AN EMPIRICAL STUDY OF THE AUDIT EXPECTATION-PERFORMANCE GAP IN SRI LANKA

Abstract

Auditing is a social phenomenon. It has no purpose or value, except in its value addition to information contained in the financial statements. The auditors’ function has evolved in response to the perceived needs of individuals or groups in the society who seek information for their financial decision making. Expectation gap is the conflict between the user and auditors with regard to the expectation of the two parties. Most auditors believe that the conduct of the audit in accordance with the Sri Lanka Auditing Standards is all that can be expected from auditors. On the other hand many users believe that auditors guarantee the accuracy of financial statements and also the financial viability of the business. Also, gap can be expressed as the difference between the perceived quality expectations of financial reports, and the financial reporting and service given by the auditor. The main objective of this research is to explore and quantify the audit expectation – performance gap in sri Lanka, communicate the findings and the ways to minimize the gap to professional accounting institutions and users of financial statements. It specifically focuses on twelve major dimensions of the gap. Data was collected through a questionnaire survey and interviews. Data was analyzed using three main quantitative mathods: percentage calculations, descriptive statistics and wilcozen signed-rank test. Also qualitative information was analyzed to identify causal factors. The study reports significant results in audit expectation-performance gap. The gap is very high in detection of frauds, detection of errors, detection of irregularities, detection of illegal acts, investor’s trust on audit opinion, auditor’s support to prepare financial statements in management interest, auditors support to select aggressive accounting policies rather than assertive policies, adequacy of evidence, auditor’s independence, and auditor’s honesty and impartiality. Also, it is very important to report that auditors accept the prediction of business failure and prediction of company bankruptcy as their duty. This is a very good trend in the auditing profession. But they accept this only within the given legal and conceptual framework of financial statements audit. Also, they specifically accept to report short-term business failures and company bankruptcy situations but, an issue arises with this as to how auditors predict bankruptcies without accepting the responsibility for the detection of frauds, errors, irregularities, illegal acts etc.

Keywords: Audit expectation – performance gap, Frauds, Errors, Irregularities, Illegal acts, Business failure, Company bankruptcy, Audit opinion, Financial statements, Accounting policies, Audit evidence, Auditor’s independence

For full Paper: fmscresearch@sjp.ac.lk