)
2.543* (1.314)
YES 0.112
Responses to the survey questions are donated on a Likert scale of 1 to 7, the lowest score representing the strongest agreement and the highest score standing for the strongest disagreement. Neutral view to each question is indicated by the score of 4.
Note: * - 5% significance level Source: SPSS output. Summary of mean comparison test
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 48
Users’ level of agreement that audited financial statements are useful in decision
making (Statement 5) is similar to perception of company performance monitoring
(Statement 7). The results indicate that bankers (mean rating of 3.341) are more critical and
careful to make any decisions based on the financial statements (Statement 5). Not
surprisingly that such perceptions influence the belief in the audit assurance level regarding
the performance of the entity (Statement 6). The overall users’ mean of 3.593, which is
close to the midpoint, may indicate that users are uncertain whether they can or cannot to
accept the assurance regarding the performance of the entity as indicated in the audited
financial statements.
It should be noted that there is the greater extent of differences in perceptions
between the auditors and users of audited financial statements in terms of decision-making
(Statement 5) and performance monitoring (Statement 7). Auditors assess the useful of
audited financial statements in decision making and performance monitoring, with mean
accounting for 2.169 and 2.127 respectively. On the other hand, users do not expect audited
financial statements to be of the highest value. Users collectively present neutral view on
the trustworthiness of the financial statements. In terms of company performance
monitoring, however, lower level of agreement among bankers (mean of 3.195) may reflect
the lessons learned from the recent bankruptcies and scandals related to the large
corporations (e.g. Enron and Andersen). The correlation (correlation = 0.10) between
Statement 7 and Statement on auditors objectivity (Statement 1) indicates that users who
are more confident about the auditors objectivity tend to trust audited financial statements
more when monitoring company’s performance.
4.3.2 Proposition 2
Auditors and users tend to agree on the role of auditors regarding the fact that
audited financial statements taken as a whole are free from material misstatement, whether
caused by fraud or error (Statement 8), with mean of the ranging from 1.850 for financial
consultants to 2.437 for auditors. This indicates that both groups, auditors and users, are
familiar with one of the main topic defined in ISA 240. However, several significant gaps
were still identified in existing roles and objectives.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 49
There is no statistically significant difference between the perception of auditors
and users with respect to the audit objective to ensure fairness and completeness of
financial statement presentation (Statement 9). Overall mean of users corresponds to 2.444,
while the mean of auditors accounts for 2.310. There is statistically significant difference
between users of audited financial statements. Table 8 reveals that the mean of bankers,
amounting to 3.024, is higher by 1.174 than the mean of financial consultants (1.850). The
difference is statistically significant at 5% significance level and may result from the
different nature of work. For example, bankers are entitled to accept more risk than
financial consultants, when dealing with different companies. Having limited access to
companies’ financial information which is accessible by auditors, they expect that auditors
ensure fairness and completeness of financial statements, but also challenge the company
and identify other risks (existing or potential) which may limit the bank’s risk-exposure. If
such actions are not taken, this may result in large losses for the bank, especially in cases
where the bank is providing financial support for large companies. Financial consultants, on
the other hand, depending on the scope of work, have access not only to audited financial
statements but also to managerial accounts. They are looking for different risks and issues
relating the company they are working in or with. For example, financial consultants may
provide services for companies in terms of divesture, acquisition, merger or similar actions,
thus the risk financial consultants are accepting is limited to a certain strategic move of the
company rather than the amount of money invested (personal communication, April 12,
2011).
The qualitative results (Table 8) provide a statistical gap in terms of the view to
prevent frauds, irregularities, inefficiency and wastage in clients’ operations (Statement
10). The results indicate that auditors tend to remain neutral regarding this statement, with
the mean accounting for 3.634. Overall users of audited financial statements have higher
expectations of auditors when it comes to preventing and deferring fraud and irregularities
(mean 2.543 implies that users agree that the objective of auditors is to prevent and deter
fraud, irregularities, inefficiencies and wastage in company’s operations). These
perceptions are reasonable since the standards require auditors to investigate suspicious
actions and potential actions to cause fraud. The distinction between material and
immaterial fraud is a result of such different perceptions (Hassink et al., 2009). Financial
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 50
consultants or bankers expect auditors to perform their work in the best way possible,
regardless the type and influence of fraud. In the meantime, auditors tend to remain neutral
in cases where the effect of fraud is uncertain or immaterial (Hassink et al., 2009).
4.3.3 Proposition 3
Results in Table 9 indicate the lesser extent of differences in belief between the
auditors and users than in previous statements. With the exception of the Statement 11,
users and auditors present relatively similar opinion on the statements. For example, users
as well as auditors agree that the audit report should disclose uncovered frauds, inefficiency
or irregularities hidden by the management (Statement 12). Auditors mean rates at 1.831,
while the analysis of users’ perception resulted in the mean of 1.926. The difference is
mainly attributable to lesser agreement among bankers, whose mean accounted for 2.200.
The results are in line with the findings of McEnroe and Martens, 2001 who found that
existing society’s expectation are higher than auditors when the later are issuing unqualified
audit opinion.
