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1. Introduction
“Whatever the
situation, I perceive that shareholders would only look at financial
reporting to be useful in assessing a company’s performance…”
Dato?Hanifah Noordin, President of MIA
and Vice-President of MICG, 1999.
Financial reports are important for shareholders to assess the
performance of a company. Company’s published financial statements
have been the only sources for shareholders for such purpose. In
Malaysia, the Companies Act 1965 stipulates that every company which
is incorporated under the Act is required to have its financial
statements audited annually. This is often referred to as the
statutory audit. Section 174(1) of the Act states that company’s
financial statements are required to be laid before the company in its
annual general meeting. While Section 174(2) of the Act requires an
auditor of a company to report to the members of the company on the
accounts presented at the annual general meeting. Thus, the auditors'
report is being attached in any company’s published annual report. It
contains the auditors' opinion about the true and fair view of the
company’s financial statements which may add credibility to
management's representations in financial statements.
1.1 The Auditors' Report
An auditors' report is
the final product of any audit process that communicates the auditors'
findings to interested users. Auditors' report may differ in
presentation, but in all cases they must inform users of the degree of
correspondence between information contained in the financial
statements and established criteria in their audit procedures.
The form and content of an auditors' report is set out in the AI 700,
entitled “The Auditors' Report on Financial Statements? The standard
stated the basic elements of an auditors' report in paragraph 5,
followed with the details of each element from paragraph 6 onwards.
Standardised language has also been developed for the purpose of
ascertaining the degree to which financial statements conform to
generally accepted accounting principles. For example, AI 700
paragraph 18 states that the terms to be used to express auditors'
opinion are “give a true and fair view?or “present fairly, in all
material respects?
Auditors' report is essential to the audit or other attestation
process because they inform users what the auditor did and the
conclusions reached. From the users' perspective, the report is
considered the primary product of the attestation process.
1.2 The Expectation Gap
Most of the time, financial statements
users consider an auditors' report to be a clean bill of health. Thus,
most users?expectations towards auditors are far more than what it
should be. Expectation gap occurs when there are differences between
what the public expects from the auditor and what the auditor actually
provides.
The research about the audit expectation gap has been extensively
conducted worldwide. The term “audit expectation gap?emerged during
the 1970s in the United States when the American Institute of
Certified Public Accountants (AICPA) set up the Commissions on
Auditors?Responsibilities (Cohen Commission) to consider “whether a
gap exists between what the public expects or needs and what auditors
can and should reasonably expect to accomplish?in 1974. The Cohen
Commission, which reported in 1978, confirmed the existence of an
expectation gap. Following that, more researches have been done all
over the world with the same outcome which agreed with the existence
of expectation gap. Among those studies are Gay et al. (1997) in
Australia; Innes et al. (1997) in the UK; Hǿjskov (1998) in Denmark;
Frank et al. (2001) in the US and Best et al. (2001) in Singapore.
1.3 Objectives of Study
A significant expectation gap exists in
Australia (Gay at el., 1997); an expectation gap exists between
auditor and users (Innes et al., 1997). One doubts if the same
situation occurs in Malaysia?
In order to reduce the expectation gap, improvement in the wording of
the report is suggested to ensure the level of assurance provided and
extents of work performed are clearly communicated (Gay at el., 1998).
The quality and usefulness of an auditors' report are interesting
topics to be explored.
The expectation gap was found to be particularly wide on the issues of
the auditors' responsibilities for fraud prevention and detection, and
the auditors' responsibilities for maintenance of accounting records
and exercise of judgement in the selection of audit procedures (Best
et al., 2001). It is important to understand which area the public
expects most than what it should be.
Three main objectives of this study are briefly described here. First,
this study aims to examine the existence of expectation gap between
auditor and users in Malaysia. The expectation gap may happen due to
the diverse perceptions towards auditor. This study also explores the
users?perceptions of the quality and usefulness of an auditors'
report. In addition, this study intends to ascertain the effectiveness
of an auditors' report as a communication medium between auditors and
users. Finally, it is important to understand that in which area the
users most expect than what it should be in order to overcome this
issue.
1.4 Importance of Study
The importance of this study can be
viewed from two ways. Firstly, the result of this study may affect the
auditing standard setting process. Modification of existing auditing
standards or new standards may be adopted according to the result of
the study. Auditors' report is the only communication medium that
includes the auditors' opinion regarding their audit works and also
their final opinion regarding the financial statements audited. It is
important to study the degree of the usefulness of an auditors'
report. Thus, amendments may be made to the IA 700 accordingly. The
findings of this study are important to suggest recommendations for
reducing the gap and also for a better and clearer presentation of
auditors' report in the future audit development.
Secondly, the result of this study may affect the audit academic
environment. Educating users regarding audit knowledge and auditors'
report is essential so that users understand the essence of audit and
able to understand the auditors' report. Knowledgeable users placed
less responsibility on auditor than less knowledgeable users. It is
important to educate the users to understand the merits and
limitations of an audit. Education is seen to be an effective approach
to narrow down the expectation gap.
1.5 The Study
Chapter I of this study gives a brief
introduction about the research topic as well as the study scope.
Chapter II includes the issues of expectation gap addressed by
previous researchers on their respective studies, and also places
their studies on the effectiveness of the auditors' report. Chapter
III describes the methodology involved in this study. Chapter IV
presents the result with analysis. Chapter V provides the limitations
and conclusion of this study.
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