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The Audit Expectation Gap in Nigeria

The Audit Expectation Gap in Nigeria

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The Audit Expectation Gap in Nigeria


Preliminary Pages


1.0 Introduction

  • 1.1 Background of the study
  • 1.1.1 Definition of the Audit expectation gap
  • 1.2 Statement of problem
  • 1.3 Aim and Objectives
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the study
  • 1.7 Scope and limitations of the study
  • 1.8 Organisation of the study
  • 1.9 Definition of terms
  • References


2.0 Literature Review

  • 2.1 Introduction
  • 2.2 General Review
  • 2.3 Concept of the audit expectation gap
  • 2.3.1 Structure of the gap
  • Communication gap
  • Performance gap
  • 2.3.2 Element of users misunderstanding of the audit expectation gap
  • Fraud detection
  • Lack of auditors independence
  • 2.4 Causes of the audit expectation gap
  • 2.5 Reasons for the audit expectation gap
  • 2.5.1 Sub standard Performance
  • 2.5.2 Deficient Standards
  • 2.5.3 Unreasonable Expectations
  • 2.6 Steps Taken To Bridge The Audit Expectation Gap
  • 2.6.1 Expansion of Auditor’s Responsibilities
  • 2.6.2 Expanded Audit Report
  • 2.6.3 Introduction of New Accounting Standards
  • 2.6.4 The Role of Forensic Accounting
  • 2.6.5 Introduction of Mandatory Auditor Rotation
  • 2.6.6 Education of Users of Financial Statements
  • 2.7 Review of Empirical Studies
  • 2.8 Theoretical Framework
  • References

Chapter Three

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Population of The Study
  • 3.4 Sample and Sampling Procedure
  • 3.5 Data Collection Instrument, Validity and Reliability
  • 3.6 Statistical Tools and Analytical Procedure
  • 3.7 Limitation of the Methodology
  • References

Chapter Four

Data Presentation and Analysis of Data

  • 4.0 Introduction
  • 4.1 Analysis of Respondents Bio-data
  • 4.2 Analysis According to Research Questions

Chapter Five

5.0 Conclusion And Recommendation

  • 5.1 Introduction
  • 5.2 Discussion of Findings
  • 5.3 Conclusions
  • 5.4 Recommendations
  • Bibliography
  • Appendices
  • Appendix A; Letter of Introduction
  • Appendix B; Questionnaires



The aim of this study is to examine the impact of audit expectation gap on the accounting profession and how the gap can be bridged. Four hypotheses were formulated and tested in the course of this study. A survey design approach was adopted for the study. The Chi square were used to test the hypotheses of the study. Consequent upon the findings, the following recommendations, among others, were made: Introduction of new standards. Rotation of auditors to improve auditors’ independence.


The Audit Expectation Gap in Nigeria



1.1 Background to the Study

An audit expectation gap which has been variously defined as the difference between what the public expects from an audit function and what the profession accepts the objective of auditing to be (Adeyemi and Uadiale, 2011). It means the auditors actual standard of the expectations of the general public but also that of shareholders, board of directors, investors, management and also the creditor’s expectation.

Liggio (1974) defined the expectation gap as the difference between the levels of expected performance “as envisioned by the independent accountant and users of financial statements”. The Cohen Commission (Commission on Auditors Responsibilities, 1978) extended this definition by considering whether a gap may exist between what the auditors can and should reasonably be expected to accomplish.

While narrowing the expectation gap has been the objective of previous changes to the audit report and the role of the auditor which has led to various factors which include, but not limited to:-

  • Interpretation of professional standards
  • Lack of communication
  • Misplaced trust

These changes have been affected by sudden collapses of various corporations (which include Enron (2001), Worldcom (2001), Arthur Andersen (2002), Lehman Brothers (2008), Tyco International (2002), BCCI (Bank of Credit and Commerce International) (1991) etc in the United States of America (USA) which spent an enormous time lobbying regulators and elected officials and they benefitted from the rules that help them compete; and also Parmalat in Italy (2003); Shell in Netherlands (2004), Marionnaud in France (2005) while Cadbury Nigeria Plc (2005), Lever Brothers (1998), Union Dicon Salt (2002), Intercontinental Bank (now Access Bank) in 2008, Oceanic Bank (now EcoBank) in 2008, Afribank Plc (now Mainstreet Bank Ltd) in 2008 etc in Nigeria. Some of which were audited by the Big Four accounting firms which include KPMG Professional Services (KPMG), Akintola Williams Deliotte (AWD), PriceWaterHouse Coopers (PWC) and Ernst & Young (E&Y) have profoundly affected the business climate and then the onset of the financial crisis with the increased questioning of the failure by auditors to forsee the looming crisis.