All three groups present the same perception on the statement regarding the fact that
the audited entity is free from fraud and/or other irregularities (Statement 13). It was
expected that users as well as auditors would indicated the disagreement with this
statement, mainly due to auditors explanation that audit may provide ‘high, but not absolute
assurance” (IFAC: IAASB, 2009b). Besides, after the collapse of several large audited
firms and global financial turmoil, everyone is more suspicions and careful in terms of
financial health of all firms. Therefore, the results the means of al free groups fluctuate
within the same range, from 6.225 to 6.338.
Statement 11 shows that bankers reported lesser agreement, with the mean
accounting for 2.293 while the auditors and financial consultants rated this statement on
1.718 and 1.875 respectively. This may be attributable to the belief that ‘while the role
played by banks, hedge funds, rating agencies, supervisors or central banks has been
questioned and analyzed in depth in many instances, limited attention has been given to
how audit function could be enhanced in order to contribute to increased financial stability’
(European Commission, 2010b).
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 51
TABLE 9: Audit expectation gap in terms of fraud prevention and detection, and liability to third parties
Overall mean Auditors Bankers
Financial consultants
Overall users
Bankers vs. Financial consultants
Statements Mean (st. dev)
Mean (st. dev)
Mean (st. dev)
Mean (st. dev) GAP
Mean difference
Statements regarding Proposition 3 11. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management
1.914
1.718 (0.814)
2.293* (0.844)
1.875 (0.648)
2.086* (0.778)
YES
0.418
12. Auditors should disclose in the audit report the uncovered frauds, inefficiency or irregularities reliability of financial statements hidden by management
1.882
1.831 (0.878)
2.220 (1.061)
1.625 (0.667)
1.926 (0.932)
NO
0.595*
13. The audited entity is free from fraud or/and other irregularities
6.289
6.338 (1.055)
6.268 (0.895)
6.225 (0.698)
6.247 (0.799)
NO
0.043
Statements regarding Proposition 4
14. The auditor is legally responsible only to the shareholders of the audited company
4.855
3.873 (2.042)
5.976* (1.294)
5.450* (1.616)
5.716* (1.477)
YES
0.526
15. Auditor is responsible if the company goes bankrupt due to fraud
3.474
4.732 (1.859)
2.488* (1.630)
2.250* (1.127)
2.370* (1.400)
YES
0.238
16. Auditors are liable for losses of interested parties if failed to disclose potential fraud in audit report
4.046
5.634 (1.606)
2.780* (1.573)
2.525* (1.414)
2.654* (1.493)
YES
0.255
Responses to the survey questions are donated on a Likert scale of 1 to 7, the lowest score representing the strongest agreement and the highest score standing for the strongest disagreement. Neutral view to each question is indicated by the score of 4.
Note: * - 5% significance level Source: SPSS output. Summary of mean comparison test
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 52
4.3.4 Proposition 4
Based on the current legislation framework, the survey results imply that bankers
and financial consultants tend to blame auditors if the fraud-related business failure occurs.
The results reveal that auditors are seen as legally responsible to all stakeholders (Statement
14) (Monroe&Woodcliff, 1994, Lin&Chen, 2004, Erickson et al, 2000). This is confirmed
by the overall users’ mean of 5.716. Rather small disagreement between the bankers (mean
of 5.976) and financial consultants (mean of 5.450) indicates that bankers tend to judge
auditors severer, as this may influence the success and return of the money invested into the
company (e.g. loans provided to large entities). In the meantime, auditors’ mean rating at
3.473 is close to the midpoint. The results are similar to the one achieved by Fadzly and
Ahmad (2004), who concluded that such tendency reflects the reasonable rating of legal
responsibilities, which are ‘in-between the shareholders and the “remote third” parties’.
The greater extent of differences in belief between auditors and users of audited
financial statements is observed in the statements related to the company’s bankruptcy
(Statement 15) or losses of the interested parties if the audit failed to disclose potential
fraud (Statement 16). There is a tendency among bankers and financial consultants (the
mean of 2.488 and 2.250 respectively) to blame auditors for audit failure to detect fraud
before the company goes bankrupt. Even if the company does not go bankrupt, the users
perceive auditors reliable for losses which are experienced by the interested parties in cases
where auditors fail to disclose potential fraud (bankers’ mean rates at 2.780 and financial
consultants’ mean rates at 2.525). Currently auditors disagree that they are accountable for
the cases mentioned above, with mean standing at 4.732 for Statement 15 and 5.634 for
Statement 16. As to the European Commission (2010b) such expectations could be based
on the need of better communication by auditors to stakeholders. One of the key issues
pointed in the Green Paper is the fact that users desire a very high level of assurance on the
components at the balance sheet date. Therefore, auditors are expected to provide a ‘true
and fair view’ by ensuring that ‘substance prevails over form’ (European Commission,
2010b). Additionally, it is expected that by challenging management from the users’ point
of view, which could be called as ‘professional scepticism’ and would express the proper
‘emphasis of matters’ in the audit report. Such action may also pay a significant part in the
fraud detection and prevention mechanism.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 53
5 Discussion and conclusion
The purpose of this research is to evaluate to what extent the audit expectation gap
in relation to auditor’s responsibility and reliability, objective, duties in detecting and
reporting frauds and irregularities, and liability to the third parties in the Lithuanian
business environment. To be more specific, the goal of the research is to identify the
possible presence and the nature of the audit expectation gap among the auditors and
sophisticated users, namely bankers and financial consultants, of audited financial
statements in Lithuania.
