Maandblad voor Accountancy en Bedrijfseconomie 94(1/2) (2020): 5–25

DOI 10.5117/mab.94.47895

Literature Review

The audit expectation gap: A review of the academic literature

Reiner Quick

Received   1 November 2019      |      Accepted   3 February 2020      |      Published   9 March 2020

Abstract
The audit expectation gap is a phenomenon that exists for many years. In particular, the audited financial statements beneficiaries’
expectations exceed what auditors can reasonably be expected to accomplish. This paper reviews the extensive body of academic
literature which has investigated the audit expectation gap for many years. The focus lies on survey-based research which is the
dominating research method applied. The objective is to provide an overview of the existing literature and to summarize its findings
and implications. The most frequently identified gaps refer to fraud detection. Education and the expansion of the auditor report are
two response strategies often analysed by prior research.

Practical relevance
Misperceptions of auditors’ roles and responsibilities may compromise the benefit of statutory audits and the reputation of the
profession. Therefore, this literature review is of interest to auditors, users of financial statements, standard setters and regulators.
Auditors may consider to overfulfill their existing duties and users can find out about their unreasonable expectations and modify
them. Standard setters and regulators must take actions to close or at least to narrow the audit expectation gap, and, therefore, need
to know what misperceptions exist and how they differ between various stakeholder groups.

Keywords
Audit expectation gap, auditor report, education, fraud

1. Introduction
External auditing and assurance are key contributors to by the Gupta family in South Africa). Such allegations
financial stability, trust and market confidence, because are often driven by the fact that the public has specific ex-
auditors provide an independent professional opinion on pectations of the scope of the statutory audit and auditors’
whether the financial statements give a true and fair view. services which exceed auditors’ performance as perceived
In order to enhance the reliability of financial statements, by the public (Ruhnke and Schmidt 2014). Thus, an ex-
which are used by investors to make decisions, the audi- pectation gap may arise through diverse perceptions of the
tor issues an auditor report, which investors use as one role of auditors (Dixon et al. 2006). For decades, the audit
basis for making sound judgments, which in turn pro- expectation gap (AEG) and how it might be narrowed has
motes efficient capital markets. Hence, the basic function been of interest to academics, regulators, professional ac-
of statutory audits is to reduce agency costs. counting bodies and users of audited financial statements.
Auditors are regularly criticized whenever companies The AEG is detrimental to the financial reporting and
fail shortly after an unmodified audit opinion was issued or auditing process, as the public may perceive the work per-
when auditors fail to detect fraud (recent cases include e.g. formed by external auditors as unsatisfactory. Therefore,
Voltabox and Steinhoff in Germany, Carillion and BHS in the AEG is critical to the auditing profession, because
the UK, Toshiba in Japan, and Linkway Trading owned greater unfulfilled expectations from the public impair the

Copyright Reiner Quick. This is an open access article distributed under the terms of the Creative Commons Attribution License
(CC-BY-NC-ND 4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and
source are credited.
6 Reiner Quick: The audit expectation gap

value of auditing and the reputation of auditors and, ac- (deficient standards), and a gap between the expected stand-
cordingly, the credibility, earnings potential and prestige ard of performance of auditors’ existing duties and auditors’
associated with the work of auditors (Lee and Ali 2008; perceived actual performance (deficient performance).
Lee et al. 2009a). Typical areas where differences in expectations arise
It is the purpose of this paper to review the existing, are (Sweeney 1997):
and extensive, literature on the AEG. The following sec-
tion provides a general overview on the AEG and defines • the role of auditors in fraud cases (Hassink et al. 2009),
it, distinguishes its components, mentions typical are- • the belief that an unqualified opinion means that the
as where differences in expectations arise, and discusses entity is financially sound,
causes for and response strategies to the AEG. In the next • the idea that the auditor should interpret the finan-
section an overview on prior research is given and its find- cial statements in such a manner that the user could
ings are discussed. A final concluding section discusses evaluate whether to invest in the entity (McEnroe and
implications, mainly for regulators, makes suggestions for Martens 2001),
future research, and points out limitations of this literature • the provision of an early warning of future insolvency,
review. • the provision of an evaluation of management perfor-
mance,
• the nature and level of assurance provided by the au-
2. Definition, primary issues, ditor report (Schelluch and Gay 2006), and
• the level of quality in the performance of audits
causes and countermeasures (Humphrey et al. 1992).
Liggio (1974) defined the AEG as the difference between
Different underlying explanations have been suggested
the levels of expected performance as envisioned by both
for the existence of the AEG. In particular, the auditing
the user of financial statements and the independent ac-
profession has attributed it to a misperception of audits
countant. A frequently used definition of the AEG is quite
by users and the public (Lin and Chen 2004). Users and
similar: The AEG refers to what the public and financial
the public expect too much and remain largely ignorant
statement users perceive auditors’ responsibilities to be,
of the precise nature, purpose and capacities of the audit
and what auditors believe their responsibilities to entail
function (Humphrey et al. 1993). Tricker (1982) viewed
(e.g. Jennings et al. 1993; Monroe and Woodliff 1993;
the AEG as the result of a natural time lag. The auditing
McEnroe and Martens 2001; Frank et al. 2001).
profession does not identify and respond to continually
Porter (1993) gave a more sophisticated definition of
evolving and expanding public expectations on a timely
the AEG (Ruhnke and Schmidt (2014) apply a similar
basis. Other authors argued that the AEG is an outcome
definition). According to her, the AEG refers to the dif-
of the contradiction of minimum government regulation
ference between society’s expectations of the auditor and
and the profession’s self-regulation, and that the related
the financial statement audit, and auditor performance as
actions of the profession must be seen in a more self-inter-
perceived by society. Thus, there are two major compo-
ested light (e.g. Humphrey et al. 1992; Sikka et al 1992).
nents of the AEG (Figure 1):
Lastly, the AEG is affected by the uncertainty surround-
(1) The reasonableness gap, which is the gap between ing auditor independence, because the auditor report is
what society expects auditors to achieve (unreason- worthless if an auditor lacks independence from the client
able expectations) and what they can reasonably be with respect to giving an impartial opinion and independ-
expected to accomplish; and ence perceptions vary (Yost 1995; Sikka et al. 1998; Lin
(2) The performance gap, which is the gap between what and Chen 2004; Salehi et al. 2009; Toumeh et al. 2018).
society can reasonably expect auditors to accomplish Independence is a bedrock principle upon which audit
and what they are perceived to achieve. quality is based. The fulfilment of the main function of
audits, which is to increase trust into financial statements,
The performance gap can be further subdivided into a gap requires that the auditor acts independently (independence
between the duties which can be reasonably expected of au- of mind) und expresses an uninfluenced conclusion. Thus,
ditors and auditors’ existing duties as defined by regulation independence is prescribed by laws and by standards (e.g.
IESBA, 400.1). A violation of the principle of independ-
Figure 1. Structure of the AEG. Source: Porter (1993). ence by an auditor represents a deficient performance and
thus, potentially causes an AEG. Moreover, auditors must
also be perceived as independent by users (independence
in appearance; IESBA 400.5). Otherwise they lose confi-
dence in the auditor’s work. It may certainly happen that
users erroneously perceive the auditor as not independent,
e.g. in conjunction with the provision of non-audit servic-
es (e.g. Van Liempd et al. 2019). Such expectations are
unreasonable.

