Executive Summary

Globally, auditors are expected to produce financial information that is considered true
and decisive to all stakeholders in a bid to ensure apt and informed judgments are
made. However, there are different debates and views regarding what the
responsibilities of auditors encompass and what their responsibilities really are.
Consequently, this report has an objective to evaluate and critique different perspectives
on the auditors’ role, as well as the audit expectation gap, as obtainable in the United
Kingdom (UK). Following this objective, the report engages in a comprehensive review
of existing literature on the subject matter, from both advanced and emerging countries,
with evidence from the United Kingdom. The report showed the subsistence of audit
expectation gap across countries. During the course of the review, it was discovered that
factors of the Audit expectation gap are summed up into four (4) - responsibility, going
concern, independence, and reliability factors. A major reference was the Brydon report
of 2019 which provided a handful of recommendations on the actual roles of auditors
and the public/stakeholders’ perception of auditors’ duty. This report recommended the
adoption of Brydon’s report on auditor responsibility and audit expectation gap to help
minimize the subsistence of the audit expectation gap globally, and the implementation
of the Sarbanes-Oxley reforms in the UK market to assist in making more operable laws,
as well as solidify the position on fraud detection and internal controls.
 Table of Contents
Executive Summary 1
1.0 Introduction 3
2.0 Debates on auditor’s responsibility for fraud and illegal acts in the UK 4
3.0 Reactions to Brydon Report on Auditor’s Responsibility for Fraud 5
4.0 Audit Expectation Gap and its Development 5
5.0 Reactions to Brydon Report on Audit Expectation Gap 6
6.0 Conclusion and Recommendations 7
References 8
1.0 Introduction
Globally, auditors have the mandate of the International Auditing Standards (IAS) to
identify errors, expose material fraud, and exercise a duty of care for stakeholders.
Rasha and Umut (2021) posited that the major duty of an auditor is to minimize the
level of risk of information asymmetry within an organization, as well as the fraudulent
attitude of managers. This position resonates with the stance of Alleyne and Howard
(2005) when they stated that auditors’ responsibility borders on identifying risks
associated with material misstatement and the detection of material misstatements in
the financial statements engineered by fraud. According to Bishop (2004), fraud
occasions significant losses to management, investors, and other business stakeholders.
It may involve financial reporting misconduct, corruption, or asset misappropriation.
On a global scale, as confirmed by the Association of Certified Fraud Examiners (ACFE),
organizations lose an estimate of over $4.7 trillion annually to fraudulent acts.

In the UK, the National Fraud Authority confirmed over £38.4 billion being lost to
fraudulent activities every year. Anderson, Maletta, and Wright (1998) opined fraud is a
prevalent and evolving criminal act, which has led to a huge number of losses both in
the public and private sectors in the United Kingdom. Dixon and Woodhead (2006)
stated that the impact of fraud and other financial acts transcends financial losses. The
UK Government Internal Audit Agency (2019) corroborated this by establishing
fraudulent activities have occasioned agencies’ reputational damage, as well as mistrust
in the corporate system. A major reference is the collapse of Barings Bank and Bank of
Credit and Commerce International (BCCI) in the UK. Thus, there is an urgent and
important need to tackle fraud, especially in the UK corporate system.

Salehi, Mansoury, and Azary (2009) opined that the increasing cases of illegal networks
and fraud have led to low public confidence and trust in audit services and financial
reporting. Jabar (2018) asserted that an expectation gap always exists between the
auditors and stakeholders. He stated that the users of financial reporting have different
perspectives as to what audit assignments should be and what assertions should be
made. Oyewobi and Adetunji (2019) stated that the issue of audit gap expectations arose
from the misconception about auditors’ responsibility due to a perceived inability to
take the happenings within the business environment into cognizance.
Several scholars (Alleyne and Howard, 2005; Bishop, 2004; Hemraj, 2004; Jannett,
2022) have expressed different perspectives as to the roles of auditors in tackling fraud
and illegal acts and they have confirmed that audit expectation gap exists across the
world (Porter, 1990; Fadzly and Ahmad 2004; Porter, 2005; Rasha and Umut, 2021).
Recently, several developments on audit expectations gaps laid credence on the fact that
low levels of disclosure, internal auditor effectiveness, external auditor independence,
transparency, and corporate accountability have undermined the trust in audit reports
globally. Thus, this report provides an expository on the roles of auditors, the audit
expectation gap in global and UK contexts, as well as a critique of the recommendations
of the Brydon report for 2019 on auditors’ responsibilities and the audit expectation gap.

