Auditing : A Practical Approach, 2nd Canadian Edition Solution Manual

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Solutions Manualto accompanyAuditing:APracticalApproachSecond Canadian EditionChapter 1–Introduction and overview of audit and assuranceSOLUTIONS TO REVIEW QUESTIONSREVIEW QUESTION 1.1AccordingtotheCPACanadaHandbook,anassuranceengagementisanengagement where a practitioner issues a written report and concludes on a subjectmatter for which the accountable party is responsible. Therefore, a prerequisite for anassurance engagement is the existence of anaccountability relationship, where oneparty is answerable to another for the subject matter (s. 5025.0304).In the financial reporting context ‘assurance’ relates to the audit or review of an entity’sfinancial statements.An audit provides reasonable assurance about the fair presentation of the financialstatements,whilea review provides limited assurance. The audit contains a positiveexpression of opinion (e.g. ‘in our opinion the financial statementsarein accordancewith (the Act) , while the review contains a negative expression of opinion (e.g., ‘wehavenotbecome aware ofanymatterthatmakes usbelieve that…thefinancialstatements arenotin accordance with Canadian GAAP).Theassurancepractitionerisanauditorworkinginpublicpracticeprovidingassuranceonfinancialstatementsofpubliclylistedcompanies,orotherentities.Intendedusersare the people for whom the assurance provider prepares their report(e.g., the shareholders). Theresponsible partyis the person or organization (e.g., a

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company) responsible for the preparation of the subject matter (e.g., the financialstatements).An assurer must have the knowledge and expertise to assess the truth and fairness ofthe information being presented by the preparers. Auditors of financial statements needtobetrainedaccountantswithdetailedknowledgeaboutthecomplextechnicalaccounting and disclosure issues required to assess the choices made by the financialstatement preparers. When undertaking an audit, the auditor should use professionalscepticism, professional judgement and due care.Auditors should be independent of the client. Independent auditors have no incentivesto aid the entity in presenting their results in the best possible light. They are concernedwith ensuring that the information contained in the financial statements is reliable andfree from any significant (material) misstatements (error or fraud). A user needs tobelievethat theauditor is acting independently. This means that not onlyshouldauditors be independent (i.e., not have any undue personal or financial incentive toprotect the client), auditors should avoid doing anything that would cause a reasonableperson to doubt their independence.REVIEW QUESTION 1.2The users of the financial statements issued by a large listed public company includeshareholders, customers, suppliers, employees, lenders, competitors, and governmentagencies. They need information which will help them evaluate thefollowing:future financial performance of the company (including profitability, liquidity andsolvencywhether the company has overseas operations and the nature of their activities inthosecountries(to evaluate exposuretoforeignexchange risk,risktothecompany of achange in economic conditions in those countries, and whether it isapparently supporting countries with dictators)possiblelack of compliance with various laws and regulations, whether thecompany (and its industry) need government support.Investors are concerned with the value of their investment, employees with theirjob security, customers with whether the company is likely to remain in businesslong enough to honour warranties, suppliers with whether they will be paid,lenders with the risk to their loans, competitors with the health of their rivals, andgovernment agencies will be interested in taxes, tariffs, industry support, andeconomic growth.Usersofasportingteam’s financial statementsarelikely to beinterested inthefollowing:condition and performance of the team (its solvency)whether it is investing in physical facilities, player payments, etc.whether the sporting team supports local businesses and community groups.

