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Users of audit services have expectations regarding the duties/responsibilities of the auditor that far exceed the current practice in the profession and indeed beyond the scope/bounds defined by the statutes and Standards. While many people believe that it is the auditor’s responsibility to keep the books, prepare the accounts, deal with tax matters, prevent and detect fraud etc, only very few understand the statutorily restricted role of the auditor. This misconceived role of the auditor by the public is referred to as AUDIT EXPECTATION GAP. The expectation gap is thus the gap between what users of auditor’s reports believe to be the purposes of the audit compared with the actual nature of the assurance reported to them by auditors.

ISA 200/NSA 1 – Objective and General Principles Governing an Audit of Financial statements, paragraph 8 defines the roles of management and auditor with respect to financial statements: “ While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and fairly presenting the financial statements in accordance with the applicable financial reporting framework is that of the management of the entity, with oversight from those charged with governance. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.”

Expectation gaps can be viewed from two dimensions, namely, Communication gap and Performance gap.

Communication Gap: This arises as a result of a misunderstanding of the role of the auditor and the information conveyed by the auditor’s report.

Many users misinterpret the content of the auditors’ report and misconstrue it to mean that

 Unqualified audit opinion is a certification of the financial health of the company(a clean bill of health)

 Auditors guarantee the continued existence of the company

 Auditors issue financial statements after the audit

 All fraud, errors and other irregularities ought to have been discovered by the audit.

To reduce the communication gap, auditors’ reports and annual reports presented to shareholders are being greatly enhanced. The recommendations of the Treadway Commission, reduced in CAMA, Cap C20, LFN 2004 feature in auditor’s report. That is, that

a. Management has responsibility for the preparation of the financial statements.

b. It is the responsibility of Management to establish, implement and maintain adequate internal and accounting controls for safeguarding the assets of the company and for preventing frauds, errors and other irregularities.

57 c. It is management’s responsibility to confirm suitability of accounting policies, ensure their consistent application and make reasonable prudent judgments and estimates in the preparation of financial information.

d. It is management’s responsibility to confirm that standards have been followed in the preparation of the fin. Statements.

e. The auditor’s report explains the basis of opinion and the audit approach.

To further reduce the communication gap, and following the provisions of the Sarbanes-Oxley Act, 2002, the annual reports currently feature as part of the financial statements

a. Statement of Directors’ responsibilities(Sample 1 below)

b. Certification by the CEO and the CFO to the “appropriateness of the financial statements and disclosures contained in the report and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition” of the company (sample 2).

Performance Gap

In performance gap, public expectation is reasonable, the auditor’s opinion is not misinterpreted but the auditor’s performance fell short of the required standard. For example, the auditor has compromised his integrity and independence, inadequate technical skills and competence have been employed etc. Most of the high profile corporate and audit failures fall within this category.

The controls put in place by ICAN and other International Professional Bodies (eg IFAC) to reduce this gap include:

a. Establishment of Professional Practice Monitoring Committee (PPMC) b. Introduction of CPE and MCPE

c. Establishment of technical Committees by the professional bodies that serve as reference to members on technical issues.

d. Establishment of disciplinary tribunals that try and sanction erring members

e. Enhancement of Education programmes of Accountants-in-training through syllabus reviews.

f. Maintenance of technical libraries by the professional bodies.

Other controls include:

i. The establishment of the audit committee

ii. Fora provided by the AGMs where shareholders can ask questions on the audited accounts.

iii. Judicial precedents and pronouncements on audit matters/negligence and failures that go to court.

iv. The role of Govt. in setting and monitoring standards through the FRCN etc.

Expectation gap may also be seen as comprising of three main elements:

58 A standards gap. This occurs because of a perception that auditing standards are more prescriptive than they actually are, and that auditors have wide-ranging rules that they must follow.

A performance gap. This occurs because of a perception that audit work has fallen below the required standards.

A liability gap. This arises from a lack of understanding about the auditor’s liability and who the auditor may be liable to.

3.1.1 Common Areas of Expectation Gaps

Different groups have different expectations with regard to an auditor’s duties. Expectations are found in the following areas of auditor’s duties:

1. Giving an Opinion on the fairness of financial statements - Expectation gap is wide in this area. A large percentage of users of audit services expect that financial statements with an unqualified audit opinion are completely free from errors and misstatements. The inherent limitations of auditing expressed in materiality and audit risk are not entirely accepted and/or understood by all groups of users.

2. Giving an Opinion on the Company’s Going Concern status – Auditorsgenerally need to determine whether the entity audited is able to continue as a going concern. If there are serious doubts about this, both the financial statements and the auditor’s opinion need to express these doubts. But auditors generally face a dilemma in situations of this nature. It is appropriate to warn users of financial statements about threats of distress but such disclosure, especially when future course of events is hard to predict (e.g. close calls), may put management in a difficult situation in their attempt to rescue a company that could be saved.

