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Is Audit Education also accountable for the Audit Expectation Gap? Results from

University students.

- WORKING PAPER submitted to the EUFIN 2016 Workshop1 -

George-Silviu CORDOŞ

[email protected]

Faculty of Economics and Business Administration

Babeş-Bolyai University, Cluj-Napoca, Romania

Melinda-Timea FÜLÖP

[email protected]



Adriana TIRON-TUDOR

[email protected]



ABSTRACT

The need for change in the accounting and audit profession is a topic discussed and accepted

by both regulators and accounting professionals. As a result of the global financial crisis, users

need more information regarding the auditor's work. But is audit regulation reform enough?

This study aims to investigate whether audit education has an effect of the presence of the audit

expectation gap; the research question is whether users with a higher level of audit education

perceive the responsibility of the auditor differently that users with a lower level of audit

education. To achieve this objective, the authors apply a survey on students with three levels of

audit studies (minimal, typical, advances) and find correlations between different categories

using ANOVA and Post-Hoc comparisons of Means. The results show that audit education does

and can have a part in covering the reasonableness gap, but more action needs to be taken in

this direction.

JEL CLASSIFICATION: M42

KEYWORDS: audit report, IAASB, audit reporting changes, audit education, audit

expectation gap, audit reasonableness gap

1 Please do not cite, quote or distribute without the author’s permission.

Corresponding author: George-Silviu Cordos, e-mail: [email protected]

mailto:[email protected]



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1. INTRODUCTION

The financial crisis and significant financial scandals (such as Enron’s demise) have had an

adverse effect on the audit profession. The public’s confidence in auditor reporting has shifted;

while users still value the expressed opinion, they perceive more information should be

provided. Therefore, a change in audit reporting is crucial and necessary for a more acquainted

decision-making process.

The need for new and improved audit reports is not a new necessity. One impediment in

offering a solution for better audit reporting is the fact that the auditor provides only reasonable

assurance through the expressed opinion, leaving the door open for possible detection risk. The

idea of extended audit reporting, or having the auditor communicate more information relevant

to users, through the audit report, has been a solution for reducing pressing matters such as the

audit expectation gap. Addressing the AEG has been a priority for IAASB, although academics

and users alike might argue it has not yet been resolved. Can it be that it is not only extended

auditor reporting that can help reduce the expectation gap, but also audit education? One of the

audit expectation gap components is the audit reasonableness gap, which can be defined as

unreasonable expectations that the public has from the auditor, in the audit mission. Thus, we

argue that even with revised standards, such as the 2015 new auditing standards, which are

aimed at improving the communicative value of the audit report – the issue remains. The new

standards will help close the deficient standards gap, or the deficient performance gap – the

other components of the audit expectation gap. However, stakeholders will still have

unreasonable expectations of the auditor, creating the reasonableness gap.

Our research objective is to prove that the level of audit education of stakeholders is an

important part of reducing the audit expectation gap and is just as important as the standards

revision process. We plan on achieving this objective by analysing responses given by three

categories of students, as proxies for stakeholders: with minimal audit studies, with typical

audit studies and with advanced audit studies.

The preliminary results of our analysis show that audit education does have an impact on the

audit expectation gap and the way users understand the responsibilities of the auditor, and, if

measures would be taken to increase the stakeholders education in audit, combined with new

and revised standards, the audit expectation gap can be reduced.

2. AUDIT EXPECTATION GAP AND AUDIT EDUCATION LITERATURE REVIEW

2.1. AUDIT REGULATION REFORM

The International Auditing and Assurance Standards Board (IAASB), the regulating body

responsible for publishing International Auditing Standards (ISAs), considers the revisions of

the audit report a top priority on its agenda and has proposed changes that fundamentally

modify the content of the audit report, and consequently the work that needs to be accomplished

by the auditor. This work has been and is achieved within the Auditor Reporting project, and

has been the priority for IAASB since 2006. The project’s objectives are to enhance the

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communication and relevance of the audit report and to revise current auditing standards; the

board has worked closely with other international regulators to reform auditing regulation.

Before we can discuss audit regulation reform, we consider it is essential to confer a synthesis

of previous and current audit reporting standards, and the reform process. Today’s public

continues to have high expectations from auditors, who need to provide assurance regarding

the financial statements provided by a company; the only way to accomplish these new

expectations is by sharing a larger part of their mission data with investors and stakeholders.

Auditors are expected to provide more reasoning on how they have reached their conclusions

and more facts to back-up the expressed opinion within the audit report. In unison, they need

to meet the needs of all interested parties (stakeholders, investors, management, and others) by

providing high-quality services, a perceived high-quality audit. Therefore, the profession and

the auditor’s work undergoes a continuous change, summarised in the figure below (Fig. 1).

Figure 1: Standards revision process, initiated by the IAASB, 2006-2015

As seen above, an important first step in this direction was 2009’s “Clarity Project”, when the

IAASB revised all current audit standards to achieve greater clarity and quality of the standards,

and to set guidelines that need to be respected by the Board in formulating and issuing future

standards (IAASB, 2009). During the life of the Audit Reporting project, several research

reports have been commissioned and published, as well as several Discussion Papers,

Consultation Papers and an Exposure Draft in 2013. In 2011, the IAASB released the

consultation paper “Enhancing the Value of Auditor Reporting: Exploring Options for Change”

and in 2012 the invitation to comment “Improving the Auditor’s Report.” The most recent work

of the regulating body has been the 2013 invitation to comment with the title “Proposed New

and Revised International Standards on Auditing. An invitation to comment”. This exposure

draft sought views from stakeholders (investors, analysts and other users of audited financial

statements) with regards to the IAASB’s plans to enhance auditor reporting. These proposals

come as a response to the users need for more relevant information, which was communicated

through comment letters for the previous invitation to comment, launched by the IAASB in 2012.

•Academic research on users perception regarding auditors activity

2006

•Results discussed from the perspective of the financial crisis

2009

•IAASB Consultation Paper that explores possible actions that can be undertaken, based on academic research

2011

•IAASB Exposure Draft -Proposed New and Revised Auditing Standards

2013•New Auditing Standards are released

2015

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2.2. NEW AUDIT REPORTING STANDARDS

On January 15th, 2015, the IAASB released new and revised standards for auditor reporting,

which, as the standard setter says are “designed to significantly enhance auditor’s reports for

investors and other users of financial statements.” The IAASB Chairman concludes that the

proposed changes will “reinvigorate the audit, as auditors substantively change their behaviour

and how they communicate about their work” (IAASB, 2015). The Chairman also concludes

that the release of new standards is only the first step, which was achieved by consulting all

interested parties, through the previous Exposure Drafts and Consultation Papers, and to which

“investors, regulators, audit oversight bodies, national standard-setters, auditors, preparers of

financial statements, audit committee members” have responded (IAASB, 2015). The second

and more challenging step is the implementation of these new standards, in order to implement

the changes investors and other users of audited financial statements need and have called for,

in terms of the report being more informative and relevant. The new and revised Auditor

Reporting standards will be effective for audits of financial statements for periods ending on

or after December 15, 2016 (IAASB, 2015). The revised standards include (IAASB, 2015):

ISA 260 (Revised), Communication with Those Charged with Governance;

ISA 570 (Revised), Going Concern;

ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements;

ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report;

ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report;

ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditor's Report;

Conforming Amendments to ISAs 210, 220, 230, 510, 540, 580, 600, and 710

The ISA 700 - Forming and Opinion and Reporting on Financial Statements is the standard

that sets the auditor’s responsibility to form an opinion on the financial statements. It also

highlights the form and content of the auditor’s report issued as a result of an audit of financial

statements (IAASB, 2009). The first ISA was published in 1991, by the International Auditing

Practices Committee (IAPC) which was later renamed to its current name, the IAASB. In the

last decades, the ISA 700 standard received revisions in 2001, 2004, 2009 and 2015; these

amendments were meant to bring enhancements to better understand the standards’ meaning, its

application and to solve uncertainties raised by practitioners in applying professional judgements.

Given the fact that the standard has been revised several times, its structure has changed over

time, probably the most prominent change occurring with the 2015 revision; several paragraphs

that were present in previous versions of the standards (such as the Emphasis of Matter and

Other Matters) have been dropped in favour of the new Key Audit Matters section and Going

Concern section. The following table (Table 1) synthesises ISA 700 standard changes.

