The audit expectation gap: a private company perspective
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Date
2023
Authors
Church, Ané
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Differences between what financial statement users expect from external auditors and what the external audit actually delivers, give rise to the widely researched phenomenon of ‘the audit expectation gap’. Most extant research focuses on public, listed companies, the findings of which are not necessarily generalisable to private companies which are subject to audit.
By focusing on the ‘evolution gap’ component of the audit expectation gap, this study aimed to determine to what extent the expectations of the users of audited private company financial statements differ from what is delivered by the audit engagement undertaken in accordance with applicable audit requirements, which includes International Standards on Auditing, International Standards on Quality Management, the International Code of Ethics for Professional Accountants by the International Ethics Standards Board for Accountants and relevant legislation, such as the Companies Act of South Africa 2008 and the Auditing Profession Act, 2005..
This qualitative, phenomenological study is positioned in the interpretive, constructivist paradigm, and uses induction as the approach to theory development. In-depth interviews were conducted with 20 participants in two financial statement user groups: Management and Shareholders (n=12) and External Stakeholders (n=8), which included participants from banking institutions and the South African Revenue Service (SARS). Data was analysed by using inductive coding to identify codes, which were categorised and synthesised into themes. Four themes emerged from the data.
The theme ‘Users of audited financial statements’ identified the users of private company financial statements as members of executive management, shareholders, providers of finance and SARS. The theme of ‘Audit purpose perceptions’ considered those areas typically identified as contributors to the audit expectation gap in public, listed companies. Private company financial statement users shared the expectations that auditors should verify compliance with all laws and regulations applicable to the company and should verify the effectiveness of all internal controls implemented by the company. Participants also expected auditors to detect all errors when underlying company financial records are transferred to the formal set of financial statements, although they did not expect auditors to detect all errors in the financial records itself.
Participants, furthermore, expected auditors to play an advisory role where doubt exists over the company’s ability to continue as a going concern. Participants, however, did not expect auditors to detect all fraud, which is the most common expectation in the context of public, listed companies.
‘Audit value perceptions’ addressed factors that participants did not necessarily view as the primary role of the auditor, but which they expected to receive as a consequence of the audit as a value-adding service. This included various forms of advisory services and agency conflict resolution, amongst others. It was also evident from the responses of participants in the Management and Shareholders group that they either misunderstand or have a lower requirement for ‘Auditor independence’ than set by applicable audit requirements.
This study underlined the differences between public, listed companies and private companies, emphasising that findings in research on public, listed companies cannot be generalised to private companies. Various factors known to contribute to the audit expectation gap in public, listed companies, were confirmed as not being present in private companies, while additional contributors in the private company context were identified.
The findings in this study enable registered auditors, professional accountancy bodies and audit regulators to respond appropriately to the contributors to the audit expectation gap in private companies, which could lead to the improved relevance of private company audits.
Description
Dissertation (MBA (Business Administration))--University of the Free State, 2023
Keywords
Audit expectation gap, private companies, audit, auditing, financial statement audit