Consistent with prior studies, the results of this research revealed substantial
evidence of the expectation gap in Lithuania on issues concerning auditors’ roles and
responsibilities. The results showed that 11 out of 16 statements provided empirical
evidence for audit expectation gap to exist. The study is designed and developed based on
the method used in Fadzly and Ahmad (2004), Lin and Chen (2004), Porter (1993) and
Monroe and Woodcliff (1994). The research question is addressed by four propositions.
The first proposition, testing whether perceptions in relation to the responsibility
and reliability of audited financial statements differ substantially among auditors and users
of financial statements, indicated that bankers and financial consultants have different
perception regarding auditors’ responsibility and reliability. The results show that 6 out of 7
statements addressing this issue indicate the gap. Bankers and financial consultants who
believed that there is the extent of assurance is clearly indicated in the audited financial
statements do not have the same understanding of auditors roles. Users of audited financial
statements do not trust and/or believe that auditors are objective and unbiased during the
engagement. Besides, the gap increases even more if you ask this person working in the
bank for a longer time period. In addition, bankers are the proponents of the view that
auditors are responsible of the soundness of the entity’s internal control structure. The study
also provides evidence that users of financial statements do not purely trust audited
financial statements, when it comes to companies monitoring, decision-making or
performance valuation. Bankers presented more severe view on these issues, which may be
the reflection of lessons which the bankers learned from the recent bankruptcies and
corporate failures. The findings related to proposition 1 are similar to the ones implied by
the studies of Hassink et al (2009) and Humphrey et al (1993), who evidenced that different
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 54
expectation towards responsibility and reliability are related to users having a greater
information asymmetry and lack of cost-benefit analysis. Fadzly&Ahmad (2004) also stress
that such findings imply miscommunication between users and auditors, which differently
perceive auditor’s explanation of high but not absolute level of assurance (IFAC: IAASB,
2004).
Proposition 2, addressing the perceptions concerning the objective of auditing differ
substantially among auditors and users of financial statements, reveals that Lithuanian
bankers and financial consultants tend to agree upon the auditors objectives. First of all, all
three groups of respondents shared the view that audit ensures fairness and completeness of
financial statements presentation, Additionally, the study evidenced the same understanding
among respondents as it implied in the regulations: perceived auditors responsibility when
obtaining reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error (IFAC: IAASB, 2009a). The
empirical evidence, however, showed that the disagreement exists whenever fraud and
other types of irregularities are addressed. The latter disagreement regarding fraud may
occur due to terms such as “reasonable”, “material”, “professional scepticism”, and
“brainstorming”, the meaning of which differs not only among users but also among
auditors (Zikmund, 2008).
Prior research reports that one of the main issues in audit expectation gap is the
obligation to detect and communicate errors, frauds, and irregularities in auditing practices
(McEnroe&Martens, 2001; Fadzly&Ahmad, 2004; Lin&Chen, 2004). According to the
third proposition addressing the perceptions concerning auditor’s duties in detecting and
reporting frauds and irregularities differ substantially among auditors and users of financial
statements in Lithuanian similar trend has been revealed. Users of audited financial
statements agree that the primary responsibility rest with entity’s management, however,
they also believe that auditors would disclose in their report any uncovered frauds,
inefficiencies irregularities hidden by the management. Answers received from auditors
imply the same trends.
Last but not least, the most significant gap in Lithuanian appears in relation to
auditors’ legal responsibility. The proposition 4 investigated the different perception
concerning auditor’s liability to the third parties in relations to auditors’ negligence and
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 55
audit failure among auditors and users of financial statements. As it was stated previously,
general public sees auditors as an independent body that may help to mitigate the risk
related to the investment into the company. Moreover, the public expects that auditors
should be liable for losses suffered by third parties owing to auditor negligence or audit
failure (Fadzly&Ahmad, 2004, Monroe and Woodcliff, 1994). Lithuanian bankers and
financial consultants expects auditors also to be legally responsible not only to shareholders
but to all other interested parties whose decisions are based on the audited financial
statements. Additionally, they (auditors) are expected to be blamed if the company after the
expression of unqualified opinion goes bankrupt and probably sued for the losses suffered
by the third parties.
Summing everything, the research indicated there are several over-expectations of
users of audited financial statements regarding the attest function. While external auditors
play a vital role, the deterrence and detection of fraud is, however, not only auditor’s
responsibility (NCFFR, 1987). According to the auditing standards, the primary
responsibility for fraud prevention and detection rests with the management of the company
(IFAC: IAASB, 2009a). An auditor, however, in accordance with ISAs is responsible for
‘obtaining reasonable assurance that the financial statements as a whole are free from
material misstatement, whether caused by fraud or error’ (IFAC: IAASB, 2009a). Global
trend, however, shows that external auditors on average were responsible for up to 5% of
fraud detection (ACFE, 2010). Lithuanian users, on the other hand, expressed diversified
view. The results indicated that bankers as well as financial consultants in Lithuania partly
agree with previously mentioned statement, however if the entity eventually goes bankrupt
auditors are the ones who are blamed for such default.