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Table 1: ISA 700 standard revisions

1994 2009

Revised

2013

Exposure

Draft

2015

Revised

Title The title should state that it is from an independent

auditor ✓ ✓ ✓ ✓

Addressee Whom the report is addressed to, e.g. shareholders ✓ ✓ ✓ ✓

Introductory

Paragraph

Example: the name of the audited entity, the title of

the each section of the financial statements that are

audited and the date or period covered by each

statement

✓ ✓

Management’s

Responsibility

for the Financial

Statements

Explains the responsibilities of management or

TCWG, i.e. those responsible for preparation of

financial statements

✓ ✓ ✓

Auditor’s

Responsibility

Explains the responsibility of auditors and

description of what an audit includes in term of risk

assessment, auditor judgment in deciding the audit

procedures, evaluation of appropriateness and

reasonableness of the entities accounting policies

and estimates. States if the auditor believes it has

obtained sufficient appropriate audit evidence to

make and opinion

✓ ✓ ✓ ✓

Auditor’s

Opinion

This is the section where the auditor expresses their

opinion about whether the financial statements

“give a true and fair view” or “present fairly, in all

material aspects” in accordance with the applicable

financial reporting framework. One of these two

expressions should be used for an unmodified

opinion.

✓ ✓ ✓ ✓

Basis for Opinion The auditor’s report shall include a section with the

heading “Basis for Opinion.” ✓ ✓

Going Concern The auditor shall report in according with proposed

ISA 570 ✓ ✓

Key Audit

Matters ✓ ✓

Other

information

The auditor shall report in accordance with

proposed ISA 720 ✓

‘Emphasis of

Matter’ and

‘Other Matter’

paragraphs

If the auditor determines that it is necessary to draw

attention to a matter in the financial statements that

is “fundamental to the users’ understanding” of the

financial statements, this is disclosed in an

Emphasis of Matter paragraph. Similar in the Other

Matter paragraph, matters other than those

disclosed in the financial statements, that are

“relevant” for users’ understanding, can be

discussed.

✓

Other Reporting

Responsibilities

Other matters on which regulation, other than ISA,

may require the auditor to report ✓ ✓ ✓

Name of the

Engagement

Partner

✓ ✓

Signature of the

Auditor Auditors should sign the audit report ✓ ✓ ✓ ✓

Date of the

Auditor’s Report

Not an earlier date than the date the auditor has

obtained sufficient appropriate audit evidence to

base its opinion on. ✓ ✓ ✓ ✓

Auditor’s

Address States the location of the auditor’s practice ✓ ✓ ✓ ✓

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Alterations in the 2013 exposure draft and the 2015 new standards include the attachment of

revised standards (ISA 700 and ISA 570 included) and the addition of a new standard: the ISA

701 - Communicating Key Audit Matters in the Independent Auditor’s Report (IAASB, 2013-

2015). As previously stated, the concept of providing matters of importance from the audit

mission is not necessarily new in the auditor reporting field, because users and professional bodies

have been pushing for more relevant information provided by the auditor report for some time now.

The most significant revision has been the addition of reporting on Key Audit Matters (KAMs),

which are “those matters that, in the auditor’s professional judgement, were of most

significance in the audit of the financial statements.” KAMs are in all cases, a selection of

matters communicated with those charged with governance” (IAASB, 2015: ISA 701 p. 8). The

requirements in the ISA 701 indicate that the key audit matters are selected from matters

communicated with those charged with governance that, in the auditor’s professional judgment,

were of most significance in the audit of the financial statements. The requirements indicate a

list of possible categories of key audit matters which is not exhaustive but visibly state that

determining the key audit matters to communicate in the auditor’s report and the adequacy and

relevance of their descriptions is a matter of professional judgement. There are three

fundamental elements of information connected to each key audit matter which must always

be revealed: (i) the nature of the audit matter; (ii) the audit approach adopted with respect to

the matter; and (iii) the outcome of the auditor’s work. Communicating KAMs requires the

auditor to apply his professional judgement but also to take into account the nature and extent

of communication with those charged with governance.

2.3. IS AUDIT REGULATION REFORM ENOUGH, OR IS AUDIT EDUCATION ALSO NECESSARY?

As seen in the previous sections, audit regulation reform is needed because the standards

provide the framework for audit activities. Carmichael (2014) stresses the importance of

standard setters and their role in regulating audit reporting, and we consider it vital to the

auditing process for regulators to continuously revise standards in order to fulfill the needs of

both auditors and interested parties. Consequently, it is clear that the audit mission has no value

if the public has no confidence in it (Maijoor & Vanstraelen, 2012).

The extensive literature on the audit expectation gap has clearly demonstrated its existence in

the audit reporting topic. The auditing profession has been subjected to many false impressions

regarding its responsibilities, mainly because the public has expectations that go beyond the

actual responsibilities of the auditors, as set by standards and regulations. Alas, is it possible

that the level of audit education can also factor to the presence of the audit expectation gap?

To prove that not only new regulation is necessary, the importance of ethics and organisational

culture is also stressed by some researchers (Barlaup et al., 2009; Sikka et al., 2009; Svanberg

& Ohman, 2013). Barlaup et al. (2009) posit that education is an important aspect - both audit

and ethical education.

Frank et al. (2001) Porter & Gowthorpe (2005), Zikmund (2008), Turner et al. (2010), Mock

et al. (2013) and Kamau (2013) provide an excellent starting point on what the audit

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expectations gap (AEG) is: a misunderstanding between the public (users of financial

statements) and auditors, regarding the responsibilities of the auditor; more straightforwardly

said, what the public believed the responsibilities of the auditors are, and what auditors actually

consider to be their responsivities. These studies consider that the AEG has two components: a

reasonableness gap and a performance gap.

Similarly, Hassink et al. (2009), referring to the Cohen Comission’s (1978) terms of reference,

find that the audit expectation gap can be attributed to three different deficiencies:

a reasonableness gap – the auditor cannot systematically detect fraud by following

standard audit procedures because fraud is in its nature “non-systematic”; the public

has set high and unreasonable expectations from the auditor that cannot be achieved;

a deficient performance gap – which appears because either lack of or inefficient

corporate governance structures which could prohibit the auditor from taking actions

or acting on a lower level that expected;

a deficient standards gap – because public expectations are not reflected in current

auditing standards.

On the other hand, what are reasonable expectations of the auditors work? Dennis (2010) and

Okafor & Otalor (2013) consider that there needs to be a consensus between the auditors and

standard setters to establish duties that are not present in current standards, to cover the

“deficient standards gap.” This concept should not be mistaken with the “deficient performance

gap” when auditors do not follow standards. Unfortunately, the general public cannot

differentiate these differences because most users/investors lack proper audit education. The

mentioned “reasonableness gap” is, according to Dennis (2010) the difference between what

regulation states the responsibility of the auditor is, and what the general public expects or

wants auditors to do. Porter (1993) provides a summary of the structure of the audit expectation gap:

Figure 2: Structure of the audit expectation gap

Source: Porter (1993)

The performance gap can be sealed by revising standards (the deficient standards gap), and

the IAASB and other regulating bodies have done so in the post-crisis period. The 2015 new

ISAs have included inputs from stakeholders and have altered audit reporting standards, in

order to contain more relevant information, such as the Key Audit Matters. In our view, the

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proposed Key Audit Matters section is useful to users as it provides pertinent information,

valuable in the decision-making process and is essential in testing management provided

information as to being subjective or not. This statement is consistent with Limperg’s

Inspired Confidence Theory (1932), as the KAM section is meant, as IAASB has stated, to

assist users even if what it only accomplishes is to highlight matters which the auditor

considers to be relevant regarding the financial statements of the entity (Cordoș & Fülöp,

2015).

On the other hand, the society’s expectation of auditors is a component of the audit

expectation gap that is much difficult to close because it is driven by the reasonableness gap.

How can the IAASB reduce a deficiency which exists because of unreasonable expectations of the

public, only by revising auditing standards? It is simply not enough, and it is in our opinion that

audit education can have an impact on this issue, being a possible solution to this.

Brown (2009) accomplishes a review of a special number of JAAR, which contains several

papers focused on different aspects of the audit expectation gap including the nature of the

audit process itself and the relationship with audit education, a topic that questions whether

audit education can help reduce the audit expectation gap. A series of studies conducted by

authors like Fadzly & Ahmad (2004), Lin & Chen (2004), Siddiqui et al. (2009),

Pourheydari & Abousaiedi (2011), De Muylder et al. (2012), Ihendinihu & Robert (2014)

and Devi & Devi (2014) undertake empirical methods with a similar methodology (using a

survey) to prove the existence of the audit expectation gap in different countries around the

world, and also methods of minimizing this issue. All studies apply a questionnaire on a

sample of various categories of users (auditors, loan officers, students). Of course, there

are elements of similarity and difference between the studies, but because similar

methodology, results allow comparability. For instance, these are the main aspects of four

of the above-mentioned studies:

Table 2: Example of studies settings and samples Study Sample Sample categories Country

Fadzly & Ahmad

(2004) 398

Auditors, brokers,

bankers, investors,

students

Malaysia

Siddiqui et al. (2009) 367 Auditors, bankers,

students (3 sub-groups) Bangladesh

Pourheydari &

Abousaiedi (2011) 204

Auditors, brokers,

bankers, investors Iran

De Muylder et al.