The users of financial statement expect that:

  • Auditors should accept prime responsibility for the financial reports
  • Auditors certify financial reports
  • A clean opinion guarantees the accuracy of the financial reports
  • Auditors perform a 100% check
  • Auditors should give early warning about the possibility of business failure
  • Auditors are supposed to detect fraud
  • Auditors should give an opinion on the business internal control

Similar incidents occuring from time to time in different parts of the world helps raise concern about the credibility of the financial statements.

Lin and Chen (2004) found out that beneficiaries believed that auditors were responsible for the truthfulness and reliability of financial statements, detecting or reporting errors and frauds, liable for fraudulent or misleading information contained in the prospectus disclosure in the annual report and disclose the uncovered frauds, inefficiency or irregularities more than management. The statement shows likely executive actions which may have resulted into fraud and has caused the loss of stakeholders investment and employee’s jobs in Nigeria, especially during the statutory recapitalization to the tune of 25 billion which led naira to mergers and acquisition of some banks, liquidation and bankruptcy of other banks. The widespread means of financial accounting and creative accounting of some firms have to awaken the accounting profession.

This expectation gap is related to issues such as responsibilities, independence, third party liability of the auditor, reliance on the audit report by users, meaning of the audit report as perceived by users. Lin and Chen (2004), Ojo (2006) and Salehi (2011) have supported this view.

Therefore, the society raises the question what the fraud is and whose responsibility is it to detect and prevent it?
In Re Kingston Cotton Mills (No 2) [1896] 6, L J Lopes of the Appeal court stated that the auditor was a watchdog and not a bloodhound. Despite the enlistment of auditors as corporate watchdogs, Nigeria has witnessed a number of bank failures since independence in 1960. The standards required that the auditor should consider whether the results of the audit indicate that substantial doubt exists as the entity’s ability to continue as a going concern for a period not to exceed a year.

This remark underlines the fact that the auditor’s primary role isn’t the detection of fraud. Nevertheless, most of the financial statement usersmisundestood the nature of the auditor’s role, especially in the situation of an unqualified opinion and it is often interpreted to mean:

  • Absences of frauds, error and irregularities
  • Evidence that the company won’t have future financial problems in operating problems
  • Evidence that the auditor responsible for the completeness of the financial statements
  • Evidence of quality of management and product
  • Evidence that the assets and liabilities are stated on the balance sheet date is a continuance statement of occurrence i.e, they will continue to remain so after the reporting date (Olowookere, 2004:320).

Though, the accounting profession in Nigeria and other climes has been brought under intense pressure due to rising public expectations. In the light of these developments the member sought whom to blame. The media coverage of financial scandals and false reporting rife in the collapsed institutions have cast the organizational controls and auditors in very poor light.

The users of financial statement which include the company management, investors, creditors and the general public all have their own view of what the auditor should be doing and the significance of what the auditor can achieve are too high, and the resulting gap between expectation and reality leads them to question the value of the audit in its current form.

  • Company management is asking how it is possible to obtain value for money from an external audit, that is a legal necessity and that doesn’t necessarily produce worthwhile information, advice or assurance about their financial position or situation.
  • Investors are asking about the value of the audit report and how far, if at all, it guarantees that all is well with the company in which they intend to invest.
  • Creditors who may have suffered from the accounting scandals and from the financial crisis are asking how the auditors could have been unaware of the hugh financial problems just lying underneath the surface (Edith, 2012).

As a result of the nature of factors involved, it is difficult to eliminate them all. A research report sponsored by the Chartered Association of Accountants of London (ACCA) in 2010 stated the expectation gap problem can only be bridged as it can’t be eliminated.

