UNIVERSITY OF NAIROBI

FACULTY OF BUSINESS AND MANAGEMENT SCIENCE

DEPARTMENT OF ACCOUNTING AND FINANCE
GROUP 001
DAC 413 AUDITING AND ASSURANCE SERVICES
ASSIGNMENT: THE AUDIT MARKET
TOPIC TWO
GROUP MEMBERS
1. Mohamed Liban Mohamud - D33/0439/2019
2. Patrick Rimomo Gitau - D33/3002/2019
3. Grace Mutheu - D33/2835/2019
4. Nancy Onchiri- D33/3084/2019
5. Stephen Nyanamba Ondeyo - D33/2992/2019
6. Halkano Adan - D33/2909/2019
7. Mohammed Salim - D33/1329/2019
8. Evalyn Ngugi - D33/5627/2019
9. Jose Sila - D33/2851/2019
10. Sharon Ndunge - D33/3021/2019

AN OVERVIEW OF THE AUDIT MARKET

We will look at the reasons why Auditing as a profession came to be, what happened in
organizations that led to the introduction of Audit, and the need and efficiency of Audit in the
operations of the organization's business and activities in the Introduction to the Audit
market.
The Industrial Revolution played a significant role in the development of today's auditors. As
a result of the industrial revolution, large industrial firms with intricate operations arose.
Bureaucratic structures, as well as the eventual need to seek outside funding to finance
additional expansion. As a result of the revolution, a somewhat wealthy middle class
emerged, and funds were raised from them by selling securities. As a result, management's
capital provision was divided.
These changes have increased the demand for bookkeeping and accounting professionals to
check financial statements both internally and externally.
Management has authority over the accounting systems of the businesses that auditors
examine. Management has the authority to decide the specifics of the representations made in
financial reports sent to investors in addition to being in charge of them. However,
management is unlikely to view this process objectively.
Financial reports evaluate the efficiency with which management performs its
responsibilities. They have a significant impact on management salaries, the value of
managers' company stock, and even their continued employment with the company. An
unbiased and expert assessment of the fairness of these reports is to boost the confidence of
investors and creditors in these financial statements.

THEORIES ON DEMAND AND SUPPLY OF AUDITING SERVICES

1. POLICEMAN THEORY
It asserts that the auditor is responsible for searching, discovering and preventing any
fraudulent activity.
However, the role of the auditor is to provide reasonable assurance and an independent; true
and fair view of the financial statements.
Although, there has been more pressure on auditors to detect fraud after recent reporting
scandals like that of ERON. It can be argued that in modern societies, the users of statements
want auditors to be responsible for fraud detection as they use audit reports to analyze and
make informed decisions.
However, auditors should improve their detection rate to instill public confidence. The
primary responsibility of fraud prevention and detection rests with the management and
governance of an organization: it is also important that more emphasis is placed on the
prevention of fraud.
The auditor also has a duty to care to the end users of audit reports and should consider risks
of material misstatements due to fraud when calculating audit risk.