(2012) 159 Students (3 sub-groups) Belgium

Fadzly & Ahmad (2004) have used an additional experiment, applying a questionnaire before

and after distributing a leaflet that explains the role, responsibility and how to conduct an audit.

This experiment proved the hypothesis of the role of education in reducing the expectations

gap. Siddiqui et al. (2009) have used three groups of students: one group without audit studies,

one group audit studies, and one group with advanced audit studies. De Muylder et al. (2012)

used three groups of students: two random groups who have not studied financial audit, and a

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group of students who have studied financial audit. The first group received an actual audit

report and the second an expanded audit report. The main conclusion is that between group “1”

and “2” there were no major differences, with group “3” (those with audit studies) providing the

“correct” answers.

Many of the researchers mentioned above find that audit education would help reduce the

expectation gap, together with the revision of auditing standards towards an extended audit

report. Bui & Porter (2010) conclude that audit and accounting education is an issue that not

been resolved yet, as many accounting graduates still lack the skills the profession expects

them to have. So if accounting graduates are not educated in audit responsibilities, how can we

expect non-professional investors to be? This judgment is consistent with our findings from

the education - professional bodies’ connection that will be detailed in Section 2 of this Report.

Mock et al. (2013) bring forward a study that discusses audit reporting viewed from the

perspective of audit expectation gap, audit communication gap, and audit information gap,

issues that have become problematic for auditors. The paper consists of a mixed research which

focuses on two main questions: what users consider the auditor report should communicate,

and what the effects of communicating this information might be with regards to reducing the

expectation gap and communication gap. Salehi’s (2011) research provides an excellent

literature review on the audit expectation gap and suggests that users are becoming more

intelligent (i.e. their level of audit education is increasing), but more demanding as well,

and now expect auditors to better protect their interest in the decision-making process. As

others have suggested, audit education plays an important part in covering the AEG.

Dennis (2010) advises that the audit expectation gap can be defined as the “differences in

beliefs and desires” about the duties of the auditors. Equally, in a more recent study, Ruhnke &

Schmidt (2014) find that the audit expectation gap can be attributed to a failure by either the

public, because of an exaggerated expectation of the auditor responsibility, the standard setter

(because proposed changes can also increase uncertainty), and even the auditor (because they

sometimes do not recognise some of their responsibilities).

The concept of financial statements expectation gap is brought into discussion by Higson

(2013). The author ascertains that the financial statements expectation gap includes the much-

discussed AEG, as an issue stakeholders have been dealing with, without being aware. As a

result of Sarbanes-Oxley, fraud prevention and mismanagement have been reduced, but the

communication between management and stakeholders has not, as highlighted by the fact that

stakeholders do not fully understand the financial statements meaning and usefulness, nor

managements’ accountability. This, coupled with the fact that users do not understand the

conclusions and the scope of the audit report, produces the audit expectation gap and also a

weakness in the corporate governance system. We consider these findings important because

they highlight the fact that stakeholders might not be familiar with the management’s, the

Board and the auditor’s responsibility.

Leung & Chau (2001) and more recently, Asare & Wright (2012) analyse how users understand

the conclusion of the audit report, by applying a questionnaire; the latter evaluate the way in

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which three categories of stakeholders (investors, auditors and banks) understand the

conclusion of an audit report, determining the influence the audit report has in an investor’s

decision to finance or borrow a company. A sample of users is being offered data from a

fictional company, and they have to decide whether to invest or not. The main discovered

deficiency is a communication gap between the way in which auditors and investors differently

understand the content and the level of assurance an audit report offers. The conclusion is that,

even though revised audit reports (containing more information) help, to a certain extent, in reducing

differences in perception, in the long term they would only deepen the audit expectation gap.

Two similar studies because of their working method, by Gold et al. (2012) and De Muylder et

al. (2012) conclude that an extended audit report would not significantly reduce the audit

expectation gap. The studies apply a survey to different categories of users, with both investors

and auditors being included in the sample. An interesting finding is that investors would be

aided in the decision-making process, should they be more informed about what an audit

mission is, and the level of assurance it provides – thus reducing the audit expectation gap.

Consequently, audit education plays a vital part here. Equally, Bedard et al. (2012) analyse

PCAOB’s proposals to clarify the auditor’s current responsibilities and to expand auditor

responsibilities to cover auditing more information. The authors find that non-professional

users do not understand the different levels of assurance auditors provide on various types of

information. Also, it is suggested that both non-professional investors and professionals make

errors as to what information is audited, and what is not.

Noghondari & Foong (2013) analyse how the audit expectation gap regarding auditor

responsibilities for fraud prevention and detection can be reduced. They use a questionnaire to

measure the input that individual expertise and experience with the expectation gap of bank

loan officers have on loan decisions in Malaysia. Bankers’ awareness of the expectation gap in

Iran is also measured by Salehi (2008). Their findings are consistent to Fadzly & Ahmad

(2004), Kamau (2013) and Okafor & Otalor (2013), as they consider that audit education and

expectation gap knowledge play an important part in reducing this issue in audit reporting.

Houghton et al. (2011) also use a survey to determine how and why key stakeholder groups

(management, auditors, users and regulators) differently understand the concept of

“materiality” concerning its meaning, application, and importance in the audit mission. The

authors find that stakeholders usually mistake “a higher level of materiality” with a “robust

audit,” whereas the relationship is the exact opposite; the authors suggest that educating the

public to understand that materiality means “tolerable error” is necessary to reduce the AEG in

this aspect. Even though the study is based on the public sector, Barrett (2012) considers that

there is confusion revolving what is being assessed in an audit, particularly how auditors are

able to exhibit accountability for audit outcomes. While the study revolves around public sector

issues regarding auditing projects and public sector performance, one significant conclusion is

drawn: most expectations are unrealistic, either overly optimistic or too pessimistic.

Fadzly & Ahmad (2004) find that there are differences in opinion regarding auditor

responsibility, with stakeholders concerned about the ability of auditors to detect fraud, even

though the level of trust in auditor activity is still high. Like Bostick & Luehlfing (2004), they

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consider that users who are more informed about audit missions and their objectives, better

understand the responsibility and level of assurance provided by auditors. Another

improvement could be the revision of standards so that the auditors cover expectation gap

origins such as internal control deficiencies, managerial or employee fraud and illegal

operations. Alas, Zikmund (2008) considers that the audit expectation gap is linked to audit

fraud detection and has two dimensions: the capability of the auditor to detect fraud, and his

experience in detecting fraud. The study offers several solutions to improve auditor

performance: continuous professional preparation, developing fraud detection knowledge and

know-how and applying rigorous audit plans. The author concludes that, even though the

auditor cannot pledge full assurance against fraud, this does not equal with inadequate

preparation for a mission or the lack of auditor independence. Salehi et al. (2009) consider that

the more independent an auditor is, the less likely the expectation gap appears.

3. AUDIT EDUCATION AND THE ACCOUNTING AND AUDIT PROFESSION

In the previous section, we have highlighted the fact that the audit expectation gap has two

main components: a performance gap and a reasonableness gap. As stated before, we consider

that the reasonableness gap can be attributed to audit education. However, how can audit

education be improved, and more importantly, where can we start?

To answer this question, we have turned to the link between the audit education system and the

audit profession. The reason for this is simple: this connection is the frame that sets the

foundations of audit studies. In the previous section, some researchers have pointed out that we

cannot expect current stakeholders to fully understand the outcome of an audit mission and

have reasonable expectations from an auditor when even graduates or students of accounting

and auditing specialisations sometimes lack fundamental knowledge in this area of expertise.

The International Accounting Education Standards Board (IAESB) is an independent standard-

setting body that serves the public interest by establishing standards in the field of professional

accounting education that prescribe technical competence and professional skills, values,

ethics, and attitudes. Through its activities, the IAESB enhances education by developing and

implementing International Education Standards™ (IES™), which increase the competence of

the global accountancy profession—contributing to strengthened public trust (IAESB, 2016).

The Board obtains input from it Consultative Advisory Group, but also from regulators, IFAC

member organisations, other accountancy organisations, and the general public. Being part of

the IFAC, all IFAC member organisations can provide input to the regulation the IAESB

publishes. One current project of the IAESB is the revision of International Education

Standards, Framework for International Education Standards for Professional Accountants and

Aspiring Accountants.