Additionally, the study provided some evidence that auditors themselves do not
have the same perceptions in relations to role and responsibilities of the auditors. The
analysis indicated that issues in relation to fraud prevention and detection, assurance and
usefulness of the audited financial statements are one of the most uncertain even for
auditors. This may be attributable to increased attention from the government and
regulatory bodies regarding this issue. Additionally, discussions and open debates
encouraged by the European Commission on the European level (European Commission,
2010b) on the role of auditors, governance and independence of audit firms as well as
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 56
stricter supervision of auditors in order to regain investors trust and confidence after the
corporate scandals and financial crisis does not add additional confidence to auditors’
perception.
In general the results indicate that there is extensive audit expectation gap in
Lithuania, mostly due to different expectations regarding fraud detection and legal
liabilities towards third parties involved. In line with prior research certain actions should
be considered in order to narrow this gap. Over-expectations of users of financial
statements regarding the functions of the auditor and lack of knowledge about auditor’s role
and responsibilities should be addressed properly.
Considering the analysis there are issues that the further research could analyse
deeper. Firstly, it would be valuable to expand the analysis over the CEE region or even the
whole EU; in other words, to evaluate whether similar audit expectation gap exists in
member states which follows the same legislation and regulation system. One more
interesting sphere is the analysis of the main contributing factors towards the extension or
narrowing the audit expectation gap extent. In addition to that, it would be valuable to study
the behaviour intention of company’s management to perform occupational fraud knowing
that external audit statistically reveals up to 5% of fraud (ACFE, 2010).
5.1 Limitations
One limitation is that only two groups of users of financial statements were included
in the sample and the distribution may not reflect the real proportion of these two groups in
Lithuania. Additionally, analysis is based on the 16 statements chosen to represent audit
expectation gap. There is a probability that different statements or different research
approached would resulted in different findings. This is one of the limitations of the
research which could be developed later on. The third limitation may be attributable to all
questionnaire studies with several factors playing a significant role. The factors include
socially desirable behaviour and a non-response bias (Hassink et al, 2009). Finally,
technical limitations of the research are related to surveys and time. The questionnaire was
placed in the Internet; however, other type of data collection could have brought additional
value.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 57
6 Appendices
Table 10: Summary of ISAs (redrafted) issued by International Federation of Accountants (IFAC): International Auditing and Assurance Standards Board
No Issues covered
ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing
ISA 210 Agreeing the Terms of Audit Engagements
ISA 220 Quality Control for an Audit of Financial Statements
ISA 230 Audit Documentation
ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements
ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements
ISA 260 Communication with Those Charged with Governance
ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
ISA 300 Planning an Audit of Financial Statements
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment
ISA 320 Materiality in Planning and Performing an Audit
ISA 330 The Auditor's Responses to Assessed Risks
ISA 402 Audit Considerations Relating to an Entity Using a Service Organization
ISA 450 ISA 450, Evaluation of Misstatements Identified during the Audit
ISA 500 Audit Evidence
ISA 501 Audit Evidence-Specific Considerations for Selected Items
ISA 505 External Confirmations
ISA 510 Initial Audit Engagements-Opening Balances
ISA 520 Analytical Procedures
ISA 530 Audit Sampling
ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
ISA 550 Related Parties
ISA 560 Subsequent Events
ISA 570 Going Concern
ISA 580 Written Representations
ISA 600 Special Considerations-Audits of Group Financial Statements (Including the Work of Component Auditors)
ISA 610 Using the Work of Internal Auditors
ISA 620 Using the Work of an Auditor's Expert
ISA 700 Forming an Opinion and Reporting on Financial Statements
ISA 705 Modifications to the Opinion in the Independent Auditor's Report
ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report
ISA 710 Comparative Information-Corresponding Figures and Comparative Financial Statements
ISA 720 The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements
ISA 800 Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
ISA 805 Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 58
Financial Statement
ISA 810 Engagements to Report on Summary Financial Statements
ISQC 1 Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 59
Table 11: Summary of accounting errors and fraud in a legal assessment of the Republic of Lithuania Code of Administrative Violations, EUR
Article Name Comment Fine
413 Illegal work A penalty shall incur to employers or their authorized persons for each person employed illegally
from 869 to 2,896
414 Infringement of the wage calculation and/or payment procedure
A penalty for employers or their authorized persons shall incur if there is: 1. Infringement of the wage calculation and/or payment procedure, established by the Republic of Lithuania Law on employment payment, collective agreement or a collective employment contract, not related the fault of the employee; 2. Intentional infringement of wage calculation and payment procedure, established by the Republic of Lithuania Law on employment payment, employment or collective agreement, or payment of wage and other employment-related benefits not included in the accounting records.