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Although sports teams are often companies limited by guarantee and havemembers, the members are usually unable to trade their interest in the team.Therefore, users of a sporting team’s financial statements are not concernedabout profitability for its own sake, but whether it helps the team pay its playersand expand its facilities. Creditors and lenders will be interested in the likelihoodthattheywillberepaid.Governmentwillbeinterestedwithsportingandcommunity concerns.REVIEW QUESTION 1.3The arguments in favour of audit firms providing other services to their audit clientsrelate to the benefits to be derived by all parties. The audit firm has very detailedknowledge about the client and can use that knowledge to recommend actions orproducts that would suit the client’s needs. In some cases, the auditor could identify apotential problem that the client had not identified. To the extent that the audit firm usesits knowledge to provide better advice than could be provided by an external consultant,REVIEW QUESTION 1.3(Continued)the client will benefit. Shareholders of the client and other interested parties will benefitfromimprovementstotheclient’sbusiness.Finally, theauditorswill benefitfromadditional revenue which can be used to subsidise the audit firm’s investments inknowledge and systems, and streamline the audit.The main disadvantages of audit firms providing services to their audit clients relate topotential adverse effects on the auditor’s independence. The auditor could be unwillingto provide services which would reduce their audit fees or cause the client to seekanother auditor. The auditor could be unwilling to criticise something to the client whichwas provided by their consulting division. The auditor could be ‘blind’ to potentialadverseimpactsontheclient’saccountingsystemsfromproductsandservicesprovided by their consulting division. Even if the consulting provided unquestionablebenefits to the client, the relationship between the audit firm and the client couldbecome ‘too cosy’, and discourage the client from considering other auditors. Finally,the auditor could be reluctant to qualify the audit report for fear of losing lucrative feesfrom consulting services. If this occurs, the audit is less valuable because the auditor isless independent.REVIEW QUESTION 1.4An auditor evaluates the contents of a financial statement against the standards andlaws that apply to that type of financial statement. According to CAS 200OverallObjectives of the Independent Auditor and the Conduct of an Audit in Accordance withCanadian Auditing Standards, the objective of a financial statement audit is for theauditor to express an opinion about whether the financial statements are prepared in allmaterial respects in accordance with a financial reporting framework (CAS200, para.

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11). Within a Canadian context, this means that the financial statements have beenpreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(GAAP) and any relevant legislation, such as the Canada Business Corporations Act.Listed public companies must abide by the appropriate Corporations Act, theCharteredProfessionalAccountantsofCanada(CPACanada)AccountingStandardsBoard(AcSB), the Canadian Securities Administrators (CSA), and the listing rules of the publicstock exchange (for instance, the TSX–Toronto Stock Exchange) and report theirfinancial statements using IFRS. Certain companies must also abide by additionalspecific legislation, depending on their industry or legal status. In addition, if a companyis listed in another country, foreign exchange listing rules and laws could apply to thefinancial statement. Private companies in Canada may report their financial statementsusing IFRS or Accounting Standards for Private Enterprises(ASPE).Auditing standards control the way an audit is conducted, they are not the criteriaagainst which the financial statements are evaluated.REVIEW QUESTION 1.5An operational audit (performance audit) is an assessment of the economy, efficiencyand effectiveness of an organization’s operations. It can be conducted internally (byinternal audit) or externally (by an audit firm) and across the entire organization or forpart of an organization.Management may request an operational audit (performance audit) of its own company(or part thereof) in order to assess the economy, efficiency and effectiveness of theorganization. Ideally, the audit would identify issues that need to be addressed in orderto increase the performance of the division or company. For example, the audit couldexamine a logistics department. It would assess the cost of running the department, thenumber of deliveries per input (such as labour hours, vehicle hours, etc), and indicatorsof delivery on time to the correct address.Anoperationalaudit(performanceaudit)couldbeconductedonagovernmentdepartmentoragencyaspartoftheprocessofaccountabilitytothepublic.Stakeholders of government entities are usually seen to be more interested in economy,efficiencyandeffectivenessthaninprofit,orsurplus.Operational(performance)auditing can expose poor practices, or even corruption, in an organization. Operational(performance) auditing can provide information on the implementation of governmentpolicies. Regular operational (performance) auditing of government entities can helpbuild trust between the government and the citizens.REVIEW QUESTION 1.6Internal auditors are employees of the company, and therefore cannot be completelyindependent of the company. However, it is possible to increase the independence of

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the internal audit department through means such as funding, terms of reference, andlines of reporting.A well-funded internal audit department can investigate more issues and spend moretime on each investigation, potentially increasing the chance of discovering fraud andother problems. An internal audit department with a small budget is likely to have fewerstaff and less qualified staff (because they will be lower paid), and will have to makecompromises on the issues to be investigated.An internal audit department with wide terms of reference has the freedom to pursue theissues which the audit staff believe are most important or create the most risk for theorganization.Adepartmentwithnarrowtermsofreferencecouldbelimitedtoinvestigatingonlycertainmatters,ormustseektheapprovalofhigherlevelsofmanagement before commencing any investigation.REVIEW QUESTION 1.6 (Continued)If the internal audit department reports to the CFO it is possible that the CFO willprevent some issues from reaching other members of the management team, or theboard of directors. Often, the problems will be within the CFO’s department, creating aconflict of interest for the CFO when deciding whether to report the issue more widely.An internal audit department that reports directly to the audit committee is outside thenormal lines of management and reporting. The audit committee is part of the board ofdirectors. Therefore, reporting to the audit committee increases the chance that thehighestleveloftheorganizationisawareoftheproblemsandwillapprovetheinvestigation. The audit committee also deals with the external auditor. If the internalauditor reports directly to the audit committee it can communicate the issues to theexternal auditor and ask them to consider them, where relevant, as part of the financialstatement audit.Not all companies have an audit committee. Where the audit committee does not exist,the internal auditor could report directly to the full board of directors.REVIEW QUESTION 1.7As defined in CAS 706 (CAS 706 (5)):Emphasis of Matter paragraph means a paragraph included in the auditor’s report thatrefers to amatter appropriately presented or disclosed in the financial statements that,in the auditor’s judgement, is of such importance that it is fundamental to users’understanding of the financial statements.The emphasis of matter paragraph is included in the audit report immediately after theopinion paragraph.