Barbara (2002) suggests “mandatory rotation of individual audit partners within an organisation so that no one audit partner looks after a particular client audit for more than a short period of time”. This is a suggestion for bridging the gap.

Others are:-

  1. Read and understand the audit engagement letter
  2. Read and understand the auditor’s report which specifically outlines both management and the auditor’s responsibilities.
  3. Discuss and undestand the auditor’s perception of your business and its risks
  4. Ensure you have implemented appropriate internal controls, have addressed issues and risks identified by the audit, and pay attention to the tone from the top.
  5. Trust that your auditor is adhering to professional standards, but don’t do so blindly. Make sure you understand what those standards are.
  6. Compliance of laws and standards.

Enyi, Ifurueze and Enyi (2012) assert that a better remedy to the present day accusation crisis in the accounting profession is to redefine the role of auditors in order to be close to the public expectations.

Despite the importance of the audit expectation gap to the auditing profession, there still exists paucity of research on how the issue can be addressed in Nigeria. Therefore, the study seeks to evaluate the perceptions of users on the existence of The Audit Expectation Gap in Nigeria investment and how the gap could be bridged.

1.1.1 Definition of the Audit Expectation Gap

At present there is no generally accepted definition of the meaning of the audit expectation gap. Several accounting researchers and professional accounting bodies have offered their definitions, since Liggio coined the phrase “expectation gap” in 1974.

Ojo (2006) defined the expectation gap as the difference between what users of financial statements, the general public perceive an audit to be and what the profession claim is expected of them in conducting an audit.
James and Izedonmi (2011).described the audit expectation gap as “the difference between auditors and users of financial statements which include investors and bankers in Nigeria”.

Salehi (2011) stated that the audit expectation gap is mainly due to user’s reasonable expectations of audit as well as unrealistic perceptions of the audit profession’s performance.

Uadiale and Adeyemi (2011) denoted it as the difference between what the public expects from an audit profession and what the auditors accept the objective of auditing to be.

According to Okoye and Okaro (2011) audit expectation gap is defined as the difference between the auditor’s actual standard of performance and the various public expectations of auditor’s performance.

Enyi et al. (2012) described it as the difference in perception between auditors and users of audited financial statement concerning the nature of auditing.

Professional Accounting Bodies in the United States of America (USA), Canada and the United Kingdom (UK) in 1978, 1988 and 1989 respectively recognised the audit expectation gap as a very important issue for auditing profession. Since then it became a priority area of research.

1.2 Statement of Problem

Some recent events like the distress of banks in 2008 and the collapse of corporate organisations around the world has shown that the profession is undergoing changes with the inclusion of standards like the IFRS (International Financial Reporting Standards) among others. Various method have been suggested for bridging the audit expectation gap from the expansion of auditor’s responsibilities (Uadiale et al., 2011) to the education of users of the financial statements (Enyi et al, 2012) in providing a means by which the opinion the auditor’s would express on the financial statement of a corporate organisation can be seen to be unbiased and independent. It is argued that the presence of the audit expectation gap is expected to cause rift between users of financial statement, management and auditors if the issue isn’t properly addressed. This means that effort must always be made to ensure that there is minimal or complete elimination of the audit expectation gap so as to enhance the operation of auditors and corporate entities as a whole. Therefore, it becomes crucial to investigate the impact of efforts geared toward bridging the audit expectation gap on the credibility of the audited financial statements in the annual report.

1.3 Aim And Objectives

The aim of the study is to examine the impact of audit expectation gap on the accounting profession and how the gap can be bridged.

The objectives are as follows:-

  1. To determine what gap exists between the expectation of users and the auditor.
  2. To investigate the cause of the audit expectation gap.
  3. To examine the reason as to why the audit expectation gap still exists.
  4. To take steps to bridge the audit expectation gap.

1.4 Research Questions

  1. Is there a gap between the expectation of users of financial statement and the auditor?
  2. What would be the cause of the audit expectation gap?
  3. What are the reasons why the audit expectation gap still exists?
  4. What steps can be taken to bridge the gap?