1. from 145 to 1,448 2. from 2,896 to 5,792
505 Violation of the shareholders, agricultural companies, cooperative societies' rights
A penalty shall incur to the Presidents of the Board , board members and executive heads if the following valuations are present: 1. Avoidance to call on time the meeting of the members of limited liability companies, including companies that operate as banks, agricultural companies, cooperative societies (cooperatives); 2. Incompliance with the meetings conduct procedures; 3. Obstruct the members of the agriculture companies, cooperative societies (cooperatives) attend the meetings; 4. Failure to present information r in accordance with the law to shareholders, agricultural companies, cooperative societies (cooperatives) or violation of non-property right as well as property rights as defined by the law
from 579 to 2,896
506 Creditors' rights violation
A penalty shall incur to administrators or managers of the companies and institutions if the violation of the creditors' rights appear (the fulfilment of the creditors' claims, failure to present the declaration of bankruptcy to court, failure to call the creditors' meeting in cases defined by the law)
from 1,448 to 2,896
1637 Mismatch of the money supply related to personal accounts or accounts not included into the cash register, as well as accounts included in the cash register
The penalty shall occur to: 1. Persons who are required to issue cash slip if there is a mismatch of the money supply by more than 20 LTL in enterprises, institutions and organizations where it is required to use cash-registers with people paying for goods and services in cash, mismatch including holding of personal or not included into cash-register money, as well as money included into cash-register; 2. Managers of enterprises, institutions, organizations or departments (branch) in case of the failure to take steps to ensure that cash records into the cash register as well as to ensure the accounts included in cash-register and cash on hand match the money supply in the enterprises, institutions and organizations which are required to use cash-registers with the residents paying for the goods or services in cash.
1. from 14 to 29 2. from 290 to 579
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 60
1721 Violation of the procedures and tax evasion based on reports and documents on individual, enterprises, institutions or organizations' income, assets, profits and taxes
The penalty shall occur to anyone who is engaged in infringement of the submission of the reports and documents about the individual, enterprise, institution or organization's income, assets, profits and taxes or submissions of incorrect data on income, assets, profits and taxes including reports and documents from individuals, institutions or organizations, senior executives and financiers (accountants), individual business owners, persons authorized to manage the affairs of partnerships, limited liability companies, agricultural and cooperative societies, State and Municipal Enterprises, companies in bankruptcy.
Warning or fine from 58 to 145
1731 Violation of accounting rules
The penalty shall occur to anyone who is engaged in: 1. Violation of the accounting transactions, money and material assets accounting rules 2. Negligent accounting treatment when it is paid for from thirty to fifty minimum subsistence level amounts (MSL) of tax that should have been paid under the law for the period being examined; 3. Deceptive accounting in order to hide or hiding from ten to fifty MSL tax rate, which had to be paid in accordance with the laws for the control period; 4. Negligent accounting treatment resulting into more than 50 MSL unpaid tax rate, which had to be paid in accordance with the laws for the control period; 5. Deceptive accounting in order to hide or hiding more than 50 MSL unpaid tax rate that should have been paid under the law for the period being examined
1. from 29 to 58 2. from 869 to 1,448 3. from 2,896 to 2,792 4. from 1,448 to 2,896 5. from 5,792 to 11,585
1733 Sale of goods without documents and forgery of documents
The penalty shall occur to anyone who is engaged in the sale of goods without document (excluding the retail sale), recording of false information into document, issue of such document, forgery of a document, and also intentional use of counterfeit document
from 29 to 1,448, including goods acquired without document or with falsified on confiscation
17311 Infringement of personal income tax payment
The penalty shall occur leaders (owners) and chief financiers of enterprises in case of violation of the personal income tax payment
from 290 to 869
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 61
Table 12: Accounting errors and fraud in a legal assessment of Republic of Lithuania: Law on the Approval and Entry into Force of the Criminal Code
Article
Name Comment Fine
182 Fraud The penalty shall occur to those who for its own or others benefit fraudulently acquired foreign asset or property right, avoided future liability or revoked it
Public works, fine, restriction of freedom or imprisonment for up to 3 years
183 Asset misappropriation
The penalty shall occur to those who appropriate foreign assets or property right entrusted to him or his possession.
Public works, fine, restriction of freedom or imprisonment for up to 3 years
186 Property damage caused by fraud
The penalty shall occur to those who was fraudulently reluctant to pay for work performed, goods and services received or was avoiding compulsory contributions, which in turn resulted into a large financial loss for the other person
Public works, fine, restriction of freedom or imprisonment for up to 2 years
220 False information on income, profits or assets
The penalty shall occur to those who in order to avoid taxes used knowingly false information about the company or its income, profits, assets in the tax declaration, other the approved report or other document and sent them to a competent authority
Withdrawal of the right to work in a job or pursue a particular business, fine, restriction of liberty, arrest or imprisonment of up to 3 years.
222 Deceptive record keeping
The penalty shall occur to anyone who fraudulently managed corporate accounts or hidden, destroyed or damaged accounting records, if it is not possible completely or partially establish the entity's economic, commercial, financial condition, results or evaluate the property,
Withdrawal of the right to work in a job or pursue a particular business, fine, restriction of liberty, arrest or imprisonment of up to 2 years.