2. THE LENDING CREDIBILITY THEORY

It suggests that adding credibility to financial statements is an integral part of auditing,
making it a fundamental service auditor ought to provide to clients.
Audited financial statements boosts users’ confidence in an organization’s financial records
and management stewardship: in turn, improving their decision quality such as investments
or new contracts, based on reliable information. This is because stakeholders need to have
faith in the financial statements.
The credibility gained by financial statements would affect decisions by stakeholders (e.g.
Credit limits provided by suppliers) and also helps shareholders put trust in management;
reducing the information asymmetry between stakeholders and management.
Information asymmetry is a situation whereby one has more information than the other thus
having competitive advantage over the other.
However, there is an efficient markets theory that holds that audited information does not
form the primary basis for investors’ investments decisions.
3. AGENCY THEORY
General description of agency relationship states that it is a contract in which a principal
engages another person as their Agent to act on their behalf.
Management is seen as an agent that tries to obtain contributions for the company, from
principals (such as bankers, stockholders and employees).
The management of the company tries to get these contributions under optimum conditions
for management i.e. (low interest rates from bankers, high share prices for stockholders, and
low wages for employees).
Information asymmetry
• This means that the management has an upper hand over the investors as they
(management) know the actual potential of the company (its ability to repay loans, its actual
profits and ability to retain employees)
Reputable auditors will therefore be an incentive to both the managers and investors as:
-investors require reliable information about the company from management so as to make
informed investment decisions
-management requires the principals to look favorably on the company as they need their
contributions
The contribution of auditors to third parties is determined by the auditor’s independence; the
willingness of an auditor to report errors when he detects them, even when it’s against the
wish of the auditee.
This cost companies their reputation and incurred other costs hence led to audit firms facing
public rebuke.
Consequentially, studies reveal that there was a decline in the share of the market for audit
firms
4. THE THEORY OF INSPIRED CONFIDENCE (Limperg, 1920)
This theory addresses the demand and supply of audit services.
According to Limperg, the demand for Audit services is a direct consequence of the
participation of third parties in the company.
The stakeholders demand accountability from the management, in return for their
contribution to the company.
An audit of the information provided by the management is required as it may be biased due
to conflict of interest between management and outside stakeholders.
The auditor therefore is to conduct the audit in such a way that any expectation of an external
stakeholder is not damaged.
Audit Regulation.
Audit regulation is concerned with ensuring that auditors conduct audits in accordance with
best practices and are competent and independent.
Why is audit regulation necessary?
 Assure users that certain standards have been met.
 Preventing anyone, regardless of credentials, from misrepresenting themselves as
auditors.
 Establishing standards that auditors must follow to ensure that their work is done
correctly.
 Assists auditing service users in reducing risk.
Audit Industry Regulation
Most countries regulate both the demand and supply of audit services in the audit market.
Companies decide whether to audit their financial statements on the demand side. On the
supply side, audit service provision is regulated by establishing official legal requirements for
auditors. Only statutory audits required by law are performed in Kenya.

Sanctions both businesses and individuals who violate the law, regulations, and rules.
Has decided that the AICPA's generally accepted auditing standards (GAAS) will be used
only temporarily; inspects registered accounting firms' operations on a regular basis and
investigates potential violations of laws, standards, consistency, and conduct.
Serves to increase investor confidence by improving the quality of corporate disclosure and
financial reporting, as well as to strengthen accounting independence.
Public Oversight Boards
These are boards that review the work of auditors and take part in setting and enforcing
standards.
Examples of such boards are;
1. Public Company Accounting Oversight Board (USA)-2002
2. Financial Reporting Council (Australia)-1999
3. The Review Board (UK)

1. Public Company Accounting Oversight Board (PCAOB)

Functions;
 Oversees and investigates the audits and auditors of public companies
 Sanctions both firms and individuals for violation of law, regulations and rules.
 Has decided the generally accepted auditing standards (GAAS) set by AICPA will be
used only temporarily.
 Regularly inspects registered accounting firms’ operations and investigate potential
violation of laws, standards, consistency and conduct.
 Serves the purpose of establishing investor confidence by improving quality of
corporate disclosure and financial reporting, strengthen the independence of
accounting firms
 Increases credibility of audit profession.

2. Financial Reporting Council (FRC)

Functions;
 Oversight accounting standards setting process for private, public and not for profit
sectors.
 Monitor development of international accounting standards (IAS).
 Sets strategic direction for Australian Accounting Standards Board(AASB)
 Approves and monitors its priorities and business plan and oversees its operations.

3. The Review Board

Functions;
 Monitor the operation of the regulatory system to confirm that it is fully meeting the
public interest.
 To carry out this function the Review Board covers the work of 3 associated bodies;
Ethics Standards Board, Auditing Practices Board and Investigation and Discipline
Board.
 The Board has limited scrutiny over UK accounting professional bodies’ authority for
investigation and discipline, monitoring, training, qualification, and registration of
their members.
General Functions of Public Oversight Boards
 Provide; independent oversight of the regulation of auditing profession by recognized
supervisory & qualifying bodies.
 Monitoring quality of auditing function in relation to economically significant
entities.
 Independent oversight of the regulation of the accountancy profession by professional
accountancy bodies
  Increase confidence of investors & other interested parties that public interest
activities of IFAC are properly responsive to public interest.
 Establish audit, quality control & independence standards
 Inspect public accounting firms
 Conduct investigation & disciplinary proceedings.
 Oversee IFAC standard setting activities in audit performance standards,
independence & other ethical standards for auditors, audit quality control & assurance
standards.