An Aspiring proessional accountant is, according to the IAESB, “an individual who has

commenced a professional accountancy education program as part of Initial Professional

Development” (IAESB, 2016). Therefore, the trainees of national auditing chambers of

professional accounting organisations and bodies are all, in light of the IES standards, aspiring

professional accountants. The IAESB Glossary of Terms states that a professional accountancy

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education program are “programs designed to support aspiring professional accountants to

develop the appropriate professional competence […]. They may consist of formal education

delivered through degrees or courses offered by universities, other higher education providers, IFAC

member bodies […]”. Consequently, we can also include in the trainee category, college students,

attending courses for either a Bachelor, Masters or Doctoral degree in Accounting and Auditing.

Given the fact that the providers of the formal education in Accounting and Auditing share the

same purpose, to develop the knowledge and skills of individuals aspiring to be part of the

accountancy profession, it should be no surprise that these providers cooperate on different

levels. Today’s trainees in auditing chambers of accounting member bodies were yesterday’s

accounting or auditing students, and graduates are tomorrow’s auditors or chartered

accountants. Each country has professional organisations for the accountancy profession and

universities that offer accounting and audit specialisations. For instance, in Romania, there are

two professional bodies in accountancy:

The Chamber of Financial Auditors of Romania, and

The Body of Expert and Licensed Accountants of Romania.

The Chamber of Financial Auditors of Romania has the main objective to provide the

sustainable development of the audit profession and its strengthening, in accordance with the

International Auditing Standards (ISAs) and with the Code of Ethics and professional conduct,

by “fully assimilating the International Standards on Auditing and the Code of Ethics issued

by the International Federation of Accountants (IFAC), that will allow the Romanian financial

auditors to provide high-quality services, for the public interest, in general, and for the business

community, in special” (CAFR, 2016). To become a trainee, one has to have graduated an

economic university, to have a minimum of 4 years of experience in the financial-accounting

activity, to have performed at least three years of practical training in the financial audit activity

and to pass the access and final exam of the traineeship.

The Body of Expert and Licensed Accountants of Romania is the representative organism of

the accountancy profession in Romania. The Body “supports and promotes high-quality

professional practices through particular concern for the competence, abilities and ethics of

those involved in the profession. By the activities it carries out, the Body encourages

professional accountants to observe the moral values required for this profession, monitors that

Romanian professional accountants, through the services they provide, always meet market

requirements, business environment requirements and public interest” (CECCAR, 2016). To

become a trainee, one has to pass an access examination; then, during a three-year period, the

trainee attends accountancy, taxation, commercial law, auditing, accounting expertise and other

disciplines; then, the trainee has a final exam, which, if passed, grants the expert accountant title.

As stated before, the professional accounting bodies usually cooperate with providers of higher

education, economic universities that offer accounting and audit disciplines for the Bachelor,

Masters or Doctoral degrees. Taking the example of Romania once more, both the Chamber of

Financial Auditors of Romania and the Body of Expert and Licensed Accountants of Romania

have signed protocols of collaboration with multiple Romanian higher education providers,

13

including the four largest economics Universities of Romania:

Babeș-Bolyai University, Cluj-Napoca;

Bucharest University of Economic Studies;

Faculty of Economics and Business Administration, Timișoara;

Faculty of Economics and Business Administration, Iași.

These cooperation protocols usually state that graduates of certain Master’s Degree courses are

exempt from having to take the access exam for the two professional organisations, based on their

marks/grades on accounting and auditing disciplines, during their master’s degree programme.

The following table is a synthesis of the Accounting and Auditing, Bachelor and Masters

Programmes (audit related disciplines) at these universities:

Table 3: Top 4 Romanian Economics Universities, Audit Disciplines

University Bachelor Masters

course seminar course seminar

Babeș-

Bolyai

University

Accounting Accounting Management, Control and Auditing

Financial

Auditing

2 2 Auditing standards 2 1

Control and Internal Audit 2 1

Audit of Information Management

Systems

2 1

Environment Accounting and Audit 1 2

Stock Market Accounting and Audit 1 2

Bucharest

University of

Economic

Studies

Accounting Financial Auditing

Financial

Auditing

2 2 Internal Audit and Corporate

Governance

2 1

Internal

Auditing

2 2 International Standards in Auditing 2 2

Financial Audit for SMEs 2 1

Auditing information system 2 2

Financial Auditing Practice and

Theory

2 2

Financial Analysis in Auditing 2 2

Audit statistics 1 1

FEBA

Timișoara

Accounting Financial Auditing

Financial

Auditing

2 2 Auditing standards 2 2

Internal

Auditing

2 1 Internal Audit and Control 2 1

Statutory Audit 2 2

Management Systems Auditing 1 2

Stock Market Accounting and Audit 2 1

Audit of European Funds 2 1

FEBA Iași Accounting Management

Systems

Accounting and Audit

Internal

Auditing

and

Control

2 1 Basis of Auditing 2 1

Financial Auditing 1.5 1.5

Accounting Management Systems

Auditing

2 1

Given the fact that the same situation as in Romania can be found in any other country, because

most accounting member bodies are IFAC members, thus comply with IAESB’s standards, but

also because these member bodies usually cooperate with the higher-education providers

http://www.feaa.uaic.ro/ro/main/page/336

http://www.feaa.uaic.ro/ro/main/page/336

14

(universities), but also with the professional space (accountancy experts, accounting and audit

firms, regulators), we can now provide a preliminary answer to the question we asked at the

beginning of this section: where can we start on our mission to improve audit education? We

propose to start at the University level. It is where the aspiring professional accountants first

gain knowledge of accounting and auditing; it is where the foundation of their expertise is set.

Thus, for the analysis of the impact of audit education on the understanding of the

responsibilities of the auditor, we believe that a first step is to test whether accounting and audit

students (at the Bachelor and Masters) fully and correctly understand the responsibility of the

auditor in the audit mission, thus having (or not) an impact on the presence of the audit

expectation gap.

4. RESEARCH DESIGN

In order to achieve our research objective of showing audit education has an impact on users

understanding of the responsibilities of the auditor, we have used a methodology similar to that

employed by Fadzly & Ahmad (2004), Lin & Chen (2004), Siddiqui et al. (2009),

Pourheydari & Abousaiedi (2011), De Muylder et al. (2012), Ihendinihu & Robert (2014)

and Devi & Devi (2014). Based on results obtained by other researchers in the literature,

but also on results obtained from the curricula analysis in different countries, we have

constructed a questionnaire that deals with the various aspects of the auditing process that,

in our opinion, highlights differences in views and expectations that different categories of

respondents have with regards to:

The auditor’s responsibilities and the procedures the auditor applies in the audit

mission;

The level of assurance the auditor provides with the issuing of the audit report opinion;

The Board’s responsibilities within the company.

We have considered that the matters mentioned above are most significant factors that

contribute to the reasonableness gap, creating unreasonable expectations of the public from the

auditor’s report. To test the view of the stakeholders our experiment, we will use different

student categories, that highlight the same differences that appear in real-life:

stakeholders that have accounting knowledge, but have no audit knowledge – this

category is represented in our study by students at the Bachelor level of studies, with

accounting knowledge, but have not yet studied auditing, as a separate discipline; these

are considered to have minimal audit education;

stakeholders that have typical auditing knowledge, either because they are accounting

professionals (Bachelor studies in accounting, members of professional bodies), or

because of their work experience, they typically understand the level of assurance an

auditor provides, but they might not have knowledge of auditing procedures – this

category is represented in our study by students at the Bachelor level of studies that

have studied auditing, as a separate discipline; these are considered to have typical

audit education;

stakeholders that have advanced auditing knowledge: they might be auditors (members

15

of national auditing professional bodies) or accounting professionals that fully

understand the level of assurance the auditor provides, have advanced knowledge of

auditing procedures and can distinguish between the auditors, the Board, and the

management responsibilities – this category is represented in our study by students at

the Masters level of studies that have studied auditing at a higher level, being

accustomed to auditing standards and auditing procedures; these are considered to have

advanced audit education.

4.1. SURVEY CONSTRUCTION

In order to conduct our experiment, we constructed an initial survey with 17 questions that

assesses the respondents knowledge of the above-mentioned matters, using a 1-5 Likert scale

for answers: 1 – Strong Disagreement, 2 –Disagreement, 3 – Neutral, 4 –Agreement, 5 –Strong

Agreement. This survey was pre-tested on 20 students and based on their response and

feedback we have decided to change the Likert scale to the following: 1 – Disagreement, 2 –

Partial Disagreement, 3 – Neutral, 4 – Partial Agreement, 5 –Agreement.

The reason behind changing the scale was the fact that in the analysis of the initial survey

responses, most responses were focused om 2 – Disagreement, 3 – Neutral and 4 – Agreement,

rendering the answers very similar to a YES/NO type of questionnaire. These types of answers

are not ideal for subsequent statistical analysis because they alter the means and standard

deviation of answers, rendering inadequate an analysis of correlations between answers

provided by different categories of respondents.