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 7

There are two main response strategies to the AEG, error remains undetected. This is because fraud is often
namely a defensive and a constructive approach (Hum- accompanied by concealment, override of controls, and
phrey et al. 1992). The defensive approach focuses on collusion, all of which may produce falsified information
education and reassuring of the public as to what the au- which may be persuasive to the auditor (ISA 240.4-6).
ditors recognize as their duties and responsibilities. One Addresses of audit financial statements do not acknowl-
specific element of this approach is the expansion of the edge such a higher detection risk. Moreover, users and the
auditor report, which informs users of what auditors ac- public have different expectations regarding the assurance
tually do and thereby improves the communication be- level and often assume absolute assurance (e.g. Epstein
tween auditors and users (Hatherly et al. 1991; Koh and and Geiger 1994; Enofe et al. 2013), whereas according to
Woo 1998; Innes et al. 1997; Mansur and Tangl 2018). auditing standards the auditor only has to obtain reasona-
The constructive approach seeks to change audit activi- ble assurance that there are no material misstatements in
ties to meet public concern, i.e. to broaden the responsi- the financial statements (ISA 200.11). Stakeholders also
bilities of auditors in areas like fraud or illegal acts, and to frequently believe that the auditor is responsible for main-
strengthen the perceived independence of auditors. Fur- taining accounting records and preparing financial state-
ther suggestions include structured audit methodologies ments (e.g. Best et al. 2001; Frank et al. 2001). Another
and an enhancement of auditors’ performance (Koh and gap which is often revealed by survey-based research is
Woo 1998; Lee et al. 2009a). related to the soundness of the internal controls (e.g. Fad-
zly and Ahmad 2004; Pourheydari and Abousaiedi 2011).
Providers of capital believe that the auditor is responsible
3. Analysis of prior literature for the soundness of the internal control structure of the
client company, however, the auditor just has to evaluate
We conducted a broad search of the literature with the the effectiveness of internal controls in preventing or de-
keyword „expectation gap“ combined with „audit“ or tecting material misstatements on a timely basis. Further-
„auditor“. I focused on major auditing (IJA, AJPT, MAJ) more, an unqualified audit opinion, which expresses that
and accounting research journals (from the latest journal a company’s financial statements are fairly and appropri-
ranking of the German Academic Association for Busi- ately presented, is often misinterpreted and viewed as a
ness Research1), but also made sure to include more re- guarantee for financial health (e.g. Gbadago 2015; Salehi
mote sources from a broad Google Scholar and Google 2016) and for the going concern of the audited entity (e.g.
search. I then examined the titles and abstracts of promis- Olagunju and Leyira 2012). In addition, the audit benefi-
ing publications. Additionally, I considered relevant stud- ciaries commonly believe that the auditor reviews man-
ies in the bibliographies of the identified publications. agement quality (e.g. Beck 1973; Ali et al. 2015). Finally,
However, I did not systematically search for working research reveals an AEG in conjunction with auditor in-
papers and books or book chapters. Surveys are the pre- dependence in general (e.g. Schleifer and Shockley 1991;
dominant research method and Table 1 provides an exten- Beattie et al. 1998) and the provision of non-audit servic-
sive overview on the survey based research on the AEG. es in particular (e.g. Haniffa and Hudaib 2007). Besides
I found 88 related articles to be relevant. these frequently identified areas of the AEG, survey-based
It is important to note that Table 1 also includes “grey” research reveals other areas from time to time, like for ex-
literature, i.e. papers published in journals not included ample the materiality level (Boterenbrood 2017) – users
in the journal ranking I used. Such research papers are expect a stricter threshold, forecast reliability (Schelluch
marked with a grey background. On average, the scientif- and Gay 2006) – addresses assume that forecasts are relia-
ic quality of such papers is lower, e.g. due to deficiencies ble, but the auditor can only assess their plausibility, audit
in the application of research method, an incomplete de- scope (Gbadago 2015) – society assumes a complete audit
scription of the methodology or the fact that they are just whereas the auditor often works sample-based, or the au-
replication studies. Nevertheless, their inclusion is neces- dit of information outside the financial statements (Bedard
sary to provide a comprehensive overview. et al. 2012) – which is not audited, but perceived as such
From the survey-based AEG research results I can by investors.
conclude that the most frequently identified gaps refer to Concerning the components of the AEG, prior sur-
the prevention, the detection and the disclosure of major vey-based research demonstrates that unreasonable ex-
errors, fraud and illegal acts (e.g. Humphrey et al. 1993; pectations and deficient performance are the key drivers,
Koh 2000). Users often do not recognize that the prima- with deficient performance contributing to a much less-
ry responsibility for the prevention and detection of fraud er extent (e.g. Porter 1993; Porter et al. 2009; Lee et al.
rests with those charged with governance of the entity 2010; Salehi 2016; Masoud 2017).
and the management. The auditor only has a secondary Two response strategies to the AEG are intensively re-
responsibility and has to obtain reasonable assurance that searched. On the one hand, the AEG prevails where users
there is no fraud which leads to material misstatements in have little experience and a lack of accounting and audit-
the financial statements. In addition, the risk that a ma- ing related knowledge (De Martinis et al. 2000). In that re-
terial misstatement due to fraud remains undetected is gard, a defensive approach may be appropriate. Research
greater than the risk that a material misstatement due to findings show that education can reduce, but not eliminate

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8 Reiner Quick: The audit expectation gap

Table 1. Survey research on the AEG.

Author(s) Year Country/ Subjects Objectives/Methodology Key Results
Countries
Beck 1973 Australia shareholders • role that society assigns to • society also expects the provision
auditors of assurance about the company and
• 32 assertions about its officials and a protection against
accountants inefficiencies and managerial
malfunctions
Baron/ Johnson/ 1977 USA large-firm audit • auditor‘s responsibility for • non-auditors indicate a higher level
Searfoss/ Smith partners, small-firm detecting and disclosing of responsibility than auditors
CPAs, bank loan corporate irregularities and • adoption of professional standards
officers, financial illegal acts can narrow the AEG
analysts, corporate
financial managers
Campbell/ 1988 USA auditors, commercial • perceptions about auditor’s • AEG in auditor’s role is not wide
Mutchler lending officers role in the presence of going
concern uncertainties and the
nature of the going-concern
opinion
Jennings/ 1991 USA judges • nine different beliefs, • auditors are expected to actively
Reckers/ Kneer including auditor’s search for fraud
responsibility for fraud • significant differences between
detection auditors and judges concerning the
role and responsibility of auditors
Schleifer/ 1991 USA Big 8 auditors, non- • accountants‘ and financial • support of the fourteen policies
Shockley Big 8 auditors, bank statement users‘ reactions to enhance auditor independence
loan officers, certified to 14 policies designed differs significantly between groups
financial analysts to enhance auditors
independence
Hatherly/ Innes/ 1991 UK MBA students • whether an expanded auditor • expanded auditor report changes
Brown report can close the AEG reader perceptions
• expanded auditor reports heightens
expectations with regard to aspects
not included in the report, i.e. a halo
effect might even widen the AEG
Humphrey/ 1993 UK chartered accountants • principal aspects of the audit • AEG for various aspects of the
Moizer/ Turley in public practice, process and the nature of nature of the audit function and the
corporate finance auditor responsibilities perceived performance of auditors
directors, investment • assessment of the performance • critical components of the AEG
analysts, bank lending of auditors against various include the auditor’s role in relation
officers, financial attributes to fraud detection; the extent of
journalists • perceptions about auditors‘ auditor’s responsibility to third
reporting of information and parties; the nature of balance sheet
the extent of audit work (six valuations; auditors’ independence;
mini case studies) and aspects of the conduct of audit
work
Garcia-Benau/ 1993 UK/Spain chartered accountants • nature of audit expectations • AEGs are observed in both
Humphrey/ in public practice, and perceptions of audit countries between auditors,
Moizer/ Turley corporate financial performance in Spain and the financial directors, and users of
directors, users of UK financial statements, but they are far
financial deposits • a semantic differential testing less extensive in Spain
(including investment instrument containing 19 key
analysts, bankers, and auditing activity constructs,
financial journalists) with 62 questions on the role
and nature of auditing and the
performance of auditors
Porter 1993 New Zealand financial community • 30 suggested duties of the • components of the AEG: half
(e.g. auditors, officers auditor (50 %) is attributable to deficient
of public companies, standards, 34 % results from society
financial analysts, holding unreasonable expectations
auditing academics), of auditors, and 16 % derives from
general public perceived sub-standard performance
(such as lawyers, by auditors
financial journalists,
and members of the
general public)