223 Negligent record keeping
If it is not possible completely or partially establish the entity's economic, commercial, financial condition, results or evaluate the property, the penalty shall occur to those who had to handle, but did not manage the accounting in accordance with the law or negligently managed accounting, or was not guarded the accounting records for the time defined by the law
Withdrawal of the right to work in a job or pursue a particular business, fine, restriction of liberty, arrest or imprisonment of up to 2 years.
300 Document forgery or possession of a forged document
The penalty shall occur to anyone who has made a false document or forged it or kept, transported, shipped, and used knowingly false or falsified document
Fine, arrest or imprisonment of up to 3 years
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 62
Table 13: Survey questionnaire
Questions related to audit expectation gap4 1 2 3 4 5 6 7
1. An auditor conducting an audit is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error
2. An audit is to prevent and deter frauds or irregularities, inefficiency and wastage in clients’ operations
3. An audit is to ensure fairness and completeness of financial statement presentation
4. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
5. Auditors should disclose in the audit report the uncovered frauds, inefficiency or irregularities reliability of financial statements hidden by management.
6. The auditor is legally responsible only to the shareholders of the audited company
7. Auditor is responsible if the company goes bankrupt due to fraud
8. Auditors are liable for losses of interested parties if failed to disclose potential fraud in audit report
9. The auditor is not responsible for the soundness of the internal control structure of the company
10. The auditor should be unbiased and objective while performing the engagement
11. The auditor should agree with the accounting policies used in the financial statements
12. The audited financial statements provide an assurance regarding the performance of the entity
13. The audited financial statements are useful for decision-making
14. The audited financial statements are useful in monitoring the company’s performance
15. The extent of assurance given by the auditors is clearly indicated in the audit report
16. The audited entity is free from fraud or/and other irregularities
4 Responses to the survey questions are donated on a Likert scale of 1 to 7, the lowest score representing the strongest agreement and the highest score standing for the strongest disagreement. Neutral view to each question is indicated by the score of 4.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 63
Demographical information
Age ____________
Gender Female □ Male □
Area of work Banking □ Financial consultant □ Auditing □ Investor □ Other _________
Education Secondary □ Undergraduate studies □ Graduate studies □ Technical □ Other __________
Total work experience Less than a year □ From 1 to 5 year □ From 6 to 10 years □ From 11 to 15 years □ More than 16 years □ None □
Experience in auditing (if any) Less than a year □ From 1 to 5 year □ From 6 to 10 years □ From 11 to 15 years □ More than 16 years □ None □
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 64
Table 14: Descriptive statistics
Mean Std. Deviation Std. Error 95% Confidence Interval for Mean
Lower Bound Upper Bound Statement 1
Fin. consultants 1.625 0.705 0.111 1.400 1.850 Bankers 2.000 0.894 0.140 1.718 2.282 Auditors 1.268 0.585 0.069 1.129 1.406
Statement 2 Fin. consultants 4.300 1.572 0.249 3.797 4.803 Bankers 5.073 1.490 0.233 4.603 5.543 Auditors 3.563 2.353 0.279 3.007 4.120
Statement 3 Fin. consultants 5.625 1.125 0.178 5.265 5.985 Bankers 5.488 1.434 0.224 5.035 5.940 Auditors 5.070 1.783 0.212 4.648 5.493
Statement 4 Fin. consultants 1.775 0.733 0.116 1.540 2.010 Bankers 2.756 1.758 0.274 2.201 3.311 Auditors 3.197 2.394 0.284 2.630 3.764
Statement 5 Fin. consultants 2.525 1.132 0.179 2.163 2.887 Bankers 3.341 1.726 0.270 2.797 3.886 Auditors 2.169 1.595 0.189 1.792 2.546
Statement 6 Fin. consultants 3.325 1.492 0.236 2.848 3.802 Bankers 3.854 1.606 0.251 3.347 4.360 Auditors 2.732 1.146 0.136 2.461 3.004
Statement 7 Fin. consultants 2.775 1.368 0.216 2.338 3.212 Bankers 3.195 1.860 0.291 2.608 3.782 Auditors 2.127 1.287 0.153 1.822 2.431
Statement 8 Fin. consultants 1.850 0.834 0.132 1.583 2.117 Bankers 2.171 1.243 0.194 1.778 2.563 Auditors 2.437 1.811 0.215 2.008 2.865
Statement 9 Fin. consultants 1.850 0.700 0.111 1.626 2.074 Bankers 3.024 1.557 0.243 2.533 3.516 Auditors 2.310 1.272 0.151 2.009 2.611
Statement 10 Fin. consultants 2.600 1.277 0.202 2.192 3.008 Bankers 2.488 1.362 0.213 2.058 2.918 Auditors 3.634 1.742 0.207 3.221 4.046
Statement 11 Fin. consultants 1.875 0.648 0.102 1.668 2.082 Bankers 2.293 0.844 0.132 2.026 2.559 Auditors 1.718 0.814 0.097 1.526 1.911
Statement 12 Fin. consultants 1.625 0.667 0.106 1.412 1.838 Bankers 2.220 1.061 0.166 1.885 2.554 Auditors 1.831 0.878 0.104 1.623 2.039
Statement 13 Fin. consultants 6.225 0.698 0.110 6.002 6.448 Bankers 6.268 0.895 0.140 5.986 6.551 Auditors 6.338 1.055 0.125 6.088 6.588
Statement 14 Fin. consultants 5.450 1.616 0.256 4.933 5.967 Bankers 5.976 1.294 0.202 5.567 6.384 Auditors 3.873 2.042 0.242 3.390 4.357
Statement 15 Fin. consultants 2.250 1.127 0.178 1.890 2.610 Bankers 2.488 1.630 0.255 1.973 3.002 Auditors 4.732 1.859 0.221 4.292 5.172
Statement 16 Fin. consultants 2.525 1.414 0.224 2.073 2.977 Bankers 2.780 1.573 0.246 2.284 3.277 Auditors 5.634 1.606 0.191 5.254 6.014
Source: SPSS output. Descriptive statistics
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 65
TABLE 15: Anova test among three groups5
Mean diff.