As stated before, based on the questions asked in surveys constructed by Fadzly & Ahmad

(2004), Lin & Chen (2004), Siddiqui et al. (2009), Pourheydari & Abousaiedi (2011), De

Muylder et al. (2012), Ihendinihu & Robert (2014) and Devi & Devi (2014), we constructed

a survey with 17 questions, that test the respondents knowledge of audit education. Many

questions of the surveys are linked to eachother, and we will provide reasoning for each

question, in the following paragraphs (Table 4).

16

Table 4: Survey questions and reasoning

No. Survey Question Reasoning

1 The auditor is responsible for the preparation of the

financial statements.

This question seeks to find whether respondents know that it is

NOT the auditor’s responsibility to prepare the financials

statements, but the company’s management.

2 The auditor is responsible for issuing an opinion on

the true view of the financial statements.

Linked with the previous question, we seek to find the

respondents knowledge on the real responsibility of the auditor.

3

The board of directors of the audited entity is

responsible for the preparation of the financial

statements

This is a “trick” question because the Board of Directors is not

responsible for the preparation of the financial statements, but

they are involved in the leadership of the company.

4

One has absolute (100%) assurance that the

financial statements are free from all errors if the

auditor issues an unqualified audit opinion.

Another “trick” question because we want to see whether

respondents are aware of the level of assurance the auditor

provides, which is reasonable, and never absolute.

5

One has reasonable assurance that the financial

statements are free from all errors if the auditor

issues an unqualified audit opinion.

Linked with the previous question.

6 The auditor should verify all the operations of the

audited entity.

The auditor can never verify all of the operations of the audited

entity. That is why sampling is critical. Whether respondents

know this aspect, remains to be seen.

7 The auditor may use sampling in an audit. Linked with the previous question.

8 The auditor is responsible for detecting fraud

With this question, we want to know whether respondents know

that the auditor is, within reasonable expectations, responsible

for detecting fraud, but not for preventing it.

9

The auditor has to apply sufficient control

procedures and professional skepticism to detect

fraud as much as possible.

Linked with the previous question.

10 The auditor is responsible for preventing fraud Linked with the previous question.

11 The board of directors is responsible for detecting

fraud.

Linked to the previous questions. Is the auditor responsible for

detecting fraud, preventing fraud, or is the Board of Directors? It

is evident to us that it is the Board’s responsibility to prevent and

possibly detect fraud, by verifying the management's activity. 12

The board of directors is responsible for preventing

fraud.

13 An unqualified audit opinion signals the fact that the

audited entity does not commit fraud.

Linked with Questions 4 and 5, we test whether respondents

distinguish between reasonable and absolute assurance, with

regards to fraud.

14

The auditor has to apply sufficient control

procedures and professional skepticism to assess the

going concern ability of the audited entity. Linked with Questions 4 and 5, we test whether respondents

distinguish between reasonable and absolute assurance, with

regards to the going concern or business continuity of the entity. 15

An unqualified audit opinion signals the fact that the

audited entity is financially sound and cannot go

bankrupt.

16

The Auditor's Report structure (form and content) as

regulated by ISAs today, is adequate and does not

require revision. The final questions are related to the knowledge of the revision

process of auditing standards and seek to find respondents

opinion/knowledge on whether the new and revised standards

will improve auditor communication. 17

The Auditor's Report structure (form and content) as

regulated by revised ISAs, set to be applied from

2016, better suits users' needs in term of provided

information by the report.

17

4.2. RESEARCH HYPOTHESES

Based on the results from the previous literature, the above-mentioned categories and our

preliminary hypothesis stated in the 2nd section of this paper, we can now construct our research

hypotheses, which will be tested in the survey analysis. As mentioned in the reasoning for the

construction of the survey questions, we believe the answers provided by the different

categories of students, can be analysed to test the following hypotheses, relating to the audit

expectation gap – the reasonableness gap:

H1: Stakeholders with a higher level of audit education better understand the auditors

responsibilities in an audit mission, relating to fraud.

H2: Stakeholders with a lower level of audit education misunderstand the responsibilities of

the board and the auditor.

H3: Stakeholders with a lower level of audit education are not as accustomed to audit

procedures as those with a higher level of audit education.

H4: The auditor level of assurance is perceived as absolute by stakeholders with a lower level

of audit education.

5. RESULTS AND DISCUSSION

In our research, we have used a qualitative analysis and this section of the report will highlight

the obtained results of the applied surveys and the responses analysis (descriptive statistics).

Running a One-way ANOVA for each of the questionnaire questions to find noteworthy

variances in the mean responses and Post-Hoc Comparisons of determined means of

respondents by category type, we will be able to validate our hypotheses. This working method

was previously used by Simnett & Higgins (2014).

The questionnaire, as presented in the previous section, contains 17 questions for which

respondents had to respond using a 1 – 5 Likert scale (1 – Disagreement, 2 – Partial

Disagreement, 3 – Neutral, 4 – Partial Agreement, 5 –Agreement). The final applied

questionnaire is presented in Annex 1.

The questionnaire was applied to a total number of 438 students, during the examination

session, on five different final exam dates, in the period May-June 2015, depending on each

student category (Bachelor and Masters). We have chosen the offline method of applying the

survey because we considered we had more control on collecting the responses from the

students, rather than using online surveys. In all cases, the questionnaire was printed and given

to the students at the beginning of the final exam for the and was collected at the end period,

when the final exam papers were collected.

For the identification of student category type, each respondent was required to complete the

discipline for which they had taken the final exam and the date of the examination. After each

examination, the questionnaires were examined and given a unique number (from 1 to 438),

for safekeeping purposes. When the final batch of surveys was collected, the entire lot was

verified once more and then the data gathered from the polls (respondents responses) was

18

manually introduced in an SPSS database, using the following variables:

Respondent Type: nominal variable, three possible values: 1 – Minimal Audit Studies,

2 – Typical Audit Studies, 3 – Advances Audit Studies;

Each Question: ordinal variable, 1-5 Likert Scale: 1 – Disagreement, 2 – Partial

Disagreement, 3 – Neutral, 4 – Partial Agreement, 5 –Agreement

5.1. DESCRIPTIVE STATISTICS

Based on the previously mentioned respondent types, Table 5 shows the demographics of

respondents with Minimal Audit Studies, Typical Audit Studies, and Advances Audit Studies.

Table 5: Respondent Types

Frequency Percent Cumulative

Percent

Valid

Minimal audit studies 108 24.7 24.7

Typical audit studies 281 64.2 88.8

Advanced audit studies 49 11.2 100.0

Total 438 100.0

Most of the respondents of our survey have been respondents with Typical Audit Studies

(64.2%). This is because most students from the Bachelor level had already completed audit

courses, and, in the end, we wanted to have a larger number of respondents with typical audit

knowledge, since we consider that most real-life users of the audit report also have typical audit

knowledge. Next, 108 respondents have accounting knowledge and minimal audit studies –

they have not completed an audit course, but have had contact with auditing terms and matters

within other disciplines. Last but not least, 49 responses (11.2%) have been collected from

students at the Masters level, which have advanced audit knowledge, having completed more

courses on auditing, such as auditing standards or auditing procedures.

The following table (Table 6) will present descriptive statistics of responses for each survey

question, with percentages and frequencies, as well as the Mean Response and Standard

Deviation.

We will now continue with an in-depth analysis of responses for groups of questions, using

One-way ANOVAs for each of the selected questions to find significant variances in the mean

responses and Post-Hoc Comparisons of determined means of respondents by category type,

we will be able to validate our hypotheses.