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 9

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Gloeck/ De Jager 1993 South Africa auditors, company • perceptions and opinions of • AEG focuses on the lack of
directors and financially knowledgeable independence and objectivity of
chairpersons, internal persons regarding the audit auditors, uncertainties regarding
auditors, brokers, bank function compared to those of the role of the auditor; and the
managers, accountants, auditors dissatisfaction with the compulsory
others • focus point of the local AEG audit of small owner-managed
against the background of the companies
international scenario
Lowe 1994 USA judges, auditors • judicial and auditor attitudes • large divergence in perceptions
toward the auditing profession between the two groups
• 8 questions on audit
knowledge, the auditor’s role,
and the general attitude toward
the profession
Epstein/ Geiger 1994 USA investors • level of assurance for • 47 % (71 %) wanted absolute
detecting material assurance that financial statements
misstatements as a result of are free of material misstatements
error and as a result of fraud due to errors (due to fraud)
Monroe/ Woodliff 1994 Australia auditors, accountants, • impact of a change in the • AEG between auditors and user
directors, creditors, wording of the auditor report groups confirmed
shareholders, students • 48 bipolar phrases about • modified wording of the auditor
relative responsibilities report eliminates some differences,
of auditors, preparers of but also creates new AEGs
financial reports, reliability
of the underlying financial
information, evaluation of the
future prospects of the firm
Gramling/ 1996 USA students, auditors • auditing and the auditing • although the perceptions
Schatzberg/ process regarding some components of
Wallace • the auditor’s role with respect the audit process and the roles and
to audit clients and audited responsibilities of auditors did
financial statements change after students completed
• parties to whom auditors an auditing course, significant
should be responsible differences in perceptions still exist
• prohibitions and regulations of between professional auditors and
an audit firm students
• performance attributes of
auditing
• likely actions to be taken
by auditors in specific
circumstances
Pierce/ 1996 Ireland students • user misunderstanding AEG • significant reduction in all elements
Kilcommins including four elements: of the misunderstanding AEG for
duties, ethical and legislative those groups who had studied either
framework, liability, and a module or a course in auditing
auditor report during the period
• impact of education on the
misunderstanding AEG
Innes/ Brown/ 1997 UK auditors, MBA • impact of an expanded auditor • existence of an AEG
Hatherly students report on the AEG • expanded auditor report reduces
• 18 dimensions of audit AEG and did not create new AEG
attributes • in some cases perceptions are
moved away from those of auditors
by expansion
Beattie/ Brandt/ 1998 UK financial journalists • views on auditor independence • perceptions of auditor independence
Fearnley are a fundamental part of AEG
• regulatory changes have reduced the
AEG, although problems still exists
in the area of non-audit services
• most significant threat to
independence is economic and
personal pressure on the partner as
an individual, an area difficult to
regulate

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10 Reiner Quick: The audit expectation gap

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
De Martinis/ Kim/ 2000 Singapore auditors, preparers, • extent of the AEG with • AEG prevails where respondents
Aw users (e.g. financial regard to expectations have relatively little business
controllers, financial/ and perceptions about the work experience and no university
credit analyst, duties and responsibilities qualifications
lawyers, bankers, of auditors, including those • AEG is not affected or constrained
company directors, tax related to fraud prevention and by political, legal, social, or
consultants) detection economic factors
Koh 2000 Singapore auditors, managers • existence of an AEG with • non-auditors place greater demands
respect to audit objectives on audits and auditors
• list of 13 possible audit • non-auditors expect auditors to
objectives detect and prevent major errors,
fraud and illegal acts and to
guarantee the accuracy of financial
reports, and to satisfy tax and other
government authorities
McEnroe/ 2001 USA audit partners, • auditors’ responsibilities • existence of an AEG
Martens investors involving various dimensions • investors have higher expectations
of the attest function, i.e. for various facets and/or assurances
mainly items of the auditor of the audit than auditors
report
Best/ Buckby/ Tan 2001 Singapore auditors, bankers, • messages communicated by • evidence of a wide AEG,
investors (general the short-form audit report in particularly in the areas of auditor
public, financial Singapore responsibility for fraud prevention
analysts, brokers) and detection and maintenance of
accounting records, the freedom
of the entity from fraud and the
exertion of auditor judgment in the
selection of audit procedures
Frank/ Lowe/ 2001 USA auditors, jurors, • eight questions categorized • large divergence in perceptions
Smith students into three groups: (1) audit among group
knowledge; (2) the auditor‘s • perceptions from jurors are
role; and (3) general attitudes different, e.g. regarding
toward the profession managements‘ and auditors’
responsibilities for the financial
statements or auditor’s role in fraud
detection
Leung/ Chau 2001 Hong Kong bankers, auditors • whether an expanded auditor • expanded auditor report reduces
report can close the AEG perceptual differences on
dimensions addressed in the report,
but could lead to a larger AEG in
the long run
Manson/ Zaman 2001 UK auditors, financial • whether an expanded auditor • expansions are successful with
directors, investment report can align the views of regard to issues dealt with in the
analysts, corporate auditors, preparers and users expanded auditor report
bankers
Dewing/ Russel 2002 UK fund managers • perceptions of the definition of • awareness of AEG and concern
the AEG, its constituents, and about the scope and responsibilities
the extent to which the AEG of the auditor, and the monitoring of
might be narrowed by audit auditor‘s work, and agreement on
regulation the potential of increased regulation
to narrow the AEG
• fund managers who were not
qualified accountants were
particularly concerned that auditors
were not perceived as independent
• establishment of an Accountancy
Foundation should provide greater
independence to the investigation
and disciplinary processes
Fadzly/ Ahmad 2004 Malaysia auditors, investors, • opinions and beliefs about the • results indicate wide AEGs and
brokers, bankers audit functions misconceptions about audit
• 17 semantic differential belief • AEGs are mainly related to the
statements grouped into responsibilities concerning the
three factors: responsibility, preparation of financial statements,
reliability, and usefulness internal control, accounting records,
and fraud