2.0 Debates on Auditor’s Responsibility for Fraud and Illegal Acts in the
United Kingdom

Some literatures are in congruence with the general notion that the auditor’s duty is to
detect fraud as it is an objective of the audit while others claimed it was the role of the
auditor to report to shareholders all the illegal acts that had happened and which
affected the content of the financial statements. The International Auditing Standards
(IAS) provide the principles, procedures, as well as recommendations on how an auditor
should carry out an audit engagement. An auditor cannot be liable for fraud prevention
because he conducts an audit, which is a way of preventing fraud. Hemraj (2004) argued
that an auditor cannot absolutely certify that significant misstatements will be detected
in the financial statements. However, he may be able to obtain a reasonable level of
assurance about the fact. Fadzly and Ahmad (2004) opined that there is an inevitable
risk of certain material misstatements which will not be detected in the financial
statement in as much as every audit must be planned and deployed properly.

With regards to the responsibility of auditors in relation to fraud detection in the UK,
Hemraj (2004) stated that auditors focus on the legal framework of auditing which
involves the fraud policy. The fraud policy has three parts which are criminalization,
financial/law enforcement agencies, and reporting of suspected instances of fraud
(Humphrey, Moizer, and Turley, 1993). However, Boynton et al (2005) argue that
Enron’s fall has propelled the revamping of auditing standards, in a way that re-
emphasizes the auditors’ responsibilities to detect fraud. This assertion is supported by
ISA 240 ‘The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial
Statement (Revised)’ and ISA 315 ‘Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement’.

Jabbar (2018) stressed that ISA 315, requiring an auditor, in the course of an audit, to
examine the effectiveness of an entity’s risk management framework in preventing
misstatements, whether through fraud or otherwise was not necessary. He stressed that
such a requirement was previously required when they opted to place reliance on that
framework and to reduce the level of the audit investigation. Jannat (2022)
corroborated this by asserting that all members involved in an audit are demanded to
communicate findings with one another. This would forestall situations where staff
members, already with the independence of working on their own sections of the audit,
fail to appreciate the significance of apparently minor irregularities that, when
combined, take on a more sinister meaning.

On the contrary, Oremade (2020) argues that auditors are more obligated to report to
the shareholders all the illegalities that had happened and which affected the content of
the financial statements. This is in alignment with the section of the UK anti-fraud eco-
system which considers the ‘report of suspected instances of fraud’. However, Lee,
Glock, and Palaniappan (2007) argue that the legal obligation to report suspicion of
fraud was not present, notwithstanding the criminalization of fraud by the Fraud Act
2006. This is unlike the legal duty to report suspicious activities under anti-money
laundering and terrorist financing regulations (Leung and Chau, 2001).

3.0 Reactions to Brydon Report on Auditor’s Responsibility for Fraud and

Illegal Acts

The recommendations in Brydon’s report, as regards the roles of auditors, pertain to the
improvement of audit quality and the effectiveness of the auditor’s responsibility for
fraud detection. There is, of course, a need to ensure audit quality and consistency
improvement as recommended by Brydon in his 2019 report. That way, an audit would
be better positioned to be a valuable service to a broader range of stakeholders.
However, this must be considered with a workable and proportionate approach to
liability in a bid to ensure responsibility and legal accountability, are fairly divided
among management, investors, and auditors. Presently, there is a clear asymmetry as to
the responsibilities of management, investors, and auditors. Nguyen and Nguyen (2020)
stated that the role of auditors is usually overstated while the roles of other stakeholders
are usually otherwise. The Sarbanes-Oxley reforms could be implemented more in the
UK market as an enhanced model, as recommended by Brydon, to assist in making
more operable laws as well as solidify the position on fraud detection and internal
controls.

4.0 Audit Expectation Gap and its Development

The audit expectation gap was an offshoot of the McEnroe and Martens fraud cases in
1937. As cited in Porter (1990), Lee (1969) was the first scholarly work on the public
perceptions of auditors’ responsibilities. However, Liggio (1974) gave the pioneer
definition of audit expectation gap as the diversity in terms of expected performance
between the auditors and users of financial information. This definition was extended by
the Commission on Auditors Responsibilities (CAR) as the consideration of what is
expected of auditors to accomplish and what public expectations are from them (Cohen,
1978). Lately, the audit expectation gap is perceived to be the variation between the
expectation of the public on the audit assignment and the corresponding objective of
auditing, as revealed by the audit profession (Jannat, 2022). Alao, Richard, and Ishola
(2020) maintained that there are several factors that occasioned the audit expectation
gap. However, these factors can be summed up into four (4), namely, responsibility
factor, going concern factor, independent factor, and reliability factor.