19

Table 6: Descriptive Statistics

Question Disagreement Partial

Disagreement Neutral

Partial

Agreement Agreement

Mean

Response

Standard

Deviation

Non-

Respondents

Total

responses

Q1: The auditor is responsible for the preparation of the financial

statements. 220 (50.2%) 103 (23.5%) 22 (5.0%) 65 (14.8%) 24 (5.5%) 2.01 1.288 4 (0.9%) 434

Q2: The auditor is responsible for issuing an opinion on the true

view of the financial statements. 3 (0.7%) 10 (2.3%) 21 (4.8%) 133 (30.4%) 264 (60.3%) 4.50 0.756 7 (1.6%) 431

Q3: The board of directors of the audited entity is responsible for

the preparation of the financial statements 60 (13.7%) 114 (26.0%) 89 (20.3%) 119 (27.2%) 45 (10.3%) 2.94 1.237 11 (2.5%) 427

Q4: One has absolute (100%) assurance that the financial statements

are free from all errors if the auditor issues an unqualified audit

opinion. 39 (8.9%) 106 (24.2%) 83 (18.9%) 142 (32.2%) 57 (13.0%) 3.17 1.206 11 (2.5%) 427

Q5: One has reasonable assurance that the financial statements are

free from all errors if the auditor issues an unqualified audit opinion. 13 (3.0%) 54 (12.3%) 61 (13.9%) 187 (42.7%) 114 (26.0%) 3.78 1.067 9 (2.1%) 429

Q6: The auditor should verify all the operations of the audited entity. 29 (6.6%) 77 (17.6%) 59 (13.5%) 146 (33.3%) 124 (28.3%) 3.60 1.252 3 (0.7%) 435

Q7: The auditor may use sampling in an audit. 8 (1.8%) 22 (5.0%) 81 (18.5%) 151 (34.5%) 158 (36.1%) 4.02 0.976 18 (4.1%) 420

Q8: The auditor is responsible for detecting fraud 20 (4.6%) 38 (8.7%) 70 (16.0%) 176 (40.2%) 120 (27.4%) 3.80 1.092 14 (3.2%) 424

Q9: The auditor has to apply sufficient control procedures and

professional skepticism to detect fraud as much as possible. 2 (0.5%) 25 (5.7%) 50 (11.4%) 155 (35.4%) 201 (45.9%) 4.22 0.898 5 (1.1%) 433

Q10: The auditor is responsible for preventing fraud 53 (12.1%) 108 (24.7%) 108 (24.7%) 110 (25.1%) 54 (12.3%) 3.01 1.223 5 (1.1%) 433

Q11: The board of directors is responsible for detecting fraud 26 (5.9%) 89 (20.3%) 142 (32.4%) 137 (31.3%) 30 (6.8%) 3.13 1.023 14 (3.2%) 424

Q12: The board of directors is responsible for preventing fraud. 14 (3.2%) 44 (10.0%) 94 (21.5%) 208 (47.5%) 68 (15.5%) 3.64 0.976 10 (2.3%) 428

Q13: An unqualified audit opinion signals the fact that the audited

entity does not commit fraud. 35 (8.0%) 92 (21.0%) 115 (26.3%) 138 (31.5%) 50 (11.4%) 3.18 1.139 8 (1.8%) 430

Q14: The auditor has to apply sufficient control procedures and

professional skepticism to assess the going concern ability of the

audited entity. 6 (1.4%) 22 (5.0%) 66 (15.1%) 227 (51.8%) 110 (25.1%) 3.96 0.859 7 (1.6%) 431

Q15: An unqualified audit opinion signals the fact that the audited

entity is financially sound and cannot go bankrupt. 31 (7.1%) 103 (23.5%) 123 (28.1%) 131 (29.9%) 44 (10.0%) 3.13 1.106 6 (1.4%) 432

Q16: The Auditor's Report structure (form and content) as regulated

by ISAs today, is adequate and does not require revision. 10 (2.3%) 80 (18.3%) 181 (41.3%) 145 (33.1%) 17 (3.9%) 3.18 0.859 5 (1.1%) 433

Q17: The Auditor's Report structure (form and content) as regulated

by revised ISAs, set to be applied from 2016, better suits users' needs

in term of provided information by the report. 7 (1.6%) 19 (4.3%) 183 (41.8%) 164 (37.4%) 62 (14.2%) 3.59 0.844 3 (0.7%) 435

20

5.2. RESPONSES ANALYSIS. HYPOTHESES VALIDATION

In this section we will statistically analyse survey responses by grouping questions by the

matter they deal with and to the hypotheses they will validate (or not).

HYPOTHESIS 1

H1: Stakeholders with a higher level of audit education better understand the auditors

responsibilities in an audit mission, relating to fraud.

The following questions of the survey have been selected:

8 The auditor is responsible for detecting fraud

10 The auditor is responsible for preventing fraud

11 The board of directors is responsible for detecting fraud.

12 The board of directors is responsible for preventing fraud.

Table 7: Analysis of Variance. Results based on Respondent Type

Part 1: Responses to Questions 8, 10, 11 and 12

Students Category

Q8: Auditor

Fraud Detection

(n=424)

Q10: Auditor

Fraud Prevention

(n=433)

Q11: Board

Fraud Detection

(n=434)

Q12: Board

Fraud

Prevention

(n=428)

Mean SD Mean SD Mean SD Mean SD

Minimal Audit Studies 3.70 1.153 3.05 1.119 3.29 0.932 3.67 0.777 Typical Audit Studies 3.78 1.104 3.00 1.250 3.08 1.072 3.61 1.046 Advances Audit Studies 4.10 0.823 3.00 1.305 3.09 0.905 3.72 0.971

Between groups (F-ratio) 2.410

(Sig. 0.091)

0.067

(Sig. 0.935)

1.706

(Sig. 0.183)

0.370

(Sig. 0.691)

Discussion

For H1, we wanted to find whether respondents with a higher level or audit education, in this

case with Advanced Audit Studies (and even Typical Audit Studies), have a better understanding

of the auditors’ responsibilities in the audit mission, relating to fraud.

Consequently, we have asked respondents whether they consider being in the auditors

responsibility to either detect or prevent fraud. We know that the auditor has the responsibility

only to detect fraud, within a reasonable assurance, and most respondents with Advanced Audit

Studies have agreed with this aspect, as emphasised by a Mean μ = 4.10. The Mean of all answers

provided to this question is 3.80 so the difference between students category is not significant in

this case (Minimal Audit Studies - μ = 3.70, Typical Audit Studies - μ = 3.78). We can, however,

state that more students with Advanced Audit Studies should have answered with “Agreement” at

this question, based on their more complete understanding of the audit process. As a whole, 67.6%

of the total population of respondents either agree or partially agree with the auditor’s role in

detecting fraud.

As for the auditor’s role in preventing fraud, we are concerned that respondents with Advanced

Audit Education lean towards a neutral answer, with a Mean response of μ = 3.00, similar to Typical

21

Audit Education (μ = 3.00) and Minimal Audit Education (μ = 3.05). In this case, the correct answer

should have leaned towards “Strong Disagreement” but, taken as a whole, most of the respondents

have either Partially Disagreed (108 – 24.7%), are Neutral (108 – 24.7%) or have Partially Agreed

(110 – 25.1%). No significant correlation between means of different categories has been found.

When asked about the Board’s responsibilities in either preventing or detecting fraud, the responses

have been consistent with responses regarding the auditors’ responsibilities:

Respondents, regardless of their level of auditing education have Means than lean more

towards agreement (Minimal Audit Studies, μ = 3.67; Typical Audit Studies, μ = 3.61;

Advanced Audit Studies, μ = 3.72) when it comes to the Board’s responsibility of

preventing fraud. 63% of all respondents either Partially Agree or Agree with this.

As for the Board’s responsibility in detecting fraud, we know that it is not necessarily in

their responsibility to achieve this; that is the role of the auditor. Still, we consider that a

strong Board does all that it can to detect any possible fraud and respondents seem to agree

with this aspect with 38.2% of total respondents Partially Agree or Agree.

Taken as a whole, the analysis of the responses to these four questions do not show any correlations

between means of answers given by different respondent categories. As such, we cannot validate

our hypothesis that Stakeholders with a higher level of audit education better understand the

auditors responsibilities in an audit mission. It seems that all stakeholders, regardless of their

audit education level know the auditor’s role in detecting fraud. Unfortunately, respondents

also consider that the auditor must prevent fraud from happening – which is simply not

possible. Also, responses regarding the Board’s responsibility have been similar within all

categories, so the education level has no impact here.

HYPOTHESIS 2


the board and the auditor.

The following questions of the survey have been selected:

1 The auditor is responsible for the preparation of the financial statements.

2 The auditor is responsible for issuing an opinion on the true view of the financial statements.

3 The board of directors of the audited entity is responsible for the preparation of the financial statements

Discussion

For H2, we wanted to find whether respondents with a lower level or audit education, in this

case with Minimal Audit Studies (and even Typical Audit Studies), misunderstand the

responsibilities of the board of the auditor.

For Q1, 73.7% of all respondents disagree or partially disagree that it is the auditor’s

responsibility to prepare the financial statements of the audited entity (with a Mean of 2.01).

This is clearly the correct response, and we are concerned that not all of the respondents with

Typical Audit Studies or Advanced Audit Studies have given this answer. Using Post Hoc

Comparisons of means (μ), using Scheffe’s Test, we can notice that there are some differences

22

of opinion based on respondents category, as indicated in Table 7. The support from

respondents with Typical Audit Studies (μ = 1.87, p = 0.000) and Advanced Audit Studies (μ =

1.71, p = 0.001) was significantly lower than the support from Minimal Audit Studies (μ = 2.51).

