Lecture 15 - Audit expectations gap and Audit quality

Question 1

ACCA defines the Audit expectations gap as….

Answer 1

“the difference between what the general public thinks auditors do and what the general public would like auditors to do”

Question 2

The Audit expectation gap contains 3 components:

Answer 2

• Knowledge gap
• Performance gap
• Evolution gap

Question 3

The knowledge gap is….

Answer 3

The difference between what auditors actually do and what the public thinks they do

• This recognizes that the public can sometimes misunderstand audit: for example, the extent to which auditors are responsible for preventing company failure

Question 4

The performance gap is…..

Answer 4

The difference between what auditors actually do and what auditors are supposed to do, given the
requirements of auditing standards or regulations.

• Insufficient focus on audit quality
• The complexity of certain auditing standards
• Differences in interpretation of auditing standard or regulatory requirements between practitioners and regulators.

Question 5

The evolution gap is…..

Answer 5

Defined as the difference between what auditors are supposed to do if they actually follow the requirements of auditing standards and regulation and what the public wants auditors to do.

• Indicates the areas of the audit where there may be a need for evolution, taking into consideration:
• the general public demand
• technological advances

Question 6

Strategies for closing the knowledge gap:

Answer 6

-Involve all stakeholders connected to the
audit process, such as regulators, standard setters, professional accountancy bodies, audit firms, audit committees, investors, governments and the media.
• Each of these need to commit to informing the public in a fair, balanced and understandable way about audit regulations and auditing standards
• Profession needs to more clearly explain the audit process. The introduction of key audit matters for listed companies by the International Auditing and
Assurance Standards Board (IAASB) is an important step.

Question 7

Strategies for closing the Performance gap:

Answer 7

Causes – lack of competence, lack of independence, deficient standards:

Lack of competence - Practicing certificate, Monitoring of audit activity – audit inspections

Lack of independence - Ethics codes

Deficient standards - Standard setters draft standards as clearly as possible and avoid creating requirements that may introduce judgement biases

Question 8

Strategies for closing the Evolution gap:

Answer 8

• Reducing the knowledge and performance gaps will help the public focus more clearly on how they want audit to evolve.
• Broad discussion between all closely connected stakeholders, on how the audit profession should evolve to remain relevant and meet public expectations

Question 9

Framework identifies five drivers of Audit quality:

Answer 9

1. The culture within the audit firm
2. The skills and personal qualities of partners and staff
3. Effectiveness of the audit process
4. The reliability and usefulness of audit reporting
5. Factors outside the control of the auditors

Question 10

Driver 1 - Culture within an Audit Firm:

Answer 10

• Creates an environment where achieving high quality is valued, invested in and rewarded.
• Emphasises the importance of ‘doing the right thing’ in the public interest and the effect of doing so on the reputation of both the firm and individual auditors.
• Ensures audit quality is monitored within firms and across international networks and appropriate consequential action is taken.

Question 11

Driver 2 - Skills and personal qualities of audit partners

and staff:

Answer 11

• Partners and staff understand their clients’ business and adhere to the principles underlying auditing and ethical standards.
• Sufficient training is given to audit personnel in audit, accounting and industry specialist issues.

Question 12

Driver 3 - Effectiveness of the audit process:

Answer 12

• The audit methodology and tools applied to the audit are well structured and:
-Encourage partners and managers to be actively involved in audit planning.
-Provide a framework and procedures to obtain sufficient appropriate audit evidence effectively and efficiently.
-Require appropriate audit documentation.
• The objectives of ethical standards are achieved, providing confidence in the integrity, objectivity and independence of the auditor.

Question 13

Driver 4 - Reliability and usefulness of audit

reporting:

Answer 13

•Audit reports are written in a manner that conveys clearly and unambiguously the auditor’s opinion on the financial statements and that addresses the needs of users of financial statements in the context of applicable law and regulations.

Question 14

Driver 5 - Factors outside the control of auditors:

Answer 14

• Audit committees that are active, professional and robust in dealing with issues identified during the audit.
• Appropriate agreed arrangements for any limitation of liability.