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Audit
Expectation Gap Slides
| Question | Answer |
|---|---|
| enron 2002 | fraudulent reporting of assets leads to its collapse, and anderson and anderson lead to sarbanes-oxley act in america |
| the reception of sarbanes-oxley act and what is entailed | audit on internal controls as well as financial reporting. hostile / apprehensive at first but now less disorderly market exits |
| financial crisis 2008 | mainly due to over valuation and investment in housing - auditors blamed for missing the likelihood of crisis lead to European audit reform |
| what did european audit reform introduce | going concern, extended reporting, disclosures |
| carillion 2018 | public sector contracts government enquiry criticised big 4 |
| brydon 2019 | - troubled by auditors getting blame for every corporate failure - seeking for audit to become more informative rather than a compliance checking function - 'narrow backward looking approach' |
| brydon recommendations, 2019 | - redefine purpose of audit - create a new corporate audit profession - replace 'true and fair' with 'presently fair in all material respects' |
| brydon recommendations, 2019 pt 2 | - difference between professional scepticism and suspicion - enhance directors reporting on risks and resilience - strengthen public interest duties - strengthen fraud detection duties |
| Porter, 1993 Audit Expectation Gap definition | the gap between society's expectation of auditors and auditors' performance as perceived by society |
| 3 components of the expectation gap | performance standards reasonableness |
| why does the gap matter | - audit affects everybody (shareholders, creditors, employees, investors, wider society) - auditors enjoy special status (pov that auditors do not serve public interest because of economic self interest AND place in market dynamics is accepted) |
| cause of deficient performance gap | - lack of competence - lack of auditor independence |
| how to fix lack of competence | practicing certificates post qualification education firms quality systems regulation discipline |
| how to fix lack of independence | rotate engagement party every 5 years tender firm service 10 years (max 20) limit NAS to 70% of audit fee individual client contribution to 10% of annual fee income |
| 3 ways client management can harm the auditor | not appointing or reappointing the auditor terminating or not awarding contracts to other services within audit firm make audit more difficult and costly by not cooperating |
| causes of deficient standards gap | arises when standards are not strict enough key areas: - fraud - going concern |
| cause of reasonableness gap | - unreasonable expectations (only reasonable if within scope of auditor role and cost beneficial to perform) |
| two suggestions to tackle the gap | - subject all public companies to a forensic audit on a regular basis - subject all public companies to a forensic audit on a random basis |
| three ways to narrow the gap - new issues | - ensure new issues are widely discussed and society becomes aware of what is and isn't feasible for auditors to achieve |
| three ways to narrow the gap - standards responsibilities | - auditing standards encapsulate the responsibilities society expects of auditors which are cost beneficial |
| three ways to narrow the gap - standards specificity | - ensure standards specify what is required to fulfil auditor role (responsibilities and monitoring of performance |
| what did sikka, 2019 say about audit and fraud | audits have become a cruel deception on people auditors collect vast fees and deliver little |
Created by:
amyperston
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