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 11

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Porter/ Gowthorpe 2004 UK/New auditors, auditees, • structure, composition and • extent of AEG in UK and NZ
Zealand audit beneficiaries extent of the AEG similar, but AEG’s components
from the financial • identification and tentative differ (reasonableness gap main UK
community, audit explanation differences in the driver; deficient standards gap main
beneficiaries from AEGs in UK and NZ, and NZ driver)
outside the financial from 1989 and 1999 • AEG narrowed over time
community • 51 actual and potential
responsibilities of auditors
Lin/ Chen 2004 China audit beneficiaries • rise of the AEG and related • groups agree that the audit function
(e.g., investors, auditing issues contextual potentially enhances the truthfulness
creditors, government to the business and auditing and reliability of financial
officials, business environment in China statements and play a positive role
management, and in the Chinese economy
academics), auditors • rising AEG with respect to audit
objectives, auditor’s obligation to
detect frauds, auditor independence,
third-party liability of auditors,
and the impact of government
sponsorship on the credibility of
audit services
Specht/ Sandlin 2004 USA auditors • appropriateness and efficacy of • scepticism among auditors
fraud renouncement regarding its effectiveness in
reducing the AEG
Alleyne/ Howard 2005 Barbados auditors and users • auditors’ responsibility for • AEG is wide, as auditors felt
uncovering fraud, the nature that the detection of fraud is
and extent of fraud management’s responsibility, while
users and management disagreed
Dixon/ 2006 Egypt auditors, investors, • AEG between auditors and • wide AEG in the areas of auditor
Woodhead/ bankers financial statement users responsibilities for fraud prevention,
Sohliman • semantic differential belief maintenance of accounting records,
statements grouped into and auditor judgment in the
three factors: responsibility, selection of audit procedures
reliability, and usefulness • smaller AEG concerning the
reliability of audits and audited
financial statements, and the
usefulness of audits
Schelluch/ Gay 2006 Australia company secretaries/ • messages communicated • significant differences in beliefs
accountants, through auditor reports between auditors, users and
shareholders, auditors on prospective financial preparers of prospective financial
information information, concerning forecast
• 47 unique bipolar adjectival reliability and the role and
statements responsibilities of auditors and
management
• auditors believe that forecasts
are more reliable than users or
preparers, and that they have a
higher level of responsibility and
accountability than is attributed to
them by users or preparers
• beliefs were affected by the type of
auditor report (positive vs. negative)
Sidani 2007 Lebanon accounting and • existence of an AEG • significant reasonableness gap
non-accounting • 9 questions covering aspects • AEG concerning the understanding
professionals of the AEG of the audit profession
• significant difference in perceptions
of the role of the auditor with
respect to fraud detection
Haniffa/ Hudaib 2007 Saudi Arabia auditors (large and • perceptions about audit • AEG concerning responsibilities
small), financial performance of auditors arising from legal pronouncements,
directors, credit • impact of the business responsibilities related to detecting
managers, investment and social environment on and reporting fraud, and provision
analysts/funds the perceptions of audit of non-audit services
managers, shareholders performance • performance gap arises from four
(substantial and factors in the auditing environment:
non-substantial), licensing policy, recruitment
representatives from process, political and legal
governmental bodies structure, and dominant societal
values

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12 Reiner Quick: The audit expectation gap

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Lee/ Gloeck/ 2007 Malaysia auditors, auditees • existence and nature of an • auditees and audit beneficiaries
Palaniappan (bankers, investors, AEG placed much higher expectations on
brokers, general • 48 duties of the auditor the auditors’ duties than auditors
public), audit covered in 34 questions • unreasonable expectations by users;
beneficiaries (company deficient standards of auditing; and
directors, accountants) deficient performance of auditors
Lee/ Ali 2008 Malaysia auditors, corporate • knowledge of the auditors • existence of knowledge gap and
managers and corporate managers of the deficient performance gap
auditors’ duties
• perceived performance of
auditors in relation to these
required duties
• 26 items related to the legal
requirements of auditors
Saha/ Baruah 2008 India chief finance officers, • levels of expectation • significant differences between
chartered accountants difference auditors (CAs in practice) and other
in practice, bankers, • series of statements of audit user groups in their views and
financial journalists assertions designed to elicit opinions as to the precise nature of
opinion on the role and nature auditing and the work that auditors
of auditing perform
• AEG is an outcome of a variety of
aspects such as the nature of the
audit process, the audit function, the
constituent boundaries surrounding
the audit and the performance of the
auditors
• the AEG is not a consequence of a
general negative attitude toward the
profession
• views of society and users of
auditor reports about the intensity of
audit work not totally irrational
Salehi/ Azary 2008 Iran auditors, bankers • AEG in auditor’s • significant AEG in areas of auditor’s
responsibility between responsibilities to detection of fraud
auditors and bankers and illegal acts
• five statements about
importance of auditing and
financial reports, 13 statements
on audit responsibilities
regarding fraud and illegal
acts
Mahadevaswamy/ 2008 India, Iran auditors, investors • existence of an AEG and • wide AEG in both countries and
Salehi country comparison little differences
• seven-section questionnaire
Kasim/ Hanafi 2008 Malaysia auditors, accountants, • existence of an AEG • existence of an AEG
accounting educators • six independent variables:
auditors and audit process,
auditors’ roles with respect to
audited financial statements,
auditors’ roles with respect to
audited client, parties to whom
auditors should be responsible,
possible prohibition and
regulation on audit firm, and
performance attributes of
auditors
Hassink/ Bollen/ 2009 Netherlands business managers • AEG concerning the role of • substantial AEG in the context
Meuwissen/ De (CFOs, financial the auditor in corporate fraud of fraud, both with respect to the
Vries controllers, cases auditor’s performance as well as
supervisory board • several statements about the the auditor’s formal obligations
members), bankers, definition and scope of fraud standards
auditors and auditors’ responsibilities • compared to bankers, business
concerning fraud among audit managers are less inclined to judge
clients auditors’ performance of existing
duties as inadequate

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 13

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Salehi/ Mansoury/ 2009 Iran investors, chartered • auditor independence as a key • significant difference regarding
Azary accountants element of the AEG the actual level of economic
• 9 questions regarding to the dependence of the auditor from the
level of audit independence client
• auditors believe that external factors
are more relevant for independence
than internal factors, while investors
believe the opposite
Siddiqui/ Nasreen/ 2009 Bangladesh auditors, bankers, • existence of an AEG • significant AEG
Choudhury-Lema students • 12 questions on auditor • audit education significantly reduces
responsibility, audit reliability, the AEG, especially in the area of
and decision usefulness of audit reliability
audited financial statements • the introduction of accounting
• the effect of audit education in scandal cases in the auditing
reducing the AEG curricula creates some unreasonable
expectations regarding audit
responsibility
Onumah/ 2009 Ghana auditors, company • existence of an AEG and • different understanding of the
Simpson/ accountants, factors influencing it work of auditors, different
Babonyire shareholders, bank perceptions with regard to auditors’
loan officers, lawyers, responsibility for detecting and
general public reporting fraud and irregularities,
users expect a higher level of
assurance
• views of company accountants are
close to those of auditors
Noghondari/ 2009 Iran bank loan officers • effect of accounting • existence of a large AEG
Foong knowledge and experience on • accounting knowledge mitigates
the AEG the extent of the AEG, but not
accounting experience
• negative relationship between the
AEG and loan decision performance
Porter/ Ó 2009 UK/New auditors, auditees, • structure, composition and • structure and composition of the
hÓgartaigh/ Zealand financial community extent of the AEG AEG are similar in both countries
Baskerville audit beneficiaries, • differences between the • AEG is significantly wider in NZ
non-financial countries and over time • in UK the AEG narrowed
community audit • list of 55 actual and potential substantially over time, in NZ it
beneficiaries responsibilities of auditors widened slightly
• deficient standards and
reasonableness components
contribute most
Lee/ Ali/ Gloeck/ 2010 Thailand auditors, financial • existence and nature of an • AEG exists with respect to 18 duties
Yap / Ng / analysts, brokers, AEG • unreasonable expectations and
Boonyanet managers, company • 48 duties of the auditor deficient standards are the more
accountants covered in 34 questions relevant components
Adeyemi/ Uadiale 2011 Nigeria auditors, stock brokers, • existence of an AEG and the • different perceptions on the
investors, company perceptions of user groups on existence of an AEG, existing duties
accountants, managers its existence and responsibilities of auditors, and
the usefulness of the auditor report
for investment decisions
Adeyemi/ 2011 Nigeria auditors, bankers, • existence and nature of an • wide AEG in the areas of auditors’
Olowookere investors, AEG responsibility for fraud prevention
stockbrokers, students, and detection
company accountants
Pourheydari/ 2011 Iran auditors, investors, • perceptions on the role of • AEG exists in the areas of auditor
Abousaiedi brokers, bankers auditors responsibility for fraud detection,
• existence of an AEG soundness of the internal controls,
• 17 semantic differential belief and preparation of the financial
statements on responsibility, statements
reliability, and decision
usefulness

