Reducing the Expectation Gap

By Zikmund, Paul E. | The CPA Journal, June 2008 | Go to article overview
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Reducing the Expectation Gap


Zikmund, Paul E., The CPA Journal


Forensic Audit Procedures

Auditing is increasingly difficult and challenging, with new rules and regulations encouraging, if not requiring, auditors to enhance their efforts to detect fraud during an audit. Unfortunately, these rules and regulations contain terms like "reasonable," "material," "professional skepticism," and "brainstorming," whose meanings vary in the minds of different auditors.

The "expectation gap" reflects a perceived difference between what one is expected to accomplish by others and what one personally believes he must accomplish. For example, the airline industry now expects a significant portion of flights to be delayed during the busy summer months. Passengers do not subscribe to this same belief, so when their flights are delayed, mis exposes an expectation gap.

Auditors face similar challenges when it comes to detecting fraud in an audit. In many instances, they are not sure how much effort must be made to uncover red flags for fraud. More important, they do not always take the appropriate steps to uncover fraud once a red flag surfaces during an audit Clients, judges, shareholders, and other parties, however, expect auditors to take steps to detect fraud during the audit They are often displeased when fraud goes undetected and is later uncovered by a tip or accident. The resulting investigation or financial statement restatement creates negative consequences for the company and its employees.

The reasons an auditor may fail to identify red flags during an audit include the following:

* Overreliance on client representations;

* Lack of awareness or recognition of an observable condition indicating fraud;

* Lack of experience;

* Personal relationships with clients;

* Failure to brainstorm potential fraud schemes and scenarios; and

* A desire "not to know."

The expectation gap is driven by two variables: the auditor's ability to detect fraud, and the auditor's efforts to detect fraud. An auditor may possess the skills to detect fraud, but might choose to take shortcuts or disregard obvious signs of potential fraud. Or, an auditor might use a variety of techniques, but lack the experience to effectively uncover red flags. Both scenarios will broaden the expectation gap.

An auditor must develop the requisite skills to detect fraud and obtain sufficient knowledge of the rules and regulations in order to better understand what is required during an audit. Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to obtain "reasonable" assurance that material fraud is not present The Institute of Internal Auditors (IIA) standard 1210.A2 requires auditors to possess "sufficient knowledge" to identify indicators of fraud. Whatever the words "reasonable" and "sufficient" mean to auditors will not matter if they fail to detect fraud. The definitions of "reasonable" and "sufficient" will be determined by their manager, client, senior management, or the judge or jury in a lawsuit.

Developing Fraud Detection Skills

Fraud examiners rely on the following tools:

* Knowledge of specific fraud schemes and scenarios;

* Knowledge of applicable laws and regulations;

* Excellent communication skills; and

* Strong interviewing skills.

While auditors cannot be expected to develop these skills to the level of a fraud examiner, they should try to become more proficient through training, hands-on experience, reading the professional literature, brainstorming, and using fraud detection skills during the audit

Training and awareness. All auditors should possess basic knowledge of fraud schemes in order to better position themselves to detect red flags during an audit Auditors can start by developing a basic understanding of fraud schemes and scenarios, as well as the reasons why people commit fraud. Organizations such as the HA (www.

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