9407210510 - CPE DIRECT INVESTOR VIEWS OF AUDIT ASSURANCE:...

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CPE DIRECT INVESTOR VIEWS OF AUDIT ASSURANCE: RECENT EVIDENCE OF THE EXPECTATION GAP What do investors expect from an audit? by Marc J. Epstein and Marshall A. Geiger nvestors and financial statement users long have agi'eed on the usefulness of the audit in financial reporting. Over time, however, auditors have been expected to provide as- surance in varying degi-ees and for differ- ent purposes. Differences in perception— especially regarding assurances provid- ed—between users, preparers and auditors have been termed the "expectation gap." This article provides some startling evi- dence of the existence of such a gap in in- vestor perceptions of the assurance provid- ed by an audit. EVOLUTION OF THE AUDIT In the early years of the U.S. auditing pro- fession—from 1850 to the early 1900s—au- ditors primarily were engaged to provide almost absolute assurance against fraud and intentional mismanagement. As corpo- rate America gi'ew and the auditing pro- fession developed, the early 1900s saw a MARC J. KPSTEIN. PhD. is a vu^iting professor of business admi.nistration at the Graduate School of Business Administration. Harvard University, Cam- bridge, Massachusetts. He is a member of the Ameri- can Accounting Association and the Institute of Man- agement Accountantn. MARSHALL A. GEIGER. CPA, PhD, is associate, professor of accountuig at the University of Riiode Inland, Kingston. He is a mem- ben- of the Awsrican Institute of CPAs, the Pe7insyliKt- nia Institute of CPAs ami tiie AAA. shift away from verifying all transactions and amounts for purposes of fraud detec- tion to determining fairness in financial statement reporting. This shift partly was a response to the burgeoning volume of business activity (making fraud detection less feasible) and the appearance and in- creased imi)ortance of a new business play- er—the shareholder. Corporate sharehold- ers and other outside parties became in- creasingly reliant on auditors to attest to management-provided information, neces- sitating a shift in the primary audit objec- tive to providing assurance on externally reported financial information. Current practice has not strayed far from that of early corporate America, with the primary audit focus on financial state- ment reasonableness. Current standards still reflect the matenal misstatement fo- cus and increasingly have relied on the con- cept of "reasonable assurance" in de})icting the level of reliance to be placed on audited information. One need only skim current auditing standards to find pervasive evi- dence of the reasonable assurance con- cept's use as the foundation for reliance on audited financial statements. Statement on Auditing Standards no. BI, Evidential Matter, SAS no. 39, Audit Sampling, and SAS no. 53, The Auditor's Respoiisibilitif to Detect and Report Errors and Irregu- 60 JOURNAL OF ACCOUNTANCY, JANUARY 1994
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larities, all I'ely on the concept of reason- able assurance. Regardless of professional standards,
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This note was uploaded on 03/20/2012 for the course ACCOUNTING 20111:010: taught by Professor Marjorieyuschak during the Spring '10 term at Rutgers.

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9407210510 - CPE DIRECT INVESTOR VIEWS OF AUDIT ASSURANCE:...

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