Expectation gap in auditing – meaning



Expectation gap is the gap between what public believe that auditors do and what actually auditors do or ought to do. Expectation gap occurs when the audits fail to meet the expectations of users of audited financial
statements. The public is generally not aware of the auditor’s actual standards of performance and the scope of his work and therefore there is always a difference between the auditor’s performance and the public’s expectations of the auditor’s performance.

Expectation gap can arise because of the following categories:

  • A standard gap – where the public believe auditing standards to be different from what the auditor actually do.
  • Performance gap – where auditors operates below required standards
  • A liability gap – where the public do not understand whom the auditor owes responsibility or accountability.

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Projection – meaning

A projection means prospective financial information prepared on the basis of:

  • hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start-up phase or are considering a major change in the nature of operations or
  • a mixture of best-estimate and hypothetical assumptions

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forecast – meaning

A forecast means prospective financial information prepared on the basis of assumptions as to future events which the management expects to take place and the actions the management expects to take as of the date the information is prepared (best-estimate assumptions).

A forecast is usually made for a period of no more than one year.

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Circumstances which indicate the existence of a related party.

Related parties are those parties considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial decisions. In the context of above, a related party could be management, owner or any person who is in a position to influence an entity’s operating policies and financial decisions.

Related party transactions refer to the transfer of resources or obligations between related parties irrespective of the value of these transactions.

circumstances which indicates the existences of related party transactions:

  • Economic substance of the transaction differs from form. In situations where the substance and economic reality of a transaction is different from the legal form, the possibility of a related party exists and it becomes necessary to assess the transaction on its substance and economic reality.
  • No logical business reason. The auditor can identify the transaction where there is no logical business reason to effect the particular transaction
  • Not adhering to the set methods of processing transactions . Transactions that are not processed in the routine manner may be on account of related party transactions
  • Terms of trade different from normal . If the terms of trade are different and not according to routine business transactions, there can be a related party transaction.
  • High volume with one customer / supplier . An extraordinary high volume of sales or purchases with one customer or vendor is also a risky area as this can be construed as a related party transaction.
  • Unrecorded transaction . If there are any unrecorded transactions, the auditor can assess whether there is a genuine error or whether the mistake had been made on purpose.
  • Transactions not having adequate evidence . An auditor always asks for the audit evidence which is sufficient and reasonable to cover the risk. If any particular transaction is effected without adequate documentary evidence, there is a probability of the transaction being a related party transaction e.g. absence of documentary evidence to support an investment made in the shares of a company.
  • Unusual transactions entered at the start and end of year

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