Audit Risk
Describe about the Extended Audit Report and Expectation Gap?
Audit report is prepared for the users of financial statements and audit is conducted as per the audit engagements, so a gap is created between the user and auditor and this gap is termed as Exception gap. In order to remove this gap or to minimize this gap, a new concept of audit report is introduced in UK named as “Extended Audit Report”.
Audit risk refers to the risk of issuing an inappropriate opinion on financial statements by auditor, which may occur due to failure in detecting material misstatements. Extended audit report. In previous reporting system, auditor is not able to include the information regarding material misstatements having impact on financial statements. Extended audit report provides the platform to the auditor to include the information regarding audit risk relating to material misstatements. Auditor can include all the relevant information which are having an impact on the resources as well as strategy developed for the engagement. Information on risk can be provided by auditor in format of comparative analysis on the basis of either type of risk or by market sector or by on the basis of time or on the basis of sector of business. This analysis will help the users to clearly understand the risk areas in specific terms in context of the concern.
The Financials of Royal Mail Plc includes the Extended Audit Report and auditors of the concern has made the assessment of risk and signified the three important areasand also mentioned how the auditor has addressed those risks during the audit process. These three areas are as follows-
Risk related to revenue recognition
Risk related to accounting and valuation of Group’s pension
Risk Related to Accounting and measurement of group provision
According to the auditors of Royal Mail Plc, the above three areas are more risk associated so the users of financial statements have been provided the clear information regarding the same and also the steps taken by the auditor during the audit process on these aspects.
In extended audit report, auditor needs to explain regarding the applicability of concept of materiality during the audit process. He needs to explain the threshold of materiality used in the audit of financial statements. Auditor provides the following information in the report-
Levels of Materiality in Financial Transactions
Performance based materiality
Any changes in terms of materiality during the audit process
Risk Related to Revenue Recognition
Unadjusted error reporting
Noteworthy consideration relating to materiality
In the report of Royal Mail Plc, auditors have explained the applicability of materiality both in planning and performance phase of audit. They have used the concept in material misstatement and have defined it as “Magnitude of Misstatement”. This implies that, due to misstatement, there is probability that the economic decisions of users will be influenced. The level of misstatements in financial records of concern has exceeded the set level of probability. Auditors have specified that the threshold limit of {1.4 million of material misstatement have exceeded so all the adjusted and unadjusted audit differences in excess of 1.4 million will be reported to the audit committee.
Expectation gap in auditing implies the difference between the expectation of pubic and stakeholders regarding the auditors responsibilities towards financial statement and what auditors believes their responsibilities towards the same. It is basically the difference between the actual and expected performance of auditor, regarding the audit of financial statement. It is the gap between the understanding of audit engagements by the user of financial statements and the auditor.
Auditor is responsible in reducing the level of audit risk for attaining the reasonable assurance level in financial statement. This word “Reasonable” is perceived differently by the users and auditor and this results in creating “Expectation gap”. This gap occurs due to lack of understanding either on part f users of financial statement or on part of auditors.
Elimination of audit expectation gap is in auditing is not very critical task as the occurrence of this gap is due to understanding difference between users and auditors. So if proper efforts are being made for elimination the gap then this can be bridged at larger extent.
Following steps can be taken in these regards for minimizing the gap-
There are some inherent limitations of audit due to this auditor can provide only the reasonable assurance and not the absolute assurance on financial statements. Users of financial statement should understand these limitations of audit and accordingly judge the efficiency of audit.
Financial Statements are known as “General purpose financial statements” and are being prepared and audited for the general needs of financial users. No specific needs are covered in this whole process. So users must understand that audited financial statements are not meant for specific decision making process.
An audit opinion is given on the basis of judgment based on the circumstances. This judgment may sometimes go wrong, so the users must understand this situation of auditor and should not count it as its ignorance. But auditor should also not take the advantage of this situation; he should apply all the possible audit procedures as required and accordingly give the opinion.
Risk Related to Accounting and Valuation of Group’s Pension
A pre audit discussion meeting should be arranged by the auditor with the users of financial statement, for understanding their expectations.
Audit report must be prepared in easy to understand manner, so that the users having limited knowledge of financial data’s can also understand it easily. But users are also required to relevant knowledge for analyzing the data and accordingly taking decision.