Types of Audit Regulation

1. Public regulation (external)-PCAOB (US), IFAC (INTERNATIONAL)
2. Self-regulation (internal) -regulatory bodies & accounting profession.
WHO IS RESPONSIBILE FOR AUDIT REGULATION?
1. State-delegate duty of regulation to audit profession
2. Audit profession-preferred as the best regulator as it has more expertise

Regulatory bodies in Kenya

They regulate the accounting profession in Kenya
KASNEB
 Prepares syllabuses and conduct accounting examinations
 Issue certificates to candidates who have satisfied examination requirements
 Promote recognition of its examination in foreign countries
REGISTRATION OF ACCOUNTANTS BOARD (RAB)
 Register accountants who are effectively graduates of IAS or hold qualifications
recognized by RAB
 Issue practicing certificates
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA (ICPAK)
 It is the statutory body mandated to develop and regulate the accountancy profession
in Kenya. Acts as the profession’s mouthpiece in Kenya hence it holds membership in
IFAC. It is responsible for;
 Setting and enforcing standards of professional competence and practice including
accounting, auditing and ethical standards.
 Promoting international recognition of the institute
 Advising the Minister on matters relating to financial accountability in all sectors of
the economy
  Advising KASNEB on matters relating to examination standards and policies
 Proving for the maintenance of competence by updating members’ knowledge
through publication of books, journals and articles.
Standards /Regulations in Auditing
International, Assurance Auditing Standards Board (IAASB) - established by IFAC to
develop and issue high quality standards on auditing, assurance and related services
engagements that are conducted according to international standards.
 International Standards on Auditing
 International Standards on Review Engagements
 International Standards on Assurance Engagements
 International Standards on Quality Control
All the above are IAASB’s Engagement Standards

PRINCIPLES INFLUENTIAL IN DEVELOPING REGULATORY STRUCTURE

 Independence-external representation on the boards is necessary.
 Public interest & integrity -inclusion of non-accounting members in the structure
through public consultation.
 Transparency &openness-regulatory structure must be open to public scrutiny.
 Proficiency & commitment-there should be balance between external participation &
professional judgment.
 Relevance-procedures must be in place to monitor compliance of firms & auditors
with professional standards.
 Review-there should be procedures to ensure that regulatory structure is subject to
both external and internal review.
ASPECTS OF REGULATION RELATING TO;
Appointment, Remuneration, Removal & Resignation of the Auditor

► Qualification for appointment as Auditor

Must be a holder of practicing certificate which is issued if;

I. A CPA
II. Member of ICPAK
III. Have a post qualification experience in auditing environment for at least two years
Should not be a partner or in employment of the officer of the company
Should not be an officer of the company
Should not be a body corporate, only natural persons can express an opinion
An auditor is reappointed at the AGM.

► Remuneration

It is fixed by whoever appoints the auditor either the directors or registrar. The amount shall
be fixed by the company in general meetings.
It includes any expenses of the auditor paid by the company

► Dismissal/Removal

An auditor can be dismissed through an ordinary resolution at a meeting with special notice
of 28 days. Within 14 days the registrar must be informed of auditor’s dismissal. However, he
can make representations to the members in case he feels he is dismissed unfairly. The
auditor is entitled to attend the meeting at which his dismissal is being discussed.

► Resignation

In case an auditor resigns before end of tenure he issues notice in writing to the company
Rights of Auditors

● Right to access at all times the accounting records of the company

● Right to receive notes of and attend general meetings

● Right to remuneration, reimbursed audit expenses incurred in connection with the

audit.

● Right to send representations to shareholders in case of attempt to dismiss him.

● Right to enquire from employees of the company any information and explanation
deemed for the purpose of the audit
Duties of the Auditor

● To report to shareholders whether the financial statements give a true and fair view.

● To consider if any report in director’s report is inconsistent with the financial

statements.

● To detect any fraud and errors in the financial statements.

