RESEARCH QUESTION 1

1. Define the audit expectation gap.

2. What has caused the audit expectation gap?
3. What can be done to reduce the audit expectation gap?
RESEARCH QUESTION 2
Find a copy of a recent (2017-2020) audit reportand a review reportof a listed company in the
Philippines. Please NO DUPLICATION of companies. You may reserve your researched
companies thru your private group chats.
Required:
1. Paste a copy (picture) of the audit report and the review report here.
2. Explain the relevance of the paragraphs Managements responsibility for the financial
statementsand Auditors responsibilityin the audit report to the audit expectation gap.
3. Find the lines in the audit report that express the auditors opinion. What sort of opinion is
it? Explain.
4. Find the lines in the review report that express the auditors conclusion. Is it an audit
opinion? Is it a positive or negative statement? Explain.
5. Make a list of the other differences between the audit report and the review report.
RESEARCH QUESTION 3
Article: Chong, KM &Pflugrath, G 2008, Do different audit report formats affect
shareholdersand auditorsperceptions?International Journal of Auditing, 12, pp. 221–41.
Chong and Pflugrath conducted a study of different audit report formats and their effects on
the audit expectation gap. They investigated whether report length (long or short), the
location of the audit opinion (at the start or the end) and plain language (instead of technical
language) affect shareholdersand auditorsperceptions of the audit. They surveyed a sample
of shareholders and auditors and concluded that the responses indicate there are only minor
effects on the audit expectation gap from using different report formats.
Required:
1. In your view, what should be contained in an audit report that conveys realistic
explanations of the auditors role and the assurance provided by the audit report?
2. Do you believe that auditors are correct in dismissing usersexpectations as unrealistic?
Should auditors be trying to meet these expectations by rethinking their role and changing
their approach? Explain.
CASE 1
ArMOR-AKN Company has been an audit client of Laut &Associates (L&A) for the past 15
years. ArMOR-AKN is based in Manila, where it manufactures high-tech armour-plated
personnel carriers. ArMOR-AKN often has to go through a competitive market tender process
to win large government contracts. Its main product, the small but powerful GOGOGO, is
highly specialized and ArMOR-AKN does business only with nations that have a recognized,
democratically elected government. ArMOR-AKN maintains a highly secure environment
because of the sensitive and confidential nature of its vehicle designs and its clients.
Hizam Rasuman has been the engagement partner on the ArMOR-AKN audit for the last five
years. Hizam is a specialist in auditing clients in the defense industry and intends to remain as
review partner when the audit is rotated next year to a new partner (Habare Abdullah, who is
to be promoted to partner to enable him to sign-off on the audit).
The board of ArMOR-AKN is considering issuing half-yearly financial statements in addition to
its full year financial statements and has approached the audit partner, Hizam Rasuman, to
discuss the possibility of engaging the firm to discuss the audit implications. Hizam suggests
that L&A could review the half-yearly financial statements. ArMOR-AKNs end of financial year
is June 30.
Required:
Discuss the expectations gap that could exist for the audit of ArMOR-AKN. Consider the
existence of any special interests of the users of ArMOR-AKNs financial statements.
CASE 2
You have recently graduated from your university course and start work with an audit firm.
You meet an old school friend, Mijh, for dinner — you havent seen each other for several
years. Mijh is surprised that you are now working as an auditor because your childhood
dream was to be an astronaut. The conversation turns to your work and Mijh wants to know
how you do your job. Mijh cannot understand why an audit is not a guarantee the company
will succeed. Mijh also thinks that company managers will lie to you in order to protect
themselves, and as an auditor you would have to assume that you cannot believe anything a
company manager says to you.
Required:
(a) Write a letter to Mijh explaining the concept of reasonable assurance, and how
reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance.
(b) Explain in the letter to Mijh the concept of professional skepticismand how it is not the
same as assuming that managers are always trying to deceive auditors.