It seems that respondents with Minimal Audit Studies consider it to be the auditor’s responsibility

to prepare the financial statements, which is erroneous. This type of misjudgement is what the

reasonableness gap is – the public setting erroneous expectations of the auditor’s responsibilities.


Part 1: Responses to Questions 1, 2 and 3

Students Category

Q1: Auditor Financial

Statements Preparer

(n=434)

Q2: Auditor Issuing

an Opinion on FT

(n=431)

Q3: Board Financial

Statements Preparer

(n=427)

Mean SD Mean SD Mean SD

Minimal Audit Studies 2.51a,b 1.390 4.23c,d 0.869 3.06 1.050 Typical Audit Studies 1.87a 1.229 4.56c 0.718 2.93 1.266 Advances Audit Studies 1.71b 1.099 4.71d 0.540 2.75 1.437

Between groups (F-ratio) 11.762**

(Sig. 0.000)

9.993**

(Sig. 0.00)

1.046

(Sig. 0.352)

*,** Show significance at the 0.05 or 0.01 level a Mean difference between Minimal Audit Studies and Typical Audit Studies for Q1 is significant at the 0.01

level (p=0.000) b Mean difference between Minimal Audit Studies and Advanced Audit Studies for Q1 is significant at the 0.01

level (p=0.001) c Mean difference between Minimal Audit Studies and Typical Audit Studies for Q2 is significant at the 0.01

level (p=0.001) d Mean difference between Minimal Audit Studies and Advanced Audit Studies for Q1 is significant at the 0.01

level (p=0.001)

Going further, for the 2nd Question (Q2), 90.7% of the total respondents either Partially Agree or

Agree that it is the auditor’s responsibility to issue an opinion on the true view of the financial

statements. As this is an elementary notion in auditing, we do not find this result that surprising,

although 30.4% of answers are not entirely convinced this is the case, as they only Partially Agreed.

Using Post Hoc Comparisons of means (μ), using Scheffe’s Test, we can notice that there are

some differences of opinion based on respondents category, as for the previous question. The

support from respondents with Typical Audit Studies (μ = 4.56, p = 0.001) and Advanced Audit Studies

(μ = 4.71, p = 0.001) was significantly higher than the support from Minimal Audit Studies (μ = 4.23).

As for the Board being the preparer of the financial statements (Q3), we have not found any

significant differences between responses of different respondent categories. The Mean response

was 2.94, and the distribution of total answers is more or less equal to 20.3% (114) being Neutral,

39.7% (174) – Disagreement, Partial Disagreement and 37.5% (163) – Agreement, Partial

Agreement. We know that the Board is not the issues of the financial statements, as this

responsibility is that of the company’s management. Judging from Mean responses on different

categories (μ = 3.06 – Minimal Audit Studies, μ = 2.93 – Typical Audit Studies, μ = 2.75 Advanced

Audit Studies) we can see that education does have an impact here, but we posit that it is not

necessarily audit education – it’s more probably accounting and finance education.

23

The analysis of responses to these three questions has proven that audit education does have an

impact on understanding the responsibilities of the board and the auditor, in the case of Q1 and Q2

(2 of 3). Thus, H2: Stakeholders with a lower level of audit education misunderstand the

responsibilities of the board, and the auditor can be validated. Respondents with Advanced Audit

Studies and even Typical Audit Studies were able to pinpoint the auditors’ responsibility in issuing

an opinion on the true view of the financial statements, and not in the preparing of the financial

statements.

HYPOTHESIS 3


procedures as those with a higher level of audit education.

6 The auditor should verify all the operations of the audited entity.

7 The auditor may use sampling in an audit.

9 The auditor has to apply sufficient control procedures and professional skepticism to detect fraud as much as

possible.

14 The auditor has to apply sufficient control procedures and professional skepticism to assess the going concern

ability of the audited entity.



Students Category

Q6: Auditor

Verification All

Operations

(n=435)

Q7: Auditor can

use Sampling

(n=420)

Q9: Auditor

Fraud Detection

(n=433)

Q14: Auditor

Going Concern

of entity (n=431)


Minimal Audit Studies 3.74 1.223 3.89e 0.922 4.07g 0.934 3.94h 0.799 Typical Audit Studies 3.53 1.240 3.99f 1.016 4.22 0.912 3.90i 0.899 Advances Audit Studies 3.67 1.375 4.49e,f 0.688 4.55g 0.614 4.31h,i 0.657


(Sig. 0.299)

6.625**

(Sig. 0.001)

4.844**

(Sig. 0.008)

4.767**

(Sig. 0.009)

*,** Show significance at the 0.05 or 0.01 level e Mean difference between Minimal Audit Studies and Advances Audit Studies for Q7 is significant at the 0.01

level (p=0.002) f Mean difference between Typical Audit Studies and Advanced Audit Studies for Q7 is significant at the 0.01

level (p=0.005) g Mean difference between Minimal Audit Studies and Advanced Audit Studies for Q9 is significant at the 0.01

level (p=0.008) h Mean difference between Minimal Audit Studies and Advanced Audit Studies for Q14 is significant at the 0.05

level (p=0.046) i Mean difference between Typical Audit Studies and Advanced Audit Studies for Q14 is significant at the 0.01

level (p=0.009)

Discussion

For H3, we have started from the assumption that respondents with a lower level in audit

education are not as familiar with auditing work procedures, as those with a higher level of

audit education.

24

For Q6, the Mean responses of the three respondent categories are similar (Minimal Audit

Studies - μ = 3.74; Typical Audit Studies - μ = 3.53, Advanced Audit Studies - μ =3.67). The Mean

response of all answers was 3.60, suggesting that most respondents lean towards partially agreeing

that the auditor should verify all the operations of the audited company. These findings are

surprising since this matter is closely linked to the level of assurance the auditor provides: the

auditors cannot offer an absolute assurance because they rely on sampling when verifying financial

data. To verify all of the financial data the company provides would be an immense workload and

auditors would not be able to finish their audit missions in time; not to mention auditing costs.

Thus, it is surprising to see that 61.6% of all answers either Agree or Partially Agree with this fact.

It is also unanticipated to note that Advances Audit Studies responses have delivered a Mean

response of μ =3.67. Students with that high knowledge of auditing should be aware that not all

operations are being verified by the auditor.

When taken together with Q6, Q7 asked users whether they considered the auditor may use

sampling in the audit mission. Here, we find contradicting results, when compared to Q6.

70.6% of responses either Agree or Partially Agree with this statement, with a Mean response

of μ = 4.02. Using Post Hoc Comparisons of means (μ), using Scheffe’s Test, we can notice

that there are some differences of opinion based on respondents category, as indicated in Table

8. The support from respondents with Advanced Audit Studies (μ = 4.49, p = 0.002) was

significantly higher than the support from Minimal Audit Studies (μ = 3.89). A significant

difference is also found between the support from Advanced Audit Studies (μ = 4.49, p = 0.005)

and the support from Typical Audit Studies (μ = 3.99). As such, it seems that respondents with

a higher level of auditing education know that sampling is more that permitted – it is the only

work procedure in audit mission because verifying all operations is impossible.

Whether the auditor has to apply sufficient control procedures and professional skepticism to

detect fraud as much as possible (Q9), using Post Hoc Comparisons of means (μ), using

Scheffe’s Test, we can notice that the support of this statement is higher at respondents from

the Advanced Audit Studies group (μ = 4.55, p = 0.008), when compared to the Minimal Audit

Studies group (μ = 4.07). A Mean response of μ = 4.22 was achieved for the whole sample of

responses, with 71.3% of replies either Agreeing or Partially Agreeing with this statement.

As for Q14, we wanted to see whether respondents consider that the auditor has to apply

sufficient control procedures and professional skepticism to assess the going concern ability of

the audited entity. Similar to results in Q7, we find significant differences in Means of answers

provided by the first two categories of respondents and the third type (Advanced Audit Studies).

Post Hoc Comparisons of means (μ) highlight that the level of agreement with this statement

is significantly higher at respondents from the Advanced Audit Studies group (μ = 4.31, p =

0.046) when compared to the Minimal Audit Studies group (μ = 3.94). Also, the same cannot

be said for the support from Advanced Audit Studies (μ = 4.31, p = 0.009) and the support from

Typical Audit Studies (μ = 3.90).

As such, taking into consideration the analysis of answers given by respondents to these four

questions, relating to auditing procedures, we have found that audit education does prove a

correlation in answers given to 3 out of 4 questions. Therefore, we consider that H3:

25

Stakeholders with a lower level of audit education are not as accustomed to audit procedures

as those with a higher level of audit education can be validated. Our conclusion on this matter

is the fact that respondents with a higher level in audit studies have responded more closely

towards the “correct” answer. Thus, audit education does have a role in closing the

reasonableness gap.

