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To cite this document:
Peter J. Best Sherrena Buckby Clarice Tan, (2001),"Evidence of the audit expectation gap in Singapore", Managerial
Auditing Journal, Vol. 16 Iss 3 pp. 134 - 144
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Peter J. Best
Associate Professor, School of Accountancy, Queensland University of
Technology, Brisbane, Australia
Sherrena Buckby
Lecturer, School of Accountancy, Queensland University of Technology,
Brisbane, Australia
Clarice Tan
Senior Associate, Assurance/Business Advisory Services Division,
PricewaterhouseCoopers, Singapore
Keywords
Auditing profession,
Financial reporting, Singapore,
Asia, Accounting information
Abstract
[ 134 ]
Introduction
The research literature examining the nature
and extent of the audit expectation gap has
been considerable over the past 20 years
(Beck, 1973; Arrington et al., 1983; Australian
Society of Certified Practising Accountants
(ASCPA) and The Institute of Chartered
Accountants in Australia (ICAA), 1994).
Research has been conducted on the impact
of modifications to the wording in audit
reports as a means of reducing this gap. The
adoption of long-form audit reports has
proven to be effective in reducing the
differences between auditors' and users'
perceptions of the audit function
(resonableness gap) in a number of areas
(Kelly and Mohrweis, 1989; Hatherly et al.,
1991; Gay and Schelluch, 1993; Schelluch,
1996).
Various definitions have been proposed for
the audit expectation gap. Porter (1988)
identified two components of the audit
expectation gap:
1 the difference between what society
expects auditors to achieve and what they
can reasonably expect to accomplish
(designated the ``reasonableness gap'');
and
2 the difference between the responsibilities
society reasonably expects of auditors and
auditors' performance (designated the
``performance gap'').
This paper does not address issues associated
with the performance gap. Society's
reasonable expectations of auditors have
become embodied in auditing standards and
legislation, and have also developed further
through decisions of the courts (e.g.
negligence actions) and the conduct of peer
reviews (mandatory or voluntary).
The main focus of this study is to examine
the extent of the audit expectation gap in
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Background
The motivation for this study was
Singapore's status as one of the ``dragon
countries'' in Asia with a large international
financial market in which foreign and local
investors depend on audited financial reports
for investment decisions. Currently, in
Singapore short-form audit reports are to be
attached to financial reports, unlike the longform reports required by major countries
like the USA, Australia and the UK.
The Companies Act has been an important
part of corporate reporting in Singapore.
Section 199 of the Companies Act (Cap. 50)
requires every company to maintain proper
accounting and other records which will
sufficiently explain the transactions and
financial position of the company and enable
the preparation of true and fair financial
statements. These records are to be kept so
that they can be audited conveniently and
properly, and retained for at least seven
years. The accounts should be audited and
set before the shareholders in the Annual
General Meeting (Section 203(1)). Section
201(15) requires directors of holding
companies to prepare consolidated accounts
and lay them before the annual general
meeting. Section 209(A) sets out the form and
content for the purposes of preparing
consolidated financial statements.
No standard reporting format of the
accounts is required by law, although certain
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Prior research
The audit expectation gap research
literature is extensive. Many studies have
examined perceptions of messages
communicated through audit. Libby (1979)
used ten different audit reports in a study
comparing bankers and CPAs and found that
fears of miscommunication between auditors
and users were unjustified. However the
study group focused on users who were
considered sophisticated. Bailey et al. (1983)
tested for differences in perceived audit
report messages as a function of report
wording and the knowledge of the reader.
They found that wording changes did make a
difference to the perceived messages in the
audit report. They also found that more
knowledgeable users put comparatively less
responsibility on auditors.
Nair and Rittenberg (1987) extended
previous research by examining the
agreement on messages in nine types of
reports including compilations and reviews
across a diverse group of CPAs and bankers.
Their investigation was based on the
[ 135 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
[ 136 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Research method
The research method adopted in this study is
identical to that used in Schelluch (1996).
Using the same methodology assists in
providing a reliable assessment of the audit
expectation gap in Singapore and permits
useful comparisons to be made between the
results from this study and prior research on
this issue. Schelluch (1996) developed a
semantic differential instrument to measure
the messages communicated through audit
reports. This followed the steps outlined in
Malhotra (1981), Holt and Moizer (1990), and
Monroe and Woodcliff (1993; 1994a; 1994b).
The questionnaire in the current study used
semantic differential belief statements to
measure the messages communicated by the
short-form audit report in Singapore. The
questionnaire was sent to a range of users of
audit reports in Singapore and each potential
participant was mailed a covering letter, the
questionnaire, a sample audit report, and a
prepaid envelope. Survey participants were
broken into three groups, auditors, bankers
and investors. Participants in the groups
auditors and bankers were selected using
systematic random sampling from
appropriate categories of the Singapore
business listed telephone directory.