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14 Reiner Quick: The audit expectation gap

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Bedard/ Sutton/ 2012 USA professional investors, • whether investors understand • professionals are more likely than
Arnold/ Phillips non-professional that information outside the non-professionals to correctly
investors financial statements is not identify which financial statement
audited and differentiate the components are audited
level of assurance • many investors in both groups
believe that information outside of
the financial statements is audited
when in fact it is not
• demand for audits of information
that is currently unaudited
Porter/ Ó 2012a UK/New auditors, auditees, • differences in the extent, • similarity in the responsibilities
hÓgartaigh/ Zealand financial and non- structure and composition of comprising the components of the
Baskerville financial community the AEG in NZ and UK AEG in the two countries
audit beneficiaries • integrated list of 55 actual and • extent of AEG 40 % wider in NZ
potential responsibilities of than in UK
auditors
Gunathilaka 2012 Sri Lanka auditors, business • AEG in terms of auditor • significant perceptual differences
managers, investors responsibility, reliability of in the areas of responsibility for
audit function and usefulness frauds detection and prevention;
of audit preparation and presentation of
• 20 statements on auditor financial statements; assurance on
responsibilities, reliability and financial statements; objectivity of
usefulness of audit service auditors; and auditor independence
• auditors place a lesser degree of
reliability on audit than the society
• accounting education significantly
reduces AEG
Eny/ Ifurueze/ 2012 Nigeria auditors, accountants • existence and components of • different expectations regarding the
Enyi in business, bankers, an AEG role of audits, the reliance upon an
investors unqualified audit opinion, and the
independence of auditors
Oseni/ Ehimi 2012 Nigeria auditors, investors, • existence, level and nature of • wide AEG regarding auditor duties
stockbrokers, an AEG and responsibilities, in particular
managers concerning fraud prevention and
detection
Olagunju/ Leyira 2012 Nigeria auditors, users • existence of an AEG • misunderstanding gap
• misperceptions relate e.g. to going
concern, fraud detection and
independence
Saeidi 2012 Iran auditors, financial • existence of an AEG • financial managers and investors
managers, investors concerning auditors’ have higher expectations than
responsibilities for preventing auditors with respect to fraud
and detecting fraud detection and prevention
• 34 statements on fraud
definition, auditors’
responsibility for detecting
fraud, auditors’ responsibility
for further investigating
suspicions of fraud, and
reporting detected fraud
Kamau 2013 Kenia auditors • existence of an AEG • AEG exists
• auditor efforts, lack of auditor skills
to detect frauds, and little society/
public knowledge significantly
influence the AEG
• lack of structured audit
methodologies, lack of auditor
independence and narrower audit
scope do not
Olowookere/ 2013 Nigeria auditors, bankers, • existence of an AEG • AEG exists
Soyemi investors • 13 semantic differential belief • expectations of auditors and users
statements grouped into differ with regard to auditors’ duty
three factors: responsibility, for fraud detection and prevention
reliability, and decision and with regard to the assurance
usefulness level

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 15

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Enofe/ Mgbame/ 2013 Nigeria auditors, managers, • reasonableness AEG • existing AEG regarding assurance
Aronmwan/ investors, public • questionnaire with 13 level, financial report preparation,
Ogbeide questions fraud prevention and detection,
auditors’ responsibilities to
shareholders
Okafor/ Otalor 2013 Nigeria accounting students • role of the auditing profession • many of the public expectations are
and teachers, in narrowing the AEG unreasonable
accountants in
practice, investing
public
Tanko/ Dabo 2013 Nigeria chartered accountants • whether the auditor report can • AEG exists
in practice, chartered reduce or even eliminate the • improved auditor report is necessary
accountants not in AEG
practice, bankers, • 61 construct question items
financial directors,
credit managers,
investment analysts,
fund managers,
accountancy students,
shareholders,
government employees
Agyei/ Kusi Aye/ 2013 Ghana auditors, stockbrokers • existence of an AEG • AEG concerning auditor
Owusu-Yeboah responsibility for fraud detection
and prevention, and the soundness
of the internal control structure of
the auditee
Devi/Devi 2014 Pakistan bankers, investors • variables that cause an AEG • AEG is caused by reliability and
• variables are audit reliability, usefulness of audited financial
audit responsibility and statement
usefulness of audited financial • reason behind AEG is lack of
statements proper education and understanding
• 16 semantic differential belief regarding audit standards and audit
statements practices so it will be reduced by
giving adequate knowledge and
awareness of audit to the users of
financial statements
Ruhnke/ Schmidt 2014 Germany auditors, academic • causes of the AEG • public has exaggerated expectations
faculty, financial • impact of proposed changes of auditors’ responsibilities under
journalists, investors, to the current statutory audit current standards
bank representatives, regime • other causes of the AEG:
management • key issues: compliance with public’s difficulty in assessing
representatives, financial reporting standards, the performance of auditors,
supervisory board level of assurance, going deficiencies in auditors’
members concern, fraud, management performance
audit • auditors are not fully aware of their
responsibilities
• increased information content of
auditor report is expected to narrow
the AEG
• mandatory rotation and ban on non-
audit services may reduce AEG to a
lesser extent
Rien 2014 Indonesia bankers, accountant • existence of an AEG • evidence of AEG, in particular
educators • 16 semantic differential belief regarding auditor responsibility for
statements fraud prevention and detection and
maintaining accounting records
Idowu/ 2014 Nigeria accounting students • impact of audit education on • knowledge and exposure of
Oluwatoyin an AEG accounting students reduce the
• questionnaire with 10 existing AEG
statements • misperceptions with regard to e.g.
discovering fraud and disclosing
illegal acts
Ogbonna/ Appah 2014 Nigeria representatives of • AEG variables and accounting • variations in earnings per share
firms performance indicators and return on capital employed
• relationship between an AEG are attributable to variations in
and firms’ performance error and fraud detection and the
expressed audit opinion

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16 Reiner Quick: The audit expectation gap