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An emphasis of matter paragraph draws the attention of the reader to an issue that theauditor believes has been adequately and accurately explained in a note to the financialstatements. The purpose of the paragraph is to ensure that the reader pays appropriateattention to the issue when reading the financial statements. The audit report remainsunmodifiedand the user of the financial statements can still rely on the informationcontained in the financial statements (CAS 706; ).The emphasis of matter paragraph is not used when the entity has not disclosed theissue in its report. The auditor can use an ‘other matter’ paragraph to introduce anothermatter that the auditor believes should bedisclosed.The usual circumstance which would warrant an Emphasis of Matter paragraph in theauditor’s report is the existence of a significant uncertainty, the resolution of which maymaterially affect the financial statements.From CAS 706:REVIEW QUESTION 1.7 (Continued)A1. Examples of circumstances where the auditor may consider it necessary to includean Emphasis of Matter paragraph are:An uncertainty relating to the future outcome of litigation or regulatory action.Early application (where permitted) of a new accounting standard (for example, anew Canadian generally accepted accounting principle) that has a pervasiveeffect on the financial statements in advance of its effective date.A major catastrophe that has had, or continues to have, a significant effect on theentity’s financial position.CAS 706 stresses that the inclusion of an Emphasis of Matter paragraph in the auditor’sreport does not affect the auditor’s opinion. An emphasis of matter can be included in anunmodifiedauditor’s report or a qualified auditor’s report (see example in CAS 706).REVIEW QUESTION 1.8In addition to the auditing standards (CAS), the Canadian Auditing and AssuranceStandards Board (AASB)issues Canadian Standards onAssuranceEngagements(CSAE)..CSAE 3000 establishes requirements and provides explanatory guidance forundertaking and reporting on assurance engagements other than audits or reviews ofhistorical financial information covered by Canadian Auditing and Assurance Standardsor Standards on Review Engagements.While many entities are voluntarily disclosing this information the AASB approved andissued CSAE 3410, Assurance Engagement on Greenhouse Gases. The purpose ofthisdisclosureistoprovideassuranceovergreenhousegasinformationtogiveinvestors, consumers and others that the information provided is reliable. The standard

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provides guidance to the auditor as to their responsibilities, work to be performed andreporting responsibilities.REVIEW QUESTION 1.9The audit expectation gap occurswhenthere is a difference between the expectations ofassurance providers and financial statement users. The gap occurs when user beliefsdo not align with what an auditor has actually done. In particular, the gap is caused byunrealistic user expectations, such as:• The auditor is providing complete assurance• The auditor is guaranteeing the future viability of the entity• An unmodified(clean) audit opinion is an indicator of complete accuracy• The auditor will definitely find any fraud• The auditor has checked all transactions.REVIEW QUESTION 1.9 (Continued)The reality is that:• An auditor provides reasonable assurance• The audit does not guarantee the future viability of the entity• An unmodifiedopinion indicates that the auditorbelieves that there are nomaterial (significant) misstatements (errors or fraud) in the financial statements• The auditor will assess the risk of fraud and conduct tests to try to uncover anyfraud, but there is no guarantee that they will find fraud, should it have occurred• The auditor tests a sample of transactions.The audit expectation gap can be reduced by:•Auditorsperformingtheirdutiesappropriately,complyingwithauditingstandards, and meeting the minimum standards of performance that should beexpected of all auditors•Peer reviews of audits to ensure that auditing standards have been applied correctly• Auditing standards being reviewed and updated on a regular basis to enhancethe work being done by auditors• Education of the public• Enhanced reporting to explain what processes have been followed in arriving atanaudit(reasonableassurance)orareview(limitedassurance)opinion(significant improvements have been introduced by standard-setters improvingassurance reporting)• Assurance providers reporting accurately the level of assurance being provided(reasonable, limited, or none).