Std. Error Sig.
95% Confidence Interval
Lower Bound
Upper Bound
Statement 1 Financial consultant Banker -.375 .158 .057 -.76 .01 Auditor .357* .141 .036 .02 .70
Banker Financial consultant .375 .158 .057 -.01 .76 Auditor .732* .139 .000 .39 1.07
Auditor Financial consultant -.357* .141 .036 -.70 -.02 Banker -.732* .139 .000 -1.07 -.39
Statement 2 Financial consultant Banker -.773 .436 .234 -1.83 .28 Auditor .737 .388 .178 -.20 1.68
Banker Financial consultant .773 .436 .234 -.28 1.83 Auditor 1.510* .385 .000 .58 2.44
Auditor Financial consultant -.737 .388 .178 -1.68 .20 Banker -1.510* .385 .000 -2.44 -.58
Statement 3 Financial consultant Banker .137 .343 1.000 -.69 .97 Auditor .555 .305 .213 -.18 1.29
Banker Financial consultant -.137 .343 1.000 -.97 .69 Auditor .417 .302 .509 -.31 1.15
Auditor Financial consultant -.555 .305 .213 -1.29 .18 Banker -.417 .302 .509 -1.15 .31
Statement 4 Financial consultant Banker -.981 .425 .067 -2.01 .05 Auditor -1.422* .378 .001 -2.34 -.51
Banker Financial consultant .981 .425 .067 -.05 2.01 Auditor -.441 .375 .726 -1.35 .47
Auditor Financial consultant 1.422* .378 .001 .51 2.34 Banker .441 .375 .726 -.47 1.35
Statement 5 Financial consultant Banker -.816 .339 .052 -1.64 .00 Auditor .356 .302 .720 -.37 1.09
Banker Financial consultant .816 .339 .052 .00 1.64 Auditor 1.172* .299 .000 .45 1.90
Auditor Financial consultant -.356 .302 .720 -1.09 .37 Banker -1.172* .299 .000 -1.90 -.45
Statement 6 Financial consultant Banker -.529 .306 .257 -1.27 .21 Auditor .593 .272 .093 -.07 1.25
Banker Financial consultant .529 .306 .257 -.21 1.27 Auditor 1.121* .270 .000 .47 1.77
Auditor Financial consultant -.593 .272 .093 -1.25 .07 Banker -1.121* .270 .000 -1.77 -.47
Statement 7 Financial consultant Banker -.420 .329 .612 -1.22 .38 Auditor .648 .293 .085 -.06 1.36
Banker Financial consultant .420 .329 .612 -.38 1.22 Auditor 1.068* .291 .001 .36 1.77
Auditor Financial consultant -.648 .293 .085 -1.36 .06 Banker -1.068* .291 .001 -1.77 -.36
Statement 8 Financial consultant Banker -.321 .325 .975 -1.11 .47 Auditor -.587 .289 .132 -1.29 .11
Banker Financial consultant .321 .325 .975 -.47 1.11 Auditor -.266 .287 1.000 -.96 .43
Auditor Financial consultant .587 .289 .132 -.11 1.29 Banker .266 .287 1.000 -.43 .96
Statement 9 Financial consultant Banker -1.174* .276 .000 -1.84 -.51 Auditor -.460 .245 .188 -1.05 .13
Banker Financial consultant 1.174* .276 .000 .51 1.84 Auditor .715* .243 .012 .13 1.30
Auditor Financial consultant .460 .245 .188 -.13 1.05 Banker -.715* .243 .012 -1.30 -.13
5 Table 16 presents the ANOVA test. To test the hypothesis of equal means between more than two groups, an ANOVA test is to be applied. In the following a one-way ANOVA test shows, whether the perception of bankers and financial consultants in Lithuanian is equal to the one of auditors.
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 66
Table 15: Anova test among three groups (Continued)
Mean diff.
Std. Error Sig.