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Onulaka 2014 Nigeria auditors, fund • perceptions on the existence of • wide AEG in the areas of auditors’
managers, the AEG and on the usefulness responsibility for fraud prevention
stockbrokers, financial of the audit process and detection
analysts • whether the AEG has an effect • AEG has a negative impact on the
on the volume of transactions transaction volume
on capital markets
Onulaka 2015 Nigeria auditors, accountants • relationship between the self- • strong relationship between self-
not in public regulation of the accounting regulation and AEG
practice, investors, and auditing profession and an • establishment of an independent
stockbrokers, financial AEG public oversight board has a
analysts • whether the establishment positive impact on AEG
of the Financial Reporting • deficient standard gap is not only
Council affects an AEG associated with self-regulation
• whether self-regulation but also with other legal
contributes to a deficient pronouncements
standard gap
• list of semantic differential
belief statements
Köse/ Erdoğan 2015 Turkey auditors, bankers, • existence of an AEG between • existence of an AEG
investment analysts auditors and the beneficiaries• expectations of users exceed the
of the audit services responsibilities and the role of
• questionnaire with statements auditors
about the role of audit and • there is both the reasonableness gap
auditors and the responsibility and the performance gap
of auditors • unreasonable expectations decrease
with experience
• as education level increases the
AEG diminishes
Gbadago 2015 Ghana final year MBA • level of knowledge of students • existence of an AEG, e.g. regarding
accounting students on auditors’ responsibilities assurance level, scope of the audit
of transactions, auditor report
guarantees financial soundness
Litjens/ Van 2015 Netherlands bankers, preparers, • whether the AEG may be • bankers have the largest AEG
Buuren/ auditors explained and reduced by followed by managers and auditors
Vergoossen frequently mentioned user • bankers require additional
information needs and changes information, management is
in the auditor report reluctant to let the auditor provide
sensitive information and auditors
try to minimize their risks
• impact of the frequently proposed
actions on the AEG is limited and
differs significantly between groups
• only information about the audit
process and the continuity of the
audited entity may reduce AEG of
all groups
Salifu/ Mahama 2015 Ghana auditors, bankers, • existence of an AEG • wide AEG with respect to detecting
students of the and preventing fraud and errors,
Institute of Chartered the soundness of the internal
Accountants control structure, the exercise of
professional judgment, the level of
assurance, and that an unqualified
auditor report means that the entity
is well managed
Füredi-Fülöp 2015 Hungary finance and accounting • causes and typical • AEG stems from the combination
managers and compositions of an AEG of the deficient performance
accountancy service • auditors’ functions, tasks, of auditors, deficiencies in
providers, bankers and responsibilities and audit standards, unreasonable
financial consultants, independence expectations and false
auditors interpretations of audit functions
Ali/ Aamir/ Raza 2015 Pakistan auditors, accountants, • existence of an AEG • AEG exists, e.g. regarding
/ Naqvi accounting educators management efficiency, fraud
detection, internal control quality
Bazrafshan 2016 Iran auditors, university • AEG concerning fraud risk • significant difference in evaluating
students indicators importance of fraud risk indicators
• questionnaire with 61 fraud between groups
risk indicators

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 17

Author(s) Year Country/ Subjects Objectives/Methodology Key Results

Countries
Salehi 2016 Iran certified accountants, • existence and extent of an • AEGs regarding measuring financial
professional investors AEG performance (e.g. assurance
• perceptions on actual and on financial health), financial
expected levels of audit control (e.g. preventing fraud
effectiveness and error), finding misstatements
(e.g. detecting illegal acts by
management), mainly driven by
reasonableness gap
DiGabriele 2017 USA accounting academics, • existence of an AEG with • significant differences in the
accounting regard to the financial expectations between users and
practitioners, users of evaluation fitness of auditors practitioners and between users and
financial statements academics
Füredi-Fülöp 2017 Hungary preparers, analysts, • causes and typical composition • AEG stems from the combination
beneficiaries of of an AEG of the deficient performance
financial statements • appropriate combinations of of auditors, deficiencies in
solutions for narrowing the audit standards, unreasonable
AEG expectations and false
interpretations of audit functions
• users expect greater responsibilities
of auditors for fraud prevention and
detection
• enhanced auditor reports could
narrow AEG
• users are not completely satisfied
with auditor independence
Masoud 2017 Libya auditors, auditees, • existence and extent of an • existence of an AEG
audit beneficiaries AEG • deficient standards account for 49 %,
deficient performance for 15 % and
unreasonable expectations for 36 %
Boterenbrood 2017 Netherlands auditors, preparers • AEG measured by total • preparers assume lower materiality
materiality levels than auditors
Shikdar/ Faruk/ 2018 Bangladesh university faculty • variables that reduce the audit • the identified variables reduce the
Chowdhury members of AEG AEG significantly
accounting and • variables include e.g. audit
auditing, auditors, education, expanded auditor
students of accounting reports, structured audit
bodies methodology, external
monitoring, improved
internal quality control, audit
committees
Toumeh/ Yahya/ 2018 Jordan auditors • factors that affect an AEG and • lack of awareness (unreasonable
Siam solutions that may narrow it to expectations) amongst users of
a least possible extent financial statements has greatest
impact on increasing AEG
• uncertainty in auditor’s
independence has less impact on
increasing AEG in the audit process
• strengthening of auditor
independence and improving
supervision of auditing profession
are suggested
Alawi/ Wadi/ 2018 Bahrain (unclear) • determinants of an AEG • the level of the AEG is affected
Kukreja • potential determinants are the by auditor efforts, the number of
efforts of auditors, the skills users’ needs, the possessed skills of
of auditors, the knowledge auditors, and (to a lower extent) the
of the public about the audit knowledge of society
profession and the users’ needs
from auditors
Azagaku/ Aku 2018 Nigeria customers, investors, • existence of an AEG • existence of an AEG, e.g. with
employees, managers, regard to auditor responsibility
general public toward fraud
Hussain/ Khalid/ 2018 Pakistan shareholders, directors • major factors causing the AEG • failure to detect errors, fraud and
Ashraf illegal acts are main drivers
Fulop/ Tiron- 2019 Romania students, used as • whether audit education has an • audit education is impactful on the
Tudor/ Cordos proxies for different effect on the existence of the audit reasonableness gap
categories of AEG
stakeholders

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18 Reiner Quick: The audit expectation gap

