The audit expectation gap: existence, causes, and the impact of changes

Ruhnke, Klaus; Schmidt, Martín

doi:10.1080/00014788.2014.929519

Cited by 63 publications

(80 citation statements)

References 33 publications

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“…19a) and in a test pilot in the Netherlands regarding the fiscal years 2012 and 2013 (http://www.NBA.nl), new style auditor's reports have been introduced that place greater emphasis on the key audit matters, making the auditor's report more auditee specific. Although, no new information on the audited entity is provided and the auditor's report is not tailored to user groups, initial results on the informational value of the new style auditor reporting are encouraging (Christensen, Glover & Wolfe, ; Czerney, Schmidt & Thompson, ; Ruhnke & Schmidt, ). However, the results we observed in our study suggest that bankers' AEG is not affected by the new elements in the auditor's report: the call for information versus the effect on reducing the AEG.…”

Section: Resultsmentioning

confidence: 99%

“…The existence of the AEG is widely acknowledged internationally (e.g., Humphrey, Moizer & Turley, ; Porter, ; McEnroe & Martens, ; Porter, O'Hogartaigh & Baskerville, ; Ruhnke & Schmidt, ) and remains an important topic in the auditing profession (see, e.g., EU Commission, ) . The International Auditing and Assurance Standards Board (IAASB) issued a consultation paper in 2011 on ‘Enhancing the value of auditor reporting, questioning possible options for change’ that was motivated by the AEG (IAASB, , para.…”

Section: Introductionmentioning

confidence: 99%

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Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from Dutch Bankers, Audited Companies and Auditors

2015

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This study examines what the impact is of frequently proposed information needs on reducing the audit expectations gap (AEG), including information about the audited company, information about the audit process and changes to the auditors' report. We base our findings on a survey of 302 participants from the Netherlands, consisting of 61 bankers, 118 preparers and 123 auditors. We consider the AEG in essence to be a classic agency problem. We find that stakeholders fall back in basic strategies to maximize their own value: bankers require additional information, management is reluctant to let the auditor provide sensitive information and auditors try to minimize their risks. Further, we observe that only information about the audit process with respect to continuity and the reporting of errors in the financial statements may reduce the bankers' AEG. Finally, we observe that format changes to the auditors' report do not reduce the bankers' AEG.

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Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from Dutch Bankers, Audited Companies and Auditors

2015

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“…This gap becomes awkward for auditors during a corporate catastrophe, and special attention has focused on the role of the auditor [20]. Users have tremendous expectations regarding the auditor's role in fraud detection, and some researchers have revealed AEG in the areas of the auditor's responsibility for fraud detection [19,23,[35][36][37][38][39] Although, according to [40], it is clear that the main concern for the deterrence and discovery of fraud rests with both the management and the governing body of the entity, and the auditor is accountable for attaining reasonable assurance that the financial statements, as a whole, are free from substantial malapropism, there still exists huge expectations regarding the matter. As auditing is a powerful tool to bolster investor confidence with the results of business operations, many expectations are influenced by the role played by the external auditors [34].…”

Section: (A) Unreasonable Gap: the Gap Between What The Society Beliementioning

confidence: 99%

“…Agency theory references the identified statutory persistence of audits as necessary to protect the stockholders [2][3][4]. The neo institutional theory emphasizes that organizations seek to gain legitimacy in the social context where they operate, and an audit expectation gap seriously impairs that legitimacy [23]; where regulation of external audit enhances that legitimacy and ensures public interest [6].…”

Section: Introductionmentioning

confidence: 99%

A Partial Least-Squares Structural Equation Modeling Approach to Investigate the Audit Expectation Gap and Its Impact on Investor Confidence: Perspectives from a Developing Country

Akther

2019

Sustainability

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The aim of this study is to empirically explore the existence of the audit expectation gap and its impact on investors’ confidence. As a maiden attempt to assess these relationships, we developed a model with higher order constructs using a partial least-squares structural equation model (PLS-SEM). Based on a questionnaire survey with auditors and institutional investors, as one of the main users of audited financial statements, this study explored investors’ perceptions of both unreasonable and sensible audit expectation gaps from diverse aspects. The findings of this study revealed that the existence of an audit expectation gap was negatively related to investors’ confidence, and the greater the audit expectation gap was, the lower the investors’ confidence on audit. It was also found that auditors’ perceived independence and improved level of communication were negatively related with the audit expectation gap but positively related with investors’ confidence. Moreover, the monitoring role of independent audit oversight acts as a moderator among auditors’ perceived independence, auditors’ improved level of communication, audit expectation gap, and investors’ confidence. As the innate characteristic of an audit is to resolve conflict between owners and management of the organization, this study provides insight about what the investors (owners) expect from the audit and how to mitigate those expectation gaps.

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“…Moreover, control risk has been found to be determined by the management's attitude toward internal controls, corporate governance quality and the audit committee quality expressed in terms of audit committee independence and audit committee financial experiences [57]. Both inherent risk and control risk have been found to be closely linked to audit adjustments [58]. Literature about the construction of the detection risk seems to be scantily addressed, even if the auditing standards suggest that detection risk may be especially associated to external auditor tenure [40].…”

Section: Audit Riskmentioning

confidence: 99%

Does Intellectual Capital Disclosure Matter for Audit Risk? Evidence from the UK and Italy

Demartini

Trucco

2016

Sustainability

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Disclosure theory argues that better information quality reduces audit risk, by decreasing information asymmetry in the market and consequently, information risk for firms. Extant literature on voluntary disclosure analyzes the relationships between Corporate Social Responsibility (CSR) and audit risk, finding that auditors charge lower fees and issue less going concern opinions to firms with good CSR performance. In this study, we test the relationship between intellectual capital disclosure (ICD) and audit risk and we assess the effect of ICD and audit risk on audit fees. To do so, we use data from the ESG Asset4 database (Thomson Reuters Datastream) on 166 UK and 27 Italian listed firms that issue stand-alone social and intellectual capital statements. The audit risk is measured from both a qualitative and a quantitative perspective. Panel data analysis on 2004-2011 years has been used to test our research hypotheses. Empirical findings from a sample of UK and Italian listed companies show that auditors estimate a lower qualitative risk, albeit a higher quantitative one, for those companies reporting higher ICD scores, compared to those ones with lower disclosure scores on the intellectual capital. Furthermore, we find that reputation risk contributes to the relationship between ICD and audit risk.

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The audit expectation gap: existence, causes, and the impact of changes

Cited by 63 publications

References 33 publications

Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from Dutch Bankers, Audited Companies and Auditors

Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from Dutch Bankers, Audited Companies and Auditors

A Partial Least-Squares Structural Equation Modeling Approach to Investigate the Audit Expectation Gap and Its Impact on Investor Confidence: Perspectives from a Developing Country

Does Intellectual Capital Disclosure Matter for Audit Risk? Evidence from the UK and Italy

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