● Express an opinion whether financial statements are prepared in accordance with an

identified financial reporting framework.
AUDIT FIRMS
This is the independent accounting firm regularly engaged by regency to review its quarterly
financial statements and provide a financial report with respect to their annual financial
statements.
It is a legal requirement for limited companies to have their accounts audited and posted in
the dailies once a year. As a result you need to ensure that your books are in order. If you are
a graduate of any business-related course and have CPA-K and are out of employment you
may need to seek from here. Some audit firms that are in Kenya include; PKF east Africa
KKCO east Africa PWC etc. Usually, audit firms are classified into two distinct categories:
(a) The big four and
(b) The non-big four.
The Big Four Firms
These firms resulted partially from several major mergers in the late 1980s. This group is
made up of
 Deloitte,
 Ernst & Young,
 KPMG and
 PricewaterhouseCoopers.
These audit firms have a global network of affiliated firms. Actually, there were the Big Five
firms after a series of mergers, including Arthur Andersen. However, as a result of the Enron
accounting scandal, the market lost its confidence in Arthur Andersen and this firm had to
forfeit its business in 2002 after almost 90 years of having been a highly respected firm. Most
of these firms are still structured as national partnerships with national instead of
international profit sharing. However, these national member firms participate in an
international head office, in which global technologies, procedures, and directives are
developed. In addition to sharing the methodology, the networks are also used for the
coordination of international audit engagements. The group auditor of a worldwide operating
company uses the services of auditors of the member firms in the countries where the client
has subsidiaries. As a result of the developments in communications technology, the
effectiveness of these networks and the efficiency of the co-ordination of international
engagements have increased significantly.
The Non-Big Four Firms
These firms are a heterogeneous group.
At one extreme there are a very large number of small local firms, with only a handful of
professionals. At the other extreme there are a small number of second tier firms, which also
have an international network, although not quite as extensive as the big four’s network. In
between, there are a large number of medium-sized national or regional audit firms, with
several offices.
It has often been suggested that big four audit firms perform higher quality audits -both in
detection and independence - than the others. This is because they have a technological edge
and because a given client will represent a smaller amount of their aggregate fee income. In
line with this argument, it is often suggested that audit firms are more independent towards
small than towards big clients.
Further, it is assumed that clients in financial trouble are audited more thoroughly (higher
audit quality) than well-performing clients, because the risk of litigation due to an audit error
is perceived as higher in case of a company failure. Whether this constitutes reason enough
for such suggestions is a matter of conjecture.

AUDIT QUALITY & AUDIT FEE DETERMINATION

AUDIT QUALITY
How is the auditor evaluated in the market place?
Auditors are evaluated based on technical & functional quality elements.
 Technical audit quality is the degree to which an audit meets a consumer’s
expectations with regard to the detection and reporting of errors and irregularities
regarding the audited company and its financial statements. Technical audit quality
addresses the quality of the outcome of the audit process i.e. how good an auditor is at
finding errors in the financial statements, at detecting fraud or going concern
problems.
 Functional audit quality is the degree to which the process of carrying out the audit
and communicating its results meets a consumer’s expectations. Functional audit
quality represents NOT the outcome, but the process itself. Dassen (1995) found out
that clients do not just appreciate the detection ability of auditors (technical quality),
but also the auditor’s ability to identify points or matters of interest to management
regarding corporate finance, internal control or general business management, as a by-
product to giving their opinion on the accuracy of the financial statements.
Quality and Length of Tenure
(How auditor tenure affects audit quality)
Auditor tenure is the length of the auditor-client relationship.
Mostly, first-year audit engagements are perceived as less thorough, since it takes some time
to identify all potential audit risks for a new client.
However, after a long period, the auditor might lose his professional skepticism (having a
questioning mind, being alert to anything that may indicate misstatement due to error/fraud or
critically assessing audit evidence) if the tenure is too long due to the repetitive nature of the
task which is the audit being performed year in year out.
Also, if the tenure is too long, there is the development of economic and social bonds
between the auditor & the client due to continuous involvement. This, in turn, has the
potential to impair the auditor’s objectivity & increase the likelihood of audit failure.
In contrast, there is a positive view regarding the auditor tenure being too long. It argues that
longer auditor tenure leads to a higher quality audit via a learning effect, due to the
accumulation of client-specific knowledge over time. An auditor that is more knowledgeable
of the client is more likely to promptly identify financial reporting problems.
AUDIT FEE DETERMINATION
Fixing auditors’ remuneration involves an agreement between the auditor & the client and
must be clearly outlined in the letter of engagement.
Important determinants of audit fees are as follows:
 Size & structure of the client’s business (auditee)-geographical dispersion
If the auditee has several branches, the audit fee is likely to be high because it involves a lot
of work auditing all the branches.
 Size of the audit firm (auditor)
Higher quality or 1st tier firms consisting of the Big Four firms (Deloitte, KPMG, Ernst &
Young and PriceWaterhouseCoopers) demand a fee premium.
A fee premium is what auditors charge clients for their services in excess of the predicted
audit fee. These are driven by the auditor, his resources, competence & reputation and
increase with the factors mentioned all of which should translate to a greater audit quality.
 Prevailing economic conditions
High inflation may require the audit fee to be adjusted upwards.
 Nature of audit assignment
Where the assignment is considered complex & risky, the fee is likely to be high because it
shall require technical expertise, knowledge and skills.
If the assignment is considered simple & less risky, the fee is likely to be lesser.
 Time factor
Audit fee is charged based on the time taken to complete the assignment.
 Stipulations of professional bodies e.g. ICPAK.
ICPAK gives guidelines on professional fees.
The need for the development of such guidelines came about in 2010 when ‘Quacks’
( persons falsely claiming to have audit knowledge & skills) were invading the professional
territory & taking away audit engagements at very low fees.
The guidelines aimed at:
 Eliminating illegal practitioners
 Providing a fair playground for all practitioners by providing the minimum fees
charged for different services to prevent undercutting in the industry
 Setting out a basis for establishing a reasonable level of remuneration.
The 2 bases for computation of professional fees are:
i) Value-based billing
Here, professional fees are charged based on knowledge & skills that the
professional would require to complete the assignment & the professional
judgement that he would be called upon to make.
ii) Time-based billing
Here, fees are based on time utilized and depends on how rates are calculated &
applied.
AUDITOR'S LEGAL LIABILITY
Legal liability can be generally classified as follows:
1. Civil liability
2. Criminal liability
3. Liability as members of a professional accounting organization

(a) Civil Liability

An auditor may be held liable for breach of contract or/and negligence against the client or a
third party, such as stockholders. Breach of contract entails where the auditor violates the
terms of the engagement, e.g. an auditor is required to maintain client's confidentiality but
fails to do so.
An auditor is also required to maintain a duty of care owed to the client. Otherwise, the
auditor is said to act negligently. However, for the plaintiff (client) to be awarded damages,
he/she must establish three things: the auditor owed him/her a duty of care, there was indeed
a breach of contract and there was actual financial loss suffered as a result of the breach.
This is seen in the case of Hedley Byrne v Heller & Partners (1964). This stated that when
a person makes a statement, he voluntarily assumes responsibility to the person he makes it
to. If the statement was made negligently, then he will be liable for any loss which results. In
the case there were two parties: The auditor (representor) who makes a representation
(statement) to the representee (Client). It was determined that in order for another party to
prove that the auditor was negligent, the following conditions must be established: The duty
of care was based on a special relationship between the representor (auditor) and representee
(Client), the representer makes a reckless representation. (Statement made by the auditor) and
the representee acted on the representation.
Other case laws include: Caparo industries v Dickman (1990) which also demonstrates that
in order for a duty of care to arise in negligence: The harm must be reasonably foreseeable as
a result of the Defendant's conduct; the parties' relationship must be proximate; and. it must
be fair, just and reasonable to impose liability.

(b) Criminal Liability

An auditor is held criminally liable if he/she knowingly defrauded another person by
falsifying information in the financial statement and making false statements. The Companies
Act of Kenya, prescribes severe criminal punishment if any altered or fraudulent entry is
made in any books of accounts or accounting records of the company. The auditor and
officers of the company who are found guilty of the offense will be subject to imprisonment
or payment of fines. Furthermore, if an auditor makes any false statement or omits any
material fact known to him intentionally which significantly influences the decisions made by
users, i.e. Reports, prospectus, etc., the Companies Act prescribes that he is subject to
punishment through imprisonment or fine.

(c) Liabilities as members of professional accounting organizations

All audit professions have some sort of a disciplinary committee or court where complaints
about an auditor are lodged. This disciplinary committee consists of representatives from the
legal and audit profession, through which it determines sanctions to be imposed.
These sanctions may include:
1. Fines - This is a penalty that an auditor who is found guilty pays after an offense has been
committed. The current fine imposed by ICPAK for ethical misconduct or financial
impropriety is sh. 5 million.
2. Reprimands - It refers a formal rebuke by the official body. This can be both oral and
written.
3. Suspensions - It refers to temporal removal of an auditor from the practice. Sometimes it
can lead to 4. Lifetime ban - It refers to deregistering of an audit firm or individual auditor
since the offence is a serious one.
SOLUTIONS TO AUDITORS’ LIABILITY
Client Solutions or Strategies
a) Thoroughly assess potential clients. Examine prospective clients for past involvement in
legal proceedings, their capacity to pay for services, and any potential conflicts of interest.
b) Display professional scepticism: This mind-set acknowledges that management may have
motivations to purposefully misrepresent quantities or disclosures in the financial statements.
c) Steer clear of transactions outside the purview of your company.
d) Use engagement letters to clarify any ambiguities.
e) Examine each audit engagement from a legal perspective. Avoid engaging in audits that
provide a significant legal risk as evidenced by elements including a lack of integrity, IRS
issues, frequent changes in key financial positions, and insufficient internal controls.

Firm-Related solutions or approaches

a) Quality Control - Put a focus on GAAS compliance, professional ethics, and quality
control rules and processes inside the company.
b) The hiring process - Hire a sufficient number of skilled individuals to carry out the audit
engagement, and ensure sure they are well-supervised, taught, and aware of the level of
professional care required.
c) Ongoing education for professionals - Keep professional standards at the forefront of
ongoing education. In order to safeguard himself, the accountant must be current.
d) Self-reliance - Strive to be independent in both appearance and action. Notify all
employees in writing of any new clients. You may be made aware of conflicts by staff
members.
e) Use reasonable professional care - This provides a strong barrier against clients and other
users. When you carry out the accounting engagements with the level of expertise anticipated
of reasonably sensible accountants, you are deemed to have exercised due professional care.
f) Sufficient working papers - Maintain sufficient working documents and check their
accuracy and completeness.
g) Protection - Keep enough professional liability coverage. Malpractice insurance is a
shield against litigation damages but it cannot help you prevent a lawsuit.
Development in the audit market
This is the development of the auditors’ duties linked to changes in the audit market. Audit
users make the audit market. When audit users want are not met as expected, there results to
an expectation gap.
Expectation gap
The expectation gap refers to the difference between what is expected or promised and what
is actually delivered. This can occur in many different contexts, such as in business,
relationships, or even personal goals.

For example, in the business world, an expectation gap can occur when a company promises
a certain level of service or product quality to its customers, but fails to meet those
expectations. This can lead to customer dissatisfaction, negative reviews, and even loss of
business.

Expectation gap in Audit market

The expectation gap in the audit market refers to the difference between what the public
expects from an audit and what an audit actually entails. The public often expects that an
audit will guarantee the accuracy of a company's financial statements and provide a high level
of assurance about the company's financial health. However, the reality is that audits are
designed to provide reasonable assurance that the financial statements are free from material
misstatements, but they cannot guarantee their accuracy or the company's financial health.

This expectation gap has become a significant issue in the audit market, as it can lead to
misunderstandings about the role and purpose of an audit, and can also contribute to a lack of
trust in the auditing profession. This can have serious consequences, such as increased
regulatory scrutiny and public pressure for more transparency and accountability in financial
reporting.

To address this expectation gap, auditors and regulators have taken steps to improve the
transparency and quality of audit reports, such as providing more detailed explanations of the
audit process and findings, and increasing the frequency and scope of auditor reporting. In
addition, efforts have been made to educate the public about the limitations of audits and the
importance of maintaining realistic expectations.