the AEG (e.g. Gramling et al. 1996; Pierce and Kilcom- tions of UK fund managers as to the definition of the
mins 1996; Siddiqui et al. 2009). On the other hand, ex- AEG, its constituents, and the extent to which the gap
panded auditor reports are a frequently researched means. might be narrowed by audit regulation. Fund managers
Such research finds that the expansion of auditor reports are aware of the AEG and are particularly concerned
potentially narrows the existing AEG, but could also cause about the scope and responsibilities of the auditor, and
new gaps (e.g. Hatherly et al. 1991; Monroe and Woodliff monitoring of auditors’ work. They perceive a need to
1994; Innes et al. 1997; Leung and Chau 2001; Manson strengthen auditor independence, prefer a more frequent
and Zaman 2001; Litjens et al. 2015). Further strategies rotation of audit engagement partners, and wish to extend
dealt with by survey-based research refer to a constructive the scope and responsibility of auditors in respect of fraud
approach, i.e. regulatory changes (e.g. Beattie et al. 1998), and going concern. The respondents agree that increased
mainly related to the strengthening of auditor independ- regulation offers potential to narrow the AEG, especially
ence (Toumeh et al. 2018), e.g. by a mandatory rotation as regards monitoring and discipline of auditors. A point
of audit firms or a ban of non-audit services (Ruhnke and of criticism is the fact that the authors just consider the
Schmidt 2014), and an improved supervision of the au- perceptions of one stakeholder group. Fund managers
dit profession (Onulaka 2015). Such regulatory changes are above-average informed subjects and less informed
potentially improve audit quality, shift auditors’ duties to- groups might perceive more and larger gaps.
wards society’s expectations, and thereby narrow the AEG. A survey by Porter et al. (2012a) identifies differences
Beyond surveys, a considerable number of experimen- in the AEG in the UK and New Zealand. Participants
tal studies on the AEG exists. They also deal with the two were from the auditor (audit partner and staff), auditee
predominating response strategies. Education may be an (internal auditors, financial directors, chief executives
effective approach to narrow the gap (for Australia: Mon- and nonexecutive directors) and financial (stockbrokers,
roe and Woodliff 1993; for Malaysia: Fadzly and Ahmand financial analysts, bankers involved in corporate lending,
2004; for Nigeria: Ihendinihu and Robert 2014), but a auditing and accounting regulators, auditing academics)
positive effect of a revised or expanded auditor report is and non-financial audit beneficiaries (solicitors, financial
questionable (for the US: Bailey et al. 1983; for the UK journalists, general public) interest groups. The ques-
and New Zealand: Porter et al. 2009; for Germany: Gold tionnaire lists 55 actual and potential responsibilities of
et al. 2012). Other experimental findings, apart from the auditors identified by reference to law, stock exchange
Australian study by Gay et al. (1998) all from the US, listing rules, professional promulgations, auditing liter-
are that there is a lack of consensus with regard to the ature and leading audit practitioners. For each, the re-
materiality threshold (Jennings et al. 1987), that ambigu- spondents had to state whether the responsibility is an
ous language contributes to the AEG (Kinney and Nelson existing one of auditors, if so, how well it is performed,
1996), that predictions of the attribution theory apply to and whether the responsibility should be a responsibility
the AEG (Arrington et al. 1983), and that users perceive of auditors. The results show that the composition and
that review reports provide less assurance than auditor re- structure of the AEG are broadly similar in both coun-
ports (Gay et al. 1998). Finally, studies by Anderson et al. tries. The deficient standards and reasonable components
(1993; 1998) investigate perception differences between contribute most to the AEG in UK, as well as in New
auditors and judges. The latter present an important user Zealand. Unreasonable expectations include e.g. a guar-
group, particularly in the US where auditors are exposed antee that the client is financially sound, the detection
to high litigation risk. and disclosure of minor thefts, detection and disclosure
Interview-based research on the AEG shows that an of illegal acts, examination and reporting regarding the
AEG exists (Chowdhury and Innes 1998 for Bangladesh), client’s non-financial controls, or examination and re-
reveals causes for the AEG (Lee et al. 2009b for Malay- porting of the client’s procedures for identifying finan-
sia), demonstrates misperceptions on the concept of ma- cial and operational risks. However, the AEG was nearly
teriality (Houghton et al. 2011 for Australia), and finds 40 % wider in New Zealand. The authors suggest that
that the adoption of an effective corporate accountability this difference may be traced to greater awareness of
system could narrow the gap (Shbeilat et al. 2017 for Jor- audit issues and more stringent monitoring of the au-
dan). A US content analysis by Cohen et al. (2017) sug- diting profession in the UK. Porter et al. (2012b) also
gests that the media causes unreasonable expectations. investigate changes in the AEG. In the UK, widespread
discussion of the environmental developments and re-
lated audit issues, along with more stringent monitoring
4. Discussion of selected papers of auditors’ performance, resulted in a narrowing of the
reasonableness and deficient performance gaps. In New
In the following, more detailed information on selected Zealand, lacking these factors, these gaps widened.
articles is provided. Quality and reputation of the journal, Additionally, changes to auditing standards resulted in
recency, and relevance from a European perspective are some ‘reasonably expected’ responsibilities becoming
used as selection criteria. actual responsibilities of auditors and, in both countries,
Dewing and Russell (2002) present the results of a the deficient standards gap narrowed. An outstanding
postal questionnaire survey. They describe the percep- advantage of this study is the wide range of issues as

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 19

well as of stakeholder groups. Unfortunately, however, that material fraud should be reported to a central govern-
the researchers do not fully differentiate their findings mental reporting agency, whereas standards require such
between the different stakeholder groups. reporting only if the audit client refuses to redress fraud.
Based on a questionnaire survey conducted in Ger- Business managers also think auditors should report ma-
many, Ruhnke and Schmidt (2014) analyze causes of the terial fraud to society by including it in the auditor report,
AEG and the impact of changes to the statutory audit re- while auditors themselves are neutral on this issue. Final-
gime. The participants cover an extensive bandwidth of ly, there is moderate agreement among business managers
subject groups (auditors, academics, financial journal- that auditors should resign if they discover non-redressed
ists, investors, bankers, directors and supervisory board employee fraud, and all sample groups are in favor of
members). The authors reveal exaggerated public expec- such a reaction in case of management fraud. With re-
tations, find public’s difficulties in assessing auditor per- gard to the reasonableness gap, business managers have
formance, but also deficiencies in auditor performance, the unreasonable expectation that auditors should detect
and demonstrate that auditors are not fully aware of their material fraud, even in the case of collusion, and non-ma-
responsibilities. In particular, the public is unaware of the terial fraud. In comparison to bankers, business managers
level of assurance provided by the auditor. Surprisingly, are less inclined to judge auditor performance of existing
the majority of participants disagrees with the proposition duties as inadequate and see fewer points where auditing
that identifying all instances of fraud is auditor’s respon- standards should be amended. This study confirms very
sibility. The results also indicate that the public has an ex- clearly that auditor’s responsibility regarding fraud is one
aggerated expectation of auditors performing a manage- of the key areas of the AEG.
ment audit. Auditors are not completely familiar with the In Australia, Houghton et al. (2011) use focus groups
concept of reasonable assurance. A substantial proportion and conduct face-to-face office interviews with stake-
of external stakeholders believe a lack of independence holders (users of auditor reports, purchasers of audit ser-
and the limited information content of the auditor report vices, auditors, auditing standard setters, regulators of
to be sources of the AEG. Furthermore, the authors show the market) in the market for audit services. They focus
that expanding the auditor reports by information on the on the issue of materiality judgments and the need for
achieved assurance level and the sources of material esti- public disclosure of materiality thresholds. Stakeholders
mation uncertainties can narrow the gap, whereas the im- perceive that the concept of materiality is not well un-
pact of a mandatory rotation of audit firms, a prohibition derstood. There is also agreement that more education is
of non-audit services and joint audits is only marginal. needed to improve understanding of the concept, espe-
This study’s findings indicate that the European regu- cially in relation to qualitative materiality and to nonpro-
lator might have been wrong when further limiting the fessional investors. Some interviewees suggest turning
provision of non-audit services, introducing mandatory to the auditing standards for this education process. With
rotation of audit firms, and fostering joint audits. How- respect to undergraduate auditing education, the authors
ever, these results regarding the effect of such regulatory recommend an earlier introduction of a unit on auditing
changes have to be interpreted with caution, because per- and that the concept of materiality is brought to the ear-
ceptions might be different after the implementation of ly stages of the course outline. There are mixed views
related amendments. as to whether materiality for the financial statements as
Hassink et al. (2009) deal with the AEG concerning a whole should be disclosed, with some feeling that it
the role of auditors in corporate fraud cases. They sur- might be detrimental or dangerous. Interviews provide a
vey the perceptions of business managers (CFOs, finan- source of data richness as the researcher is able to enquire
cial controllers, supervisory board members), bankers, further into the complexity of issues. Such personal inter-
and auditors in the Netherlands. The authors find clear action, however, restricts the number of interviews that
evidence of a substantial AEG in the context of fraud, can be conducted within a reasonable time frame. As a
both with respect to auditor performance as well as the consequence, the expressed opinions may not be repre-
auditor’s formal obligations. Regarding a performance sentative.
gap, this study finds that business managers and bank- An expanded auditor report is an attempt to educate
ers consider fraud detection significantly stronger a duty users and to clarify certain matters pertaining to the au-
of the auditor. Business managers also have higher ex- dit function. Manson and Zaman (2001) investigate the
pectations concerning a further investigation of fraud extent to which an expansion of the report can align the
suspicion. There is an inverse gap related to the situation views of audit partners, finance directors as preparers and
when the audit client refuses to redress material fraud, investment analysts and corporate bankers as users about
i.e. auditors agree more than stakeholders that they then issues communicated by the auditor report, and the extent
should resign. In contrast, business managers were less to which these groups consider that it would be useful
sure than auditors that the latter are sufficiently independ- for additional matters to be reported upon by the auditor.
ent to successfully urge audit clients to redress detected Their study is based on a questionnaire survey. UK ex-
fraud. Concerning the standards gap, the authors find that pansions from 1993 had been successful in clarifying the
business managers believe more than auditors that even purpose of the audit and the respective responsibilities of
non-material fraud should be reported. Both groups argue auditors and directors. Nevertheless, users do not consid-

