A new report issued by several bodies has recommended any notion of an audit expectation gap needs to be narrowed if it is to be trusted and meet demands of public interest.
‘Holistic’ approach needed to narrow audit expectation gap
The report, Closing the expectation gap in audit – the way forward on fraud and going concern: a multi stakeholder approach, has been issued by the Association of Chartered Certified Accountants (ACCA), Chartered Accountants Australia and New Zealand (CA ANZ), Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Auditing and Assurance Standards Board (AASB) to provide recommendations for regulators, standard setters and auditors.
Based on research with key players of the financial reporting ecosystem, including financial statement preparers, auditors, regulators, boards and audit committees, and investors, the report’s recommendations primarily centre on taking a “holistic” approach to audits in order to narrow the expectation gap related to fraud and going concern.
Among the key findings were that factors contributing to the expectation disparity include gaps in knowledge, performance and the evolution of audit.
“To tackle fraud, a main recommendation is to encourage the involvement of forensic specialists in risk assessment where a high risk is identified, but auditors should still apply their professional judgement when determining how to respond to identified fraud risks,” the report noted.
“Participants noted that mandating the involvement of forensic specialists may widen the expectation gap, as this could lead to a ‘box-ticking’ approach.
“The report concludes that it is not necessary to have a ‘suspicious mindset’ for enhanced fraud identification when planning and performing the audit; instead, ACCA, CA ANZ, AASB and CPA Canada suggest that the IAASB and national standard setters consider areas where the auditing standards could be enhanced to guide audit practitioners in the application of professional scepticism.”
In terms of going concern, the report’s recommendation is that the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB) “explore supplementing the current binary approach to disclosing material uncertainty on going concern with additional going concern disclosures”.
Commenting on the recommendations, Maggie McGhee, executive director of strategy and governance at ACCA said the report comes at an important time.
“Audit needs to evolve if it is to be trusted and meet demands of public interest,” she said.
“Fraud and going concern were top of the agenda for our roundtable participants, but also gaps around knowledge and the need for everyone in the financial reporting ecosystem to understand each other’s role. It is an interconnected system on which all players rely.”
Simon Grant, group executive, advocacy and International at CA ANZ echoed a similar sentiment.
“Our aim with this report is to support constructive change towards the narrowing of the expectation gap in audit,” he said.
“And that’s because it has a vital part to play in strong and resilient capital markets, especially with regards to instilling trust for investors.”