3. Giving an Opinion on the company’s internal control – Auditing standard requires the auditor to obtain an understanding of the company’s accounting and internal control systems, sufficient to plan the audit and develop an effective audit approach. It does not require him to test the adequacy of the internal controls. But public expectations are high on auditor’s role in testing whether a satisfactory system of internal control is being operated. These expectations exceed the auditor’s current duties.

4. Giving an Opinion on the occurrence of Illegal Acts – Users of audit services expect the auditor to detect and report illegal acts that have a significant impact on the financial statements. But ISA 250/NSA 6 – Consideration of Laws and Regulations in the Audit of Financial Statements, restricts the responsibility of the auditor to designing and executing the audit in a way that there is a reasonable expectation of detecting material illegal acts which have a direct impact on the form and content of the financial statements. The Auditor reports the illegal act through the audit report and to those charged with governance as well as to the regulatory authorities and anti-crime/corruption Agencies if so required by the laws. The auditor is not expected to report to the general public/third parties.

59 5. Giving an Opinion on the occurrence of fraud

The audit expectation gap is frequently associated with the fraud issue. The Government and all users of audit services expect the auditor to find existing fraud cases and report them. Thus, misunderstanding of the auditor’s responsibilities in respect of fraud has become a major component of the 'expectation gap'. This aspect of the expectation gap is the subject of ISA 240/NSA 5 The auditor's responsibility to consider fraud in an audit of financial statements. By the provisions of this standard, the responsibility for the prevention and detection of fraud rests with directors and management of the entity.

But the standard also sets out the key requirements for an auditor with regard to fraud.

Sample 1

STATEMENT OF DIRECTORS’ RESPONSIBITIES, For the year ended…….

The Directors are responsible for the preparation of the Financial Statements, that give a true and fair view of the state of affairs of the Company at the end of each financial year and of the profit or loss for that year and comply with the requirements of the Companies and Allied Matters Act, cap C20, LFN 2004. In doing so, they ensure that:

 Adequate control procedures are instituted which, as far as is reasonably possible, safeguard the assets and prevent and detect fraud and other irregularities;

 Ethical standards are maintained and that the company complies with the laws of Nigeria and the Code of Corporate Governance;

 The terms of reference and procedures of all board committees are determined;

 Proper accounting methods are maintained;

 Applicable accounting standards are adhered to;

 Suitable accounting policies are adopted and consistently applied;

 Judgments and estimates made are reasonable and prudent;

 The going concern basis is adopted, unless it is inappropriate to presume that the company will continue in business.

The directors accept responsibility for the preparation of these financial statements, which have been prepared in compliance with:

 The provisions of CAMA

 The provisions of the FRCN, Act No.6, 2011;

 The published accounting and financial reporting standards issued by the FRCN

 The regulations of the Securities and Exchange Commission and the NSE.

The Directors have made an assessment of the company’s ability to continue as a going concern based on the supporting assumptions stated in the financial statements, and have every reason to hold that the company will remain a going concern in the financial year ahead.

Chairman Managing Director.

60 Sample 2.

CERTIFICATION PURSUANT TO SECTION 60(2) OF INVESTMENT AND SECURITIES ACT NO.29 OF 2007

We the undersigned hereby certify the following with regards to our twelve months financial report for the year ended……….. that:

(a) We have reviewed the report;

(b) To the best of knowledge, the report does not :

i. Contain any untrue statement of a material fact, or

ii. Omit to state a material fact, which would make the statements misleading in the light of the circumstances under which such statements were made

(c) To the best of our knowledge, the financial statement and other financial information included in the report fairly present in all material respects the financial condition and results of operation of the company as of, and for the periods presented in the report.

(d) We:

i. Are responsible for establishing and maintaining internal controls;

ii. Have designed such internal controls to ensure that material information relating to the company is made known to such officers and others within those entities particularly during the period in which the annual reports are being prepared;

iii. Have evaluated the effectiveness of the company’s internal controls as of date and within 90 days prior to the report;

iv. Have presented in the report our conclusions about the effectiveness of our internal controls based on our evaluation as of that date.

(e) We have disclosed to the auditors of the company and the audit committee:

i. All significant deficiency in the design or operation of internal controls which would adversely affect the company’s ability to record, process, summarize and report financial data and have identified for the company’s auditors any material weakness in internal controls; and

ii. Any fraud, whether or not material, that involves management or other employees who have significant role in the company’s internal controls;

(f) We have identified in the report whether or not there were significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Managing Director/CEO Finance Director/CFO

Self-assessment questions 1. Explain the following terms:

61

 Communication gap

 Performance gap

 Standards gap; and

 Liability gap

2. Discuss the responsibilities of management with regard to the financial statements of their company.

3.2 THE AUDITOR AND FRAUD AND ERROR IN THE AUDIT OF FINANCIAL