Extended Audit report helps in eliminating the exception gap to large extent. The format of extended audit report is vast and it is implemented for removing the limitations of normal audit report. It is more informative to the users of financial statement. The Annual report of Royal Mail plc is including the extended audit report for its users.
Following points of extended audit report helps in eliminating the exception gap-
A specific clarification regarding the scope of audit is being included in the audit report. This Para of extended audit report defines the role of auditor, scope and limitations of audit of financial statements and the language to be used in audit report. This helps in removing the misunderstanding of user regarding role of auditor and its related duties and responsibilities towards audit of financial statement. It’s also provides the information regarding the level of assurance being offered by the audit process of financial statement. so that users can accordingly make their expectation from auditor.
Information is being provided regarding the team engaged in the audit process and related audit engagements. This helps the users to know the specific team details and their engagements in different audit process. Any specialist, being engaged in audit is also highlighted though this information. User will gain confidence on the audit of financial statement, as they will know how the whole audit is conducted and what type of team is engaged in the process.
It is also clarified in the extended audit report as what process of audit is being used by the auditor in conducting the audit of financial statements. This information is divided into different parts. Firstly it includes the assessment of risk of concern to be audited. Secondly the components to be used for assessment of risk related to material misstatement. Thirdly the sources thought which detection risk are assessed. Lastly it includes the discussion of audit and all related disclosures. This helps the user to understand all the audit engagements, disclosures and its implications in financial statement.
It also provides information regarding the results of audit. It clarifies the evaluation of auditor regarding the financial statement. It provides the internal management information as regards to the effectiveness of internal control procedure, quality of financial statements of concern, chances of illegal acts in concern, problem related to going concern concept, etc. An assessment of sustainability, adjusted misstatements is also provided in the audit report to the users of financial statements. This will help the users to closely judge the financial situation of business of concern and accordingly take the relevant decisions, as required.
Following stapes are taken in extended audit report for eliminating the exception gap-
Clarifying the scope of financial statement audit to the auditor as well as the users.
Simplifying the language of audit report so that those non financial background persons may also easily understand the report.
Proper formation of audit team and specification of their parameters regarding the audit process.
Involving the users of financial statement in audit process by informing them the criteria of risk assessment by auditor and their judgmental process regarding the same.
Disclosing the extended facts of auditor evaluation and results of audit in audit report, which was not previously included in normal audit report.
Conclusion-
On the basis of above information, it can be concluded that the introduction of Extended Audit Report in UK is fruitful in minimizing the Exception Gap and also help users in getting detailed information regarding the whole audit process.
Reference:-
Financial Reporting Council, January, 2016, Extended Audit Report: A Further Review of Experience.Viewed 1st March, 2016
https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Report-on-the-Second-Year-Experience-of-Extended-A.pdf
Naroni Rainey, June 2014, Extended Audit & Audit Committee Reports Produce Varied Results, Viewed 1st March, 2016
https://www.accountancyage.com/aa/analysis/2351292/extended-audit-and-audit-committtee-reports-produce-varied-results
FRC Second Survey of Extended Audit Reporting, January 2016, viewed 1st March, 2016
https://www.iasplus.com/en-gb/news/2016/01/frc-extended-auditor-reporting-second-survey
FRC Extended Auditor’s Reports, March 2015, A review of experience in the first year, viewed on 1st March, 2016
https://frc.org.uk/Extended-auditors-reports.pdf
Hasaan Fazal, May 2013, What is exception Gap in Auditing, viewed 29th Feb, 2016,
Imen Jedidi, Doctorante Allocataire, DRM-CREFIGE, Université Paris-Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, The Social Construction of the Audit Exception Gap: The market Excuses
https://halshs.archives-ouvertes.fr/halshs-00460146/document
Dr. A. Vanstraelen, Dr. C. Schelleman, July 2012, A research Project Commissioned by Association of Chartered Certified Accountants (ACCA)
https://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/extended_audit_reporting.pdf
Closing the Exception Gap in Deterring Financial Statement Fraud: A Roundtable Summary
https://www.thecaq.org/docs/reports-and-publications/anti-fraudreportexpectationgaps.pdf?sfvrsn=0
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