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The audit expectation gap is represented graphically inFigure1.6 of the text.REVIEW QUESTION 1.10The two main bodies that regulateauditors are Canadian Securities Administrators(CSA) and the Canadian Public Accountability Board (CPAB).CPABregistersauditorsforpubliccompanies,processesannualstatementsfromregisteredauditors,enforcesindependencerequirementsandprovidesawhistleblowing facility for the reporting of contraventions of the appropriate Corporations Acts.CPAB conducts an audit inspection program to report on audit quality and makerecommendations for continued improvement. CPAB visits a selection of firms annuallytogainanunderstandingoftheirpoliciesandproceduresinrelationtotheirindependence, audit quality, methodologies and training programs.REVIEW QUESTION 1.10 (Continued)The CPAB also responds to allegations that an auditor hasbreached the appropriateCorporations Act or the standards set out by the Accounting and Assurance StandardsBoard (AASB). The CPAB,and AASB will be involved when it is believed an auditor hasnot carried out their duties properly, is not a fit and proper person, is subject todisqualification or should not remain registered for some other reason. In response, theymay cancel or suspend the individual’s registration, give the individual a warning or askthem to make an undertaking to improve their conduct.Theinspectionprocessconcentratesonanauditfirm’scompliancewithauditingstandards, and their independence and quality control systems. The process includes:Reviewing and undertaking limited testing of the firm’s independence andquality control systemsInterviewing the leaders of the audit firm, human resources personnel andselected partners and staffExaminingthefirm’sauditmethodologyforcompliancewithauditingstandardsReviewingtheconductofaspectsofselectedauditandreviewengagements.The program finishes with an exit meeting and CPAB sends the audit firm a confidentialreport of their findings. CPAB publishes a public report summarising all their findings.CPAB-Practice InspectionsIn accordance with CPAB's mission, they have developed a program of qualityinspectionswhichcoversallfirmswhoauditreportingissuerswhoissuesecurities to the public in Canada and are subject to the rules of provincial orterritorial securities commissions.

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Registered firms who audit reporting issuers are subject to inspection by CPAB.Their current practice inspection program selects firms for inspection on a cycleranging from one to three years according to certain criteria. Annually, CPABmonitorstheongoingeffectivenessofitspracticeinspectionprogramandpublishes a report highlighting inspection findings from the current year as wellas trends relating to audit quality.As part of their inspection process, CPAB has the right to take a disciplinaryaction against firms orindividuals that CPAB has determined did not performaudits in accordance with professional standards.(see http://www.cpab-ccrc.ca/ for further information)

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SOLUTIONS TO PROFESSIONAL APPLICATION QUESTIONSPROFESSIONAL APPLICATION 1.1–Demand for assuranceThethreetheoriesdiscussedinthechapterareagencytheory,theinformationhypothesis and the insurance hypothesis.Agency theory suggests there are incentives to hire an auditor to assess the fairpresentation of the information contained in the financial statements.An auditor reportsto the members on the fair presentation of the financial statements prepared by themanager.Good quality managers are willing to haveanaudit of their results because itallows them to distinguish themselves from poor quality managers. Shareholdersarewilling to pay the audit fee (i.e. the audit fee is paid by the company, reducing the profitavailable to distribute to the shareholders) to monitor the managers (who are theiragents). Good quality auditors are more highly valued for this monitoring function thanpoor quality auditors. Andersen’s lowered their quality through their involvement withEnron, leading some companies to prefer another auditor. It has been suggested thatcompanies taking early action to dismiss Enron could have protected their share priceby retaining their financial reporting credibility. Ultimately, all Andersen’s clients had tofind another auditor.The information hypothesis suggests that financial statement users value higher qualityinformation.Higherqualityauditorsareassociatedwithhigherqualityfinancialstatements.Therefore,whenAndersen’s qualitywascalledintoquestionbytheirassociationwithEnron,theirclientcompaniesthatvaluedhigherqualityauditorsswitched to another auditor.Insurance hypothesis suggests that investors insure against their losses from companyfailure by purchasing an audit. When Andersen’s credibility was damaged by the Enronaffair, there was doubt about their ability to survive and provide the insurance for suchlosses. The insurance factor is ‘impounded’ into share prices, so when the insurancecover is lost the share price should fall. This means that companies that were moresensitive to the loss of the insurance cover were more likely to dismiss Andersen early.PROFESSIONAL APPLICATION 1.2–Assurance providers(a)The solution will depend on the accounting firm chosen and the date of the analysis.However, the answers should show for the Big 4: greatergeographic coverage, largernumbers of staff and broader range of skills offered, greater claims to specialization andindustrycoverage,morepublicationsavailable(particularlyfromtheinternationaloffices), more consistent and sophisticated marketing.PROFESSIONAL APPLICATION 1.2 (Continued)

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(b)Financial statement audits are mandatory for most companies, so overall demand islargely fixed or determined by economic conditions affecting the number of companies.However, for organizations that are not required by legislation to have an audit, thereare two opposing pressures in times of economic recession. First, cost-cutting wouldresult in fewer audits. Second, organizations with less credible financial statements willface most difficulty in borrowing during a credit squeeze. This suggests that demand forauditing will increase in difficult times, because an audit will increase the credibility ofthe statements and thus increase access to external finance.Also, shifting from a national auditor to a Big 4 auditor would increase both costs andfinancial reporting credibility for a company. Therefore, it can be argued that firms withgreater need to reduce costs will shift ‘down’ from Big 4 auditors to national auditors, butfirms with greater need for credibility (and financial advice) will shift ‘up’ from nationalauditors to Big 4 auditors.PROFESSIONAL APPLICATION 1.3–Types of assurance engagementsA review provides limited assurance.The auditor does adequate work to report whetheror not anything came to their attention, which would lead them to conclude that theinformation being assured is notfairly presented.To comment on the appropriateness of a review for financial statements, the differencesbetween an audit and a review should be identified.•Assurance: reasonable vs limited•Opinion: positive vs negative•Procedures: nature, timing and extent–review procedures are a subset of thoseperformed for an audit•Reports: annual reports–both audits and review engagements are appropriate forannualreportingaslongastheyachieve thedesiredlevelofassuranceforthestakeholders.•Conclusion: Review engagement reporting is more limited than auditing andthus alower level of assurance is appropriate as long as it is understood and agreed to by thestakeholders.PROFESSIONAL APPLICATION 1.4–Expectations gap

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The expectations gap is the difference between the expectations of financial statementusers and the auditor’s performance.Special users for Securimax could include:Government agencies, including Department of Foreign Affairs and Trade, whowould be interested in the purchases by foreign governments and individuals ofthis type ofsecurity vehicle.Competing companies and/or governments who would be interested in sensitiveinformationabouttheconstructionofthevehiclesandtheidentityofthepurchasers.Waterloo local government and Ontario Provincial Government, who would beinterestedinthefinancialviabilityofthebusinessanditsimpactonlocalemployment and economic activity.Suppliers of technological equipment–it is possible that the Terrain Master usesspecialized components. These suppliers would be interested in the financialviabilityofthe business andthelikelihood ofits timely paymentfor goodspurchased on credit. Such equipment could be made to specialized order withlimited alternative customers. The suppliers would have large investments tosupport the manufacture of these specialized components.Other potential customers.Usual relationships would exist with lenders, shareholders, employees.Discussion:Consider how well would Securimax’s financial statements provide the information that theseusers would require, given the highly sensitive and confidential nature of the manufacturingprocess. Management is responsible for preparing the reports, but the users may look to theauditors to make sure that the required information is provided. Also consider how well wouldthe audit process be able to meet the users’ needs for this information.PROFESSIONAL APPLICATION 1.5–Performance and compliance auditsTCCL must comply with the Department’s ‘Guidelines for Procurement of MedicalEquipment’ when purchasing the accelerator. We are not provided with this document,but it is likely to contain rules about approved suppliers, the tendering/purchasingprocess (including the type of supplier/equipment documentation required), and so on.The auditor will gather evidence about TCCL’s purchases of the linear accelerators andassess whether the guidelines were followed. If the guidelines are specified with a greatdeal of detail, the audit will focus on ensuring that these guidelines were followed asspecified. If the guidelines are expressed loosely (e.g., ‘the firm should obtain a numberof quotes’), the auditor will need to use more judgement to assess compliance than ifPROFESSIONAL APPLICATION 1.5(Continued)

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the guidelines are expressedprecisely (e.g., ‘the firm will obtain 3 quotes’). The auditorwill have to decide if the number of quotes obtained in those circumstances is sufficientto satisfy the loosely expressed guidelines. Are two quotes sufficient? If three quotesare required, the auditor could decide that two quotes are not sufficient, unless there areextenuating circumstances (e.g., there are only two possible suppliers worldwide).PROFESSIONAL APPLICATION 1.6–Types of assurance engagements(a)Areviewengagementisrequiredbecausethebankrequiresacertainlevelofassurance, but it has already been agreed that an external audit will not be required.Areview provides limited assurance.The auditor does adequate work to report whether ornot anything came to their attention, which would lead them to conclude that theinformation being assured is not true and fair.(b)The title of the report or communication that Smith & Jones will prepare is a "Reviewengagement report".(c)The types of procedures that Smith &Jones would be required to conduct in this reviewengagement would be inquiry, analysis, and discussion.This means comparing yearover year balance, considering the relationships between financial statement data, andcalculation of various financial statement ratios. Once unusual or significant fluctuationsare identifies the auditor then inquires and discusses with the client whether thesefluctuations and changes are plausiblePROFESSIONAL APPLICATION 1.7–Audit opinions(a)Unmodifiedwith Emphasis of Matter.(b)Adisclaimer of opinion.(c)Unmodifiedwith Emphasis of Matter.(d)Either an adverse opinion or a qualified opinion.PROFESSIONAL APPLICATION 1.7(Continued)

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(e)Either adisclaimer of opinionor a qualified opinion.(f)Adisclaimer of opinion.(g)A qualified opinion.(h)A qualified opinion.PROFESSIONAL APPLICATION 1.8–Types of audit opinionsSituation 1(a)Unmodified, qualified or disclaimer of opinion.(b)The client has,in effect, imposed a scope limitation on Glenn and Bruce. The type ofreport issued depends upon the materiality of accounts receivable and the likelihoodthat a potential error would be material or significantly material.Iftheaccountreceivablebalancewereinsignificantandimmaterial,thenanunmodifiedreport could still be issued. If the likelihood that a potential error would bematerial, but not pervasive, then an opinion qualified as to scope would be appropriate.If the likelihood that a potential error would be material and pervasive, then a disclaimerof opinion would be warranted.Situation 2(a)Unmodifiedor adverse opinion.(b)By not including the probable need to pay $3,000,000 as a result of the lawsuit in thefinancialstatements, they are likely materially misstated. If the financial statements areconsidered to be materially misstated but not pervasive, a qualified opinion would beappropriate. If the statements are considered to be both materially and pervasivelymisstated, an adverse opinion would be appropriate.PROFESSIONAL APPLICATION 1.9–Different audit opinions

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Stephen should review the completed financial statements and the working papers tosatisfy himself that:• the financial statements are notmaterially misstated;• they present fairly the financial position of the company; and• the information provided is in accordance with Canadian GAAP.PROFESSIONAL APPLICATION 1.10–The expectation gap(a)The auditor is responsible to provide anopinion on the fair presentation of the historicalfinancial statements in accordance with Canadian GAAP, unless they are engaged toprovideassuranceonotherinformation.Therefore,auditorsdonotreviewpressreleasesandotherinformationthatmaybedistributedtotheusersandotherstakeholders. Auditors do have a responsibility to ensure offering documents providedby the company are consistent with the financial statements but they do not provideassurance over that information.(b)The audit expectation gap occurs when there is a difference between the expectationsof assurance providers and financial statement users.Inthiscase,theusersseemtobelievetheauditorshouldhaveprovidedmoreinformation with respect to the future success of the company. This demonstrates the“expectation gap”, where users tend to blame the auditor when companies fail. Userstend to believe that the auditor should have done more (i.e., provided assurance overthe success of research expenditures). Auditors however, tend to avoid opinions oversuch subjective information, therefore, research costs are expensed as whether theywill lead to a future benefit is too difficult to verify.(c)The audit expectation gap can be reduced by:•auditors performing theirduties appropriately, complying with auditing standardsand meeting the minimum standards of performance that should be expected ofall auditors,•peer reviews of audits to ensure that auditing standards have been appliedcorrectly,•auditing standards being reviewed and updated on a regular basis to enhancethe work being done by auditors,•education of the public,•enhanced reporting to explain what processes have been followed in arriving atan audit (reasonable assurance) or a review (moderate or limited assurance)opinion (significant improvements have been introducedby standard settersimproving assurance reporting),PROFESSIONAL APPLICATION 1.10(Continued)

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