The Expansion Of Investment Driven Businesses Essay

The Expansion Of Investment Driven Businesses Essay

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The expansion of investment driven businesses has raised the need of assuring the credibility of the financial information that is presented to the shareholders and other users involve in the process. The periodic financial statements prepared by the management of an organization and audited by the auditors are the main source that investors rely upon, therefore; the auditors are expected assure whether the financial statements presented are free from any material misstatements and represent the true and fair view of the company (Ruhnke & Schmidt 2014, p. 572). The corporate collapse cases such as Enron and Pamalat raised the concerns about auditor’s responsibility and the auditor’s service was criticised by the public due to the disparity between the perception of the public and auditors in relation to the auditors’ role and responsibility –known as Expectation Gap (Hassink et al. 2009, p.85). An audit that does not uncover major losses in assets, over-stated profits, understated liabilities or any other financial duplicities regardless of the level of audit procedures and tests performed by the auditor is known as an audit failure (Anderson, Lowe & Reckers 1993, p. 713).
There are many different underlying potential explanations offered for the occurrences of the expectation gap and the reasons why the role of the auditor is questioned in relation to corporate fraud. This includes the auditor’s obligation to detect frauds, the extent of auditor’s responsibilities to the third parties and the threats associated with auditors’ independence status (Koh & Woo 1998, p. 148).
The expectation gap is classified into two components reasonableness gap and performance gap. The existence of ‘reasonableness gap’ which is the gap between w...

... middle of paper ...

...he audit client’s susceptibility to fraud with the audit team members are a few other suggestions made to narrow down the gap (Hassink et al. 2009, p.88). If the auditing profession were willing to expand the responsibilities that society reasonably expect through new standard or revised auditing standard, it is proposed that the deficient standard gap would be narrowed significantly (Hassink et al. 2009, p.87). The recent accounting scandals such as Enron and the establishment of new rules (such as in the Sarbanes-Oxley Act of 2002) has reinforced and persuaded to attempt of reducing the expectation gap (Zhang 2007, p. 641).
In conclusion, it is important to narrow the expectation gap as it is unfavorable to the auditing profession and compliance with auditing standards are not sufficient to protect auditors from lawsuits and unfavorable legal decisions.

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