Participants in the investors group were
selected using systematic random sampling
from the Singapore alphabetic telephone
directory for the general public participants,
and from appropriate categories of the
Singapore business listed telephone
directory for financial analysts' and
stockbroker participants. A contact was
established in Singapore where the subjects
could return their surveys. After the closing
[ 137 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Results
Demographics of respondent groups
Table II
Occupational experience of respondents
Experience in current
occupation (years)
1-5
6-10
11-15
16+
Total
Number
Percentage
37
21
3
36
97
38.1
21.6
3.1
37.1
100.0
Table I
Demographics of respondents
Subject group
Auditors
Bankers
Investors
Total
[ 138 ]
Responses
received
n
%
Accounting
experience
Yes
No
Accounting
qualifications
Yes
No
35
26
36
97
35
20
21
76
35
13
21
69
35
26
36
32.3
0
6
15
21
0
13
15
28
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Table III
Responsibility statements
Statement
Mean responses
Auditors
Bankers
Investors
Across
groups
5.200
3.346*
3.000*
3.886
5.200
6.486
4.346
5.654*
3.972*
5.444*
4.515
5.876
2.171
2.857
1.629
2.500
3.846*
1.654
2.528
4.222*
2.389
2.392
3.629
1.918
6.114
5.769*
5.417*
5.763
Table IV
Reliability statements
Mean responses
Statement
Auditors
Bankers
Investors
Across
groups
3.000
3.000
2.861
2.949
6.143
5.500
5.139*
5.598
3.057
2.923
3.250
3.093
1.829
4.9429
4.086
2.615*
3.385*
3.692
2.083
3.750*
3.639
2.134
4.083
3.814
Table V
Decision usefulness
Mean responses
Statement
14. The audited financial statements are not useful in monitoring
the performance of the entity
15. The audited financial statements are not useful for making
decisions
16. The entity is well managed
Auditors
Bankers
Investors
Across
groups
4.743
5.500
4.639*
4.908
4.714
5.154
4.611
4.794
3.514
3.577
3.086
3.375
[ 139 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
[ 140 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Limitations
This study suffers from several limitations.
The scope of the study was limited to only 300
potential respondents. More compelling
evidence might have been obtained using a
larger respondent group. While the response
rate was credible, the risk of non-response
bias remains. Given the collection in
Singapore of responses using a Post Office
Conclusion
The aims of this study were to provide
evidence of the level and nature of the audit
expectation gap in Singapore in the mid1990s and to compare the level and nature of
any expectation gap found with prior studies
of this type in both Australia and Singapore.
The final aim of the study was to determine
whether the continued use of the short-form
audit report in Singapore may be primarily
responsible for the expectation gap existing
in this country and whether prior calls for a
change to the long-form audit report should
be continued as a means of significantly
reducing the level of the expectation gap.
The results of this study found an
expectation gap which was quite wide
particularly in relation to the level and
nature of auditor's responsibilities. The
expectation gap was found to be particularly
wide on the issues of the auditor's
responsibilities for fraud prevention and
detection, and the auditor's responsibilities
for maintenance of accounting records and
exercise of judgment in the selection of audit
procedures. To a lesser extent, an
expectation gap was also found concerning
the auditor's responsibility for the
soundness of internal controls, the degree to
which financial statements give a true and
fair view, auditor agreement with
accounting policies used in the financial
statements and the usefulness of audited
financial statements in monitoring the
performance of the entity.
These findings present a serious picture
for Singapore's professional accounting
bodies, as they indicate that considerable
potential value from the financial reporting
process is being lost as a result of the quite
considerable expectation gap in existence in
this country. These findings support the call
by Low et al. (1988) for a change from a shortform audit report to the long-form audit
report. This call for change should no longer
be ignored as prior research findings of
Schelluch (1996) and others clearly indicate
[ 141 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Managerial Auditing Journal
16/3 [2001] 134144
References
[ 142 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Managerial Auditing Journal
16/3 [2001] 134144
Accounting qualifications:
Accounting experience:
If yes:
1-5 years
____
6-10 years
____
11-15 years
____
Over 16 years
____
Yes ____
No ____
Yes ____
No ____
Stockbroker
Financial analyst
Other
____
____
____
Section II
The following uses a seven point scale. One (1) being your answer closest to the statement on the left while
seven (7) being your answer closest to the statement on the right.
Example:
The auditor is responsible for guaranteeing
the going concern of the company.
1 2
3 4 5 6 7
The example answer above shows that you believe that the auditor is responsible for guaranteeing the going
concern of the company.
Please circle your response.
Responsibility factor
1 The auditor is responsible for detecting
all fraud.
2 The auditor is responsible for the
soundness of the internal control
structure of the entity.
3 The auditor is responsible for
maintaining accounting records.
4 Management has responsibility for
producing the financial statements.
5 The auditor is not responsible for
preventing fraud.
6 The auditor is unbiased and objective.
7 The auditor does not exercise judgment
in the selection of auditor procedures.
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
[ 143 ]
Peter J. Best,
Sherrena Buckby and
Clarice Tan
Evidence of the audit
expectation gap in Singapore
Managerial Auditing Journal
16/3 [2001] 134144
Reliability factor
8 Users can have absolute assurance that
the financial statements contain no
material misstatements.
9 The auditor does not agree with the
accounting policies used in the
financial statements.
10 The extent of assurance given by the
auditor is clearly indicated.
11 The financial statements give a true
and fair view.
12 The entity is free from fraud.
13 The extent of audit work performed is
clearly communicated.
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
[ 144 ]