95% Confidence Interval
Lower Bound
Upper Bound
Statement 10
Financial consultant Banker .112 .341 1.000 -.71 .94 Auditor -1.034* .303 .003 -1.77 -.30
Banker Financial consultant -.112 .341 1.000 -.94 .71 Auditor -1.146* .301 .001 -1.87 -.42
Auditor Financial consultant 1.034* .303 .003 .30 1.77 Banker 1.146* .301 .001 .42 1.87
Statement 11
Financial consultant Banker -.418 .174 .053 -.84 .00
Auditor .157 .155 .938 -.22 .53
Banker Financial consultant .418 .174 .053 .00 .84 Auditor .574* .153 .001 .20 .95
Auditor Financial consultant -.157 .155 .938 -.53 .22 Banker -.574* .153 .001 -.95 -.20
Statement 12
Financial consultant Banker -.595* .196 .009 -1.07 -.12 Auditor -.206 .175 .721 -.63 .22
Banker Financial consultant .595* .196 .009 .12 1.07
Auditor .389 .173 .079 -.03 .81 Auditor Financial consultant .206 .175 .721 -.22 .63
Banker -.389 .173 .079 -.81 .03 Statement 13
Financial consultant Banker -.043 .207 1.000 -.54 .46 Auditor -.113 .184 1.000 -.56 .33
Banker Financial consultant .043 .207 1.000 -.46 .54 Auditor -.070 .182 1.000 -.51 .37
Auditor Financial consultant .113 .184 1.000 -.33 .56 Banker .070 .182 1.000 -.37 .51
Statement 14
Financial consultant Banker -.526 .391 .542 -1.47 .42 Auditor 1.577* .348 .000 .74 2.42
Banker Financial consultant .526 .391 .542 -.42 1.47 Auditor 2.102* .345 .000 1.27 2.94
Auditor Financial consultant -1.577* .348 .000 -2.42 -.74 Banker -2.102* .345 .000 -2.94 -1.27
Statement 15
Financial consultant Banker -.238 .363 1.000 -1.12 .64 Auditor -2.482* .323 .000 -3.26 -1.70
Banker Financial consultant .238 .363 1.000 -.64 1.12 Auditor -2.245* .320 .000 -3.02 -1.47
Auditor Financial consultant 2.482* .323 .000 1.70 3.26
Banker 2.245* .320 .000 1.47 3.02 Statement 16
Financial consultant Banker -.255 .344 1.000 -1.09 .58 Auditor -3.109* .306 .000 -3.85 -2.37
Banker Financial consultant .255 .344 1.000 -.58 1.09 Auditor -2.853* .304 .000 -3.59 -2.12
Auditor Financial consultant 3.109* .306 .000 2.37 3.85 Banker 2.853* .304 .000 2.12 3.59
Note: * -The mean difference is significant at the 0.05 level.5 Source: SPSS output. Summary of mean comparison test (Anova test)
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 67
Table 16: Auditors vs Users (Mean comparison)
Sum of Squares df
Mean Square F Sig.
1 Between Groups 11.329 1 11.329 21.749 .000 Within Groups 78.138 150 .521 Total 89.467 151
2 Between Groups 48.139 1 48.139 12.349 .001 Within Groups 584.749 150 3.898 Total 632.888 151
3 Between Groups 8.905 1 8.905 3.766 .054 Within Groups 354.648 150 2.364 Total 363.553 151
4 Between Groups 32.414 1 32.414 8.601 .004 Within Groups 565.264 150 3.768 Total 597.678 151
5 Between Groups 22.389 1 22.389 9.312 .003 Within Groups 360.663 150 2.404 Total 383.053 151
6 Between Groups 27.996 1 27.996 14.608 .000 Within Groups 287.471 150 1.916 Total 315.467 151
7 Between Groups 28.041 1 28.041 12.713 .000 Within Groups 330.847 150 2.206 Total 358.888 151
8 Between Groups 6.811 1 6.811 3.188 .076 Within Groups 320.452 150 2.136 Total 327.263 151
10 Between Groups 45.001 1 45.001 19.254 .000 Within Groups 350.578 150 2.337 Total 395.579 151
9 Between Groups .685 1 .685 .400 .528 Within Groups 257.183 150 1.715 Total 257.868 151
11 Between Groups 5.127 1 5.127 8.115 .005
Within Groups 94.761 150 .632 Total 99.888 151
12 Between Groups .341 1 .341 .414 .521 Within Groups 123.527 150 .824 Total 123.868 151
13 Between Groups .314 1 .314 .365 .546 Within Groups 128.949 150 .860 Total 129.263 151
14 Between Groups 128.487 1 128.487 41.330 .000 Within Groups 466.328 150 3.109 Total 594.816 151
15 Between Groups 211.090 1 211.090 79.396 .000 Within Groups 398.804 150 2.659 Total 609.895 151
16 Between Groups 335.878 1 335.878 140.417 .000
Within Groups 358.800 150 2.392 Total 694.678 151
Note: that “groups” means the difference between auditors and pooled results of users (bankers and financial consultants together) Source: SPSS output. Summary of mean comparison test
AN EMPIRICAL STUDY OF AUDIT EXPECTATION GAP 68
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