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20 Reiner Quick: The audit expectation gap

er the wording to clearly indicate auditors’ responsibility The AEG exists for a long time and numerous regula-
for the detection of fraud and illegal acts. Additionally, tory efforts to narrow it were only partially successful. Re-
the auditor report needs to provide more information search findings suggest that education might be a promis-
about the findings of the audit. Finally, users are particu- ing approach. However, the possibilities to implement this
larly keen for the auditors to include statements on the proposal are limited, because it seems to be impossible to
going concern status of the client, the extent to which the educate millions of stakeholders. Another promising ave-
auditors have examined and relied upon the internal con- nue is the expanded auditor report. The auditor report is the
trols, and the materiality level they used. primary means of communication between the auditor and
To test the effectiveness of additional information in users of financial statements. It is the objective of expan-
the auditor report, provided by the revised ISA 700 which sions of the auditor report like the disclosure of key audit
came into force in 2007, Gold et al. (2012) conducted a matters (KAM) to increase both its information content and
web-based experiment with German auditors and financial its transparency, thereby increasing its information value
statement users as participants. They read a summary of and leading to the efficiency of capital markets. However,
a firm’s financial statements and an auditor report which the auditor report loses its usefulness if users misunderstand
was either a traditional one or an expanded one with ex- it, and the disclosure of KAMs may then have the opposite
planations of auditor versus management responsibilities effect. It should also be noted that it potentially narrows the
and of the nature, scope and procedures of the audit. The existing gap, e.g. by avoiding unreasonable expectations,
authors find strong evidence for a persistent expectation but could also create new gaps if the information is not ade-
gap with respect to the auditor’s responsibilities. On the quately disclosed and understood. Users may e.g. perceive
other hand, auditors and users reach a reasonable belief auditors to be responsible for the preparation of financial
consensus regarding management’s responsibilities and statements or misinterpret KAMs as qualifications of the
financial statement reliability. Overall, the expansions auditor opinion. Prior experimental and archival research
of the auditor report do not result in a smaller expecta- on KAM analyzes whether the related information is de-
tion gap. Thus, the findings suggest that the audit opinion cision-useful for the providers of capital and often fails to
alone may signal sufficient relevant information to users. find a significant impact (Christensen et al. 2014; Boolaky
A study by Litjens et al. (2015) uses a survey approach and Quick 2016; Gutierrez et al. 2018; Lennox et al. 2019;
with participants from the Netherlands to examine infor- Bédard et al. 2019). KAM disclosure could also impact au-
mation needs regarding their potential effect on narrowing ditor liability, however, the direction is unclear (Brasel et al.
the AEG. Subjects are bankers, preparers and auditors. The 2016; Gimbar et al. 2016; Kachelmeier et al. 2017; Backof
results indicate that bankers require additional information, et al. 2017). With regard to the AEG a study by Kachelmei-
management is reluctant to let the auditor provide sensi- er et al. (2019) is of particular interest. It tests the effects of
tive information and auditors try to minimize their risks. disclosing a KAM, showing that such a disclosure lowers
Bankers consider information regarding the entity, such as user perceptions of audit assurance and responsibility and
breaching covenants, quality of controls, and accounting thus, narrows the AEG. Therefore, it would be of interest
policies, as well as information regarding the audit pro- to further analyze the impact of the revised IAASB auditor
cess, such as audit procedures regarding the going concern report standards on the AEG.
of the entity and applied materiality, important. Moreover, A good example for the constructive approach are the
only information about the audit process with respect to regulatory changes regarding auditors’ responsibility for
continuity and the reporting of errors in the financial state- fraud detection. Historically, the main auditing objective
ments may reduce bankers’ AEG. The AEG of managers was the discovery of defalcations. However, the empha-
may be reduced if information regarding fraud is provided. sis on fraud detection dissipated over time. Regulators
Entity information regarding breaching covenants may re- shifted auditors’ focus away from fraud detection and
duce auditors’ expectation gap. Format changes to the au- determining fairness of the financial statements became
ditor report are not effective. Unfortunately, this study just the focus. However, recurring major fraudulent account-
includes one external stakeholder group, bankers. In par- ing scandals resulted in a public perception of miscon-
ticular, the expectations of investors are not investigated. duct, which in turn caused regulators to increase auditors’
responsibility for fraud detection step by step (Chong
2013). Today, according to ISA 240, the auditor has to
5. Conclusion obtain reasonable assurance that the financial statements
are free from material misstatements, whether caused by
Research on the AEG is comprehensive, exists for almost fraud or error. However, the standard setter allows a high-
50 years, and covers a broad range of countries. This con- er detection risk for fraud-based misstatements.
tradicts assumptions that this research is mainly limited to The auditor only has a secondary responsibility and has
the UK and New Zealand (Porter 2014; Hay 2020). Howev- to obtain reasonable assurance that there is no fraud which
er, most of the prior research is performed in Anglo-Saxon lead to material misstatements in the financial statements.
countries and in emerging/developing countries from Asia In addition, the risk that a material misstatement due to
and Africa, like e.g. Iran and Nigeria. There is still a lack fraud remains undetected is greater than the risk that a ma-
of research with regard to Continental European countries. terial misstatement due to error remains undetected.

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Maandblad voor Accountancy en Bedrijfseconomie 94(1/2): 5–25 21

Prior research reveals that the AEG differs signif- lications having the term AEG in the title or the abstract.
icantly between countries (Garcia-Benau et al. 1993; Furthermore, I only searched for papers written in Eng-
Porter and Gowthorpe 2004; Porter et al. 2009; Porter et lish. Finally, it was not possible to finalize my Google
al. 2012a and 2012b). Consequently, the AEG problem search (approximately 28 million hits for AEG).
cannot be solved solely by actions taken by international Surveys are the predominant research method. They al-
standard-setters. These must be supplemented by nation- low researchers to analyze a broad range of topics. How-
al legislative actions to consider national characteristics. ever, participants can easily identify the research objective
Moreover, what stakeholders expect auditors to achieve which in turn increases the risk for biased responses. There-
varies by subject group (Schleifer and Shockley 1991; fore, future research should more frequently apply exper-
Jennings et al. 1993; Hassink et al. 2009; Litjens et al. imental research approaches. In addition, given that the
2015). Consequently, this causes a grave problem for reg- AEG is a very complex phenomenon, and that the previous
ulators, who have to decide to which stakeholder group qualitative research on the AEG is not only limited but also
they should align legislative actions. mostly very specific, future research projects could use
This literature review is subject to a specific limita- interview techniques. There is also a lack of cross-coun-
tion. Despite an extensive and thorough search, I cannot try studies. Finally, a promising avenue for future might
guarantee completeness. I systematically searched for be investigations regarding the impact of recent regulatory
journal papers but not for working papers and books or changes, like KAM reporting or stricter regulations regard-
book chapters. In addition, my review is limited to pub- ing the provision of non-audit services, on the AEG.

„„ Prof. Dr. R. Quick is professor in auditing at Darmstadt University of Technology/Germany. His research covers
audit quality, auditor independence, provision of non-audit services, auditor rotation, and assurance services.

Note
1. This list can be found online: https://vhbonline.org/vhb4you/vhb-jourqual/vhb-jourqual-3/gesamtliste. The rankings are quite similar to those
from other organizations, like that one from the Australian Business Deans Council.

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