HYPOTHESIS 4


of audit education.

4 One has absolute (100%) assurance that the financial statements are free from all errors if the auditor issues an

unqualified audit opinion.

5 One has reasonable assurance that the financial statements are free from all errors if the auditor issues an

unqualified audit opinion.

13 An unqualified audit opinion signals the fact that the audited entity does not commit fraud.

15 An unqualified audit opinion signals the fact that the audited entity is financially sound and cannot go

bankrupt.



Students Category

Q4: Auditor

Assurance

Absolute

(n=427)

Q5: Auditor

Assurance

Reasonable

(n=429)

Q13: Auditor

Unqualified - No

Fraud

(n=430)

Q15: Auditor

Unqualified – No

Bankruptcy

(n=432)


Minimal Audit Studies 3.32 1.033 3.65j 0.976 2.98 1.078 3.06 1.026 Typical Audit Studies 3.15 1.239 3.76k 1.112 3.26 1.156 3.14 1.137 Advances Audit Studies 2.94 1.343 4.21j,k 0.898 3.13 1.142 3.21 1.110


(Sig. 0.168)

4.793**

(Sig. 0.009)

2.381

(Sig. 0.094)

0.698

(Sig. 0.698)

*,** Show significance at the 0.05 or 0.01 level j Mean difference between Minimal Audit Studies and Advances Audit Studies for Q5 is significant at the 0.05

level (p=0.011) k Mean difference between Typical Audit Studies and Advanced Audit Studies for Q5 is significant at the 0.05

level (p=0.025)

Discussion

For H4, we wanted to find whether respondents with a lower level or audit education, in this case

with Minimal Audit Studies, perceive the level of assurance the auditor provides as absolute.

For Q4, we wanted to test whether respondents believed that an unqualified opinion means that

the financial statements are 100% free of any errors. The Mean response for all answers to this

question was unusually high, at 3.17, highlighting the fact that as a whole, many respondents

believe that the auditor offers absolute assurance. Even in the Advanced Audit Studies, the

Mean response is 2.94, but no significant differences have been found between groups. Q5 asks

the same question, the only difference being the term “reasonable” instead of “absolute.” Here,

we find significant differences in Means of answers provided by the first two categories of

respondents and the third type (Advanced Audit Studies). Post Hoc Comparisons of means (μ)

highlight that the level of agreement with this statement is significantly higher at respondents

26

from the Advanced Audit Studies group (μ = 4.21, p = 0.011) when compared to the Minimal

Audit Studies group (μ = 3.65). Also, the same cannot be said for the support from Advanced

Audit Studies (μ = 4.21, p = 0.025) and the support from Typical Audit Studies (μ = 3.76). It is

unexpected to see that the difference in mean responses is not significant between the first two

groups, as Typical Audit Studies respondents should be aware of the difference between

reasonable and absolute assurance. This proves that audit education has an impact to answers

given to this question.

As for Q13 and Q14 relating to whether an unqualified audit opinion signals the fact the audited

entity does not commit fraud, on one hand, and is financially sound and cannot go bankrupt,

on the other hand, the results are fairly similar. No significant differences between users

categories have been found, with the Mean response of Q13 being 3.18 and the Mean response

for Q15 being 3.13. We would have expected respondents to express more caution when

responding to these questions because as accounting students they should know that a

company’s financial position can rapidly change. Also, as related to previous questions, the

auditors cannot offer absolute assurances; their opinion is based on the sampled date they have

analysed. Thus, the responses here, as they lean more towards agreement, are worrying. What’s

even more worrying, is the fact that respondents from the Advanced Audit Studies group have

provided answers with a Mean response of 3.21, higher than those from the other groups. We

consider that students with a higher level of auditing knowledge should know better here; this

result is unexpected.

The analysis of responses to these four questions has underlined that respondents with a lower

level or audit education, in this case with Minimal Audit Studies, do perceive the degree of

assurance the auditor provides as absolute, but it is not only these respondents. The answers

given by respondents from the other groups are also pointing in the same direction. It is true

that answers given for Q5 prove that a higher level of audit education emphasises that

respondents are aware that the level of assurance the auditor provides is only reasonable, not

absolute; but answers given to the other questions are contradictory, and prove otherwise. Thus,


of audit education cannot be validated.

OTHER QUESTIONS

The results from responses given to the last two questions of the questionnaire serve as a

discussion as to whether respondents believe the current (in 2015) and revised auditing

standards (after the 2015 revision of auditing standards) will have a higher communicative

value to the stakeholders of the audit report.

16 The Auditor's Report structure (form and content) as regulated by ISAs today, is adequate and does not require

revision.

17 The Auditor's Report structure (form and content) as regulated by revised ISAs, set to be applied from 2016,

better suits users' needs in term of provided information by the report.

27


Part 1: Responses to Questions 16 and 17

Students Category Q16: Audit Report Structure

<2015 (n=433)

Q17: Audit Report

Structure Revised (n=435)

Mean SD Mean SD

Minimal Audit Studies 3.07 0.876 3.44 0.702 Typical Audit Studies 3.23 0.866 3.64 0.894 Advances Audit Studies 3.13 0.761 3.58 0.821


(Sig. 0.236)

2.133

(Sig. 0.120)

No significant differences between the means of responses by different categories have been

found. We consider that these responses cannot shed light to any conclusion because the

general trend of answers is the same. Q16 asked whether respondents felt that the audit report

structure is adequate and does not require revisions. The mean response here was 3.18,

suggesting neutrality towards partial agreement with the statements. Thus, we would have

expected the results for Q17 to show this as well. Moreover, this aspect is confirmed, as the

provided answers lean towards a need of a revision of the Auditor’s Report structure (in form

and content), but again, users have mostly expressed neutrality towards a partial agreement.

We believe that these results need to be analysed in comparison with responses given by

stakeholders to the 2013 IAASB Exposure Draft, as issued through comment letters.

6. CONCLUSIONS

The extensive literature on the audit expectation gap has clearly demonstrated its existence in

the audit reporting topic. The auditing profession has been subjected to many false impressions

regarding its responsibilities, mainly because the public has expectations that go beyond the

actual responsibilities of the auditors, as set by standards and regulations. Therefore, is it

possible that the level of audit education can also factor to the presence of the audit expectation

gap? As seen in the first section of this report, many papers have analysed what Porter (1993)

has underlined in his paper: the reasonableness gap and its part in the audit expectation gap –

or the public’s unreasonable expectations of the auditor.

Based on the results from previous literature, we have constructed our research hypotheses,

which have been tested in the survey analysis. As stated in the reasoning for the construction

of the survey questions, we believe the answers provided by the different categories of students

(1 – Minimal Audit Studies, 2 – Typical Audit Studies, 3 – Advances Audit Studies) are relevant

to investigate whether audit education had a direct link to the audit expectation gap.

The purpose of this report is to research whether audit education has an impact for stakeholders

to better understand the auditor’s responsibilities, and to reduce the reasonableness gap, and in

the end, the audit expectation gap. In our research, we have used a qualitative analysis: the

obtained results of the applied surveys and the responses analysis (descriptive statistics) are

concluded with a One-way ANOVA for each of the questionnaire question to find noteworthy

variances in the mean responses and Post-Hoc Comparisons of determined means of respondents

by category type; this working method has proved viable in validating some of our hypotheses.

28

After analysing the responses to the 17 questions, we can conclude the following:

H1 cannot be validated: Stakeholders with a higher level of audit education better

understand the auditors responsibilities in an audit mission. It seems that all stakeholders,

regardless of their audit education level know the auditor’s role in detecting fraud.

Unfortunately, respondents also consider that the auditor must prevent fraud from

happening – which is simply not possible. Also, responses regarding the Board’s responsibility

have been similar within all categories, so the education level has no impact here.


the board, and the auditor can be validated. Respondents with Advanced Audit Studies and

even Typical Audit Studies were able to pinpoint the auditors’ responsibility in issuing an opinion

on the true view of the financial statements, and not in the preparing of the financial statements.


procedures as those with a higher level of audit education can be validated. Our

conclusion on this matter is the fact that respondents with a higher level in audit studies

have responded more closely towards the “correct” answer. Thus, audit education does have

a role in closing the reasonableness gap.

It is true that answers given for Q5 prove that a higher level of audit education emphasised

the fact that respondents know that the level of assurance the auditor provides is only

reasonable, not absolute; but answers given to the other questions are contradictory, and

prove otherwise. Thus, H4: The auditor level of assurance is perceived as absolute by

stakeholders with a lower level of audit education cannot be validated.

While we have proven that audit education can and does have an impact on users understanding

of the auditor’s responsibility, the real challenge still lies ahead: now that we know what the

matters are, how can we change them? How can we improve audit education, and where do we

go from here?

29

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