Section 401 of the CAMA Act supported the stance that an auditor in a corporate entity
is tasked with the obligation of considering the financial statements and reporting to the
company after necessary investigations that would enable forming an opinion on the
financial statements have been made. However, the responsibility factor always plays
out where there is corporate failure after the audit exercise, leading to the public
questioning the audit process thereby leading to an audit expectation gap (Jannat,
2010). Further, auditors are expected to act in accordance with the going concern
adoption of the IAS by adopting those procedures that give assurance that the going
concern assumption used in preparing financial statements is appropriate and that the
purported financial statements adequately disclose such basis to give a true and fair
view. However, a clean audit report is perceived by the public as a pointer to the going
concern status. In the final analysis, a corporate auditor is not expected to offer non-
audit services to his client, otherwise, his independence may be impaired (Alleyne and
Howard, 2005). Such cases as this gave room for the variations of expectations from
auditors by the public.

Several developments have occurred since the release of ACCA’s initial report on the
audit expectation gap in 2019. A very key development is the COVID-19 pandemic which
has, of course, influenced the going concern factor associated with the audit expectation
gap. According to the COVID-19 global survey: Inside Business; Impacts and
Responses conducted by ACCA in 2020, a significant number of auditors summing up to
53% were faced with pressures emanating from work completion, and about 36% were
reported to have undergone difficulties in obtaining audit evidence. Over 27% of the
auditors experienced huge risk in relation to assets valuation, going concern issues, and
liabilities completeness. Meanwhile, all the aforementioned experiences are owed to the
fact that COVID-19 forced many businesses to make significant adjustments to their
activities. This issue is highly important for corporates that are yet to be directed to
prepare detailed assessments prior to the pandemic. The pandemic has carried
significant implications for businesses and auditors both in the areas of fraud and going
concerns (Bishop, 2004). Thus, it is important that the expectations about the auditor’s
responsibilities and that of users and stakeholders must be aligned.

5.0 Reactions to Brydon Report on Audit Expectations Gap

One of the key highlights of Brydon’s report on the audit expectation gap is the
reorientation of the term ‘expectation gap’ given to the variation between the auditor’s
role and the overestimation of the auditor’s responsibility by the public. He mentioned
that the delivery gap would have sufficed for the erosion of trust in the audit. This has
sparked a lot of controversies among commentators. However, it would suffice to say
there exist both an expectation gap and a delivery gap. By revisiting the purpose of an
audit, expectations still exist as accounting standards are becoming more prescriptive.
This raises the question of ‘Do auditors do enough?’ in line with the view of the Business
Energy and Industrial Strategy Committee (BEIS Committee).

In another vein, Brydon’s recommendation on fraud and the expectation of the auditor
which involves the amendment of ISA (UK) 240 might be a very positive
recommendation. An audit could be better at explaining what it does and what it does
not do. This would ensure more clarity as to the process involved in reaching major
judgments. KPMG (2019) added that this could be integrated with technology
opportunities such that clear demands are made of the users, and its scope extended to
the need of other information users.

6.0 Conclusion and Recommendations

This report focused on the review of the extant literature on auditor’s roles and audit
expectation gap. From the review, it has been established that there is a subsistence of
audit expectation gap in the United Kingdom (UK) and across the globe. Most times,
corporate failure after audit exercises is leading to the public questioning the audit
process thereby leading to an audit expectation gap. However, it is important that a
defensive approach is undertaken, as recommended by the Brydon report of 2019, such
that the public is enlightened on the duties and responsibilities of auditors, as well as
that of the directors. Following this realization, the report recommends the adoption of
a constructive and practical approach by the Audit, Reporting, and Governance
Authority to provide a concise guide on the concepts and elements of audit in a bid to
narrow public variations about the responsibilities of an auditor. In the final analysis,
the Sarbanes-Oxley reforms could be implemented further in the UK market as an
enhanced model, as recommended by Brydon, to assist in making more operable laws as
well as solidify the position on fraud detection and internal controls.
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