Overall, reducing the expectation gap in the audit market is critical for maintaining the
integrity of financial reporting and building public trust in the auditing profession.
Examples of expectation gap in audit markets

Here are some examples of expectation gaps in the audit market:

 Detection of Fraud: The public often assumes that auditors can detect all forms of
fraud in a company's financial statements. However, auditors are only required to
design their audit procedures to provide reasonable assurance that material
misstatements, whether from fraud or error, are detected. Therefore, an expectation
gap may arise if the public expects auditors to detect all forms of fraud.

 Early Warning System: Another expectation gap in the audit market is related to the
role of auditors as an early warning system. The public often expects auditors to
detect any signs of financial distress or potential bankruptcy of a company. However,
auditors are not required to assess a company's ability to continue as a going concern,
and they may not always be able to identify all of the indicators of financial distress.

 Expertise and Judgment: The public often assumes that auditors have a higher level of
expertise and judgment than they actually possess. Although auditors are highly
trained and knowledgeable professionals, they may not always be able to identify all
of the risks and potential issues that can impact a company's financial statements.

 Company Management: The public often expects auditors to provide a level of

oversight and control over company management, which is beyond the scope of an
auditor's role. Auditors are required to evaluate the adequacy of a company's internal
controls, but they are not responsible for the effectiveness of those controls or the
actions of company management.

Overall, the expectation gap in the audit market can arise from unrealistic expectations about
the role and responsibilities of auditors, and it is important for auditors and regulators to
educate the public about the limitations of the audit process.

Elements of expectation gap.

The expectation gap in the audit market has several elements that contribute to the differences
between what the public expects from an audit and what an audit actually entails. Here are
some of the key elements of the expectation gap in the audit market:
  Perception Gap: The perception gap refers to the differences in how the public and
auditors perceive the role and responsibilities of auditors. The public often has high
expectations of auditors, while auditors may have a more realistic understanding of
what an audit can and cannot accomplish.

 Communication Gap: The communication gap refers to the differences in how

auditors communicate the results of their audits to the public. The public may not
always understand the language and terminology used in audit reports, and auditors
may not always effectively communicate the limitations of their findings.

 Expectation Gap in Standards: The expectation gap in standards refers to the

differences in how auditing standards are developed and implemented. The public
may expect that auditing standards are always rigorous and up-to-date, while in
reality, standards may not always keep up with changes in the business environment
and emerging risks.

 Expectation Gap in Regulations: The expectation gap in regulations refers to the

differences in how regulations are developed and implemented. The public may
expect that regulations provide sufficient oversight and protection, while in reality,
regulations may not always be effective in addressing emerging risks or preventing
fraudulent activity.

 Expectation Gap in Legal Liability: The expectation gap in legal liability refers to the
differences in how auditors and companies are held liable for errors or omissions in
financial reporting. The public may expect that auditors will always be held
accountable for any mistakes, while in reality, the legal liability of auditors may be
limited by contractual limitations of liability and other legal protections.

Overall, the expectation gap in the audit market is a complex issue that is influenced by
several different factors, and it is important for auditors, regulators, and the public to work
together to address the gaps and build trust in the auditing profession.

Potential ways of closing expectation gap in audit market.

1. Closing the expectation gap is crucial for ensuring that auditors can meet the
expectations of stakeholders, maintain their professional reputation, and restore public
 trust in the audit process. Here are some potential ways to close the expectation gap in
the audit market:

2. Improving communication: Auditors can close the expectation gap by improving

communication with stakeholders about the scope and limitations of an audit. This
can be achieved by using plain language and providing clear explanations of audit
procedures and findings.

3. Enhancing transparency: Auditors can enhance transparency by making their audit

procedures more visible and accessible to stakeholders. This can be achieved by
publishing audit reports online or providing more detailed information about audit
procedures.

4. Increasing auditor independence: Auditors should maintain their independence and

avoid conflicts of interest to ensure that their audits are objective and impartial. This
can be achieved by increasing the accountability of audit firms and limiting the
number of non-audit services they provide to clients.

5. Strengthening regulation: Regulators can strengthen regulation by setting higher

standards for audits and imposing stricter penalties for non-compliance. This can
increase public confidence in the audit process and encourage auditors to take their
responsibilities more seriously.

6. Enhancing the audit profession: The audit profession can be enhanced by improving
the training and education of auditors and by promoting a culture of continuous
improvement. This can help auditors keep up with new technologies and emerging
risks, and provide more effective audits.

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