1.5 Research Hypotheses

The following hypotheses have been formulated to be tested in the course of this study.

Hypothesis 1
  • Ho; There is no gap between the expectation of users of financial statement and the auditor
  • H1; There is a gap between the expectation of users of financial statement and the auditor
Hypothesis 2
  • Ho; The cause of the audit expectation gap cannot be investigated
  • H1; The cause of the audit expectation gap can be investigated
Hypothesis 3
  • Ho; The reasons why the audit expectation gap exists are non-specific
  • H1; The reasons why the audit expectation gap exists are specific.
Hypothesis 4
  • Ho; The steps taken cannot bridge the audit expectation gap
  • H1; The steps taken can bridge the audit expectation gap.

1.6 Significance of the Study

This research work on its conclusion, together with whatever solutions or findings that may arise, will prove useful to some particular group of persons i.e. shareholders, management etc or otherwise for various researcher reasons in accordance with their varying needs. It addresses the issue of lack of independence and fraud detection which have contributed immensely to the audit expectation gap which has affected the audit profession in Nigeria due to rising public expectations. The study will be beneficial to the following:-

i. Audit Clients:

They form part of audit beneficiaries and they will benefit from the results of this study. They will get to know the essence of the role and responsibilities of auditors in Nigeria.

ii. The Government:

It will acquaint government of the importance of financial reporting and the expansion of the auditor report and how it should be properly managed.

iii. The public:

This study will help to restore lost confidence of the public as regard the quality of the audit report in Nigeria.

iv. Academic and future researchers:

They will both find it as a useful source of learning and research.

1.7 The Scope of the Study

This research work is an empirical study on the audit expectation gap and how it can be bridged in Nigeria. The population of the study is Nigeria, while the sample is some selected banks, companies and students in Lagos state. This study will involve assessing the effectiveness of the method used in bridging The Audit Expectation Gap in Nigeria investment. The limitations of this study include time constraint and inadequate information may affect the inclusion of all relevant parameters to the study which might lead to sample bias.

1.8 Organisation Of The Study

  1. Chapter One of the study gives a background of the study about the research topic as well as aims and objectives of the study, research questions, statement of hypothesis and significance of the study.
  2. Chapter Two contains the general review of the literature, methods aimed at bridging the audit expectation gap and overview of theorectical framework of accounting and auditing.
  3. Chapter Three continues with a description of the empirical part of this research. In this chapter the research methodology and the design of the research will be described.
  4. Chapter Four, data analyses of the result will be presented.
  5. Chapter Five concludes with the summary of research findings and recommendations concerning further research.

1.9 Definition Of Terms


It is an independent examination of, and the subsequent expression of an opinion on, the financial statements of an organisation.

Audit Report:

It is a report by the auditors appointed to audit the accounts of a company or other organisation.

External Auditor:

An audit of an organisation carried out by an auditor who is external to, and independent of, the organisation.


A false misrepresentation by means of a statement or conduct, in order to gain a material advantage.


It refers to the independence of both the internal and external auditor from the other parties that may have a financial interest in the company.

Unqualified Audit Report:

It is issued after an independent auditor gather sufficient competent evidence and conduct the audit according to generally accepted auditing standards (GAAS) using financial statements that the client prepares using IFRS (International Financial Reporting Standards).


2.0 Literature Review

2.1 Introduction

This chapter focuses on the review of related literature. A literature review includes the current knowledge as well as theoretical and methodological contributions to a particular topic. It documents the state of the art with respect to the topic you are writing. It surveys the literature in the topic selected. In this research work the literature review includes the …


Conclusion And Recommendation

5.1 Introduction

This chapter presents and discusses the findings, presented conclusions and recommendations based on the analysis of the results of the study.

5.2 Discussion Of Findings

The result of the first hypothesis tested shows that there is a gap between the expectation of users and the auditor. This result is in consonance with the findings of Salehi et al. (2008), Izedonmi et al. (2010) that the audit expectation gap exists between users of financial statements and the auditors. The audit expectation gap exists in the responsibility of fraud detection. This means that the users of financial statement expect the auditors to detect all fraud while the auditor believes that is not their responsibiliry. Therefore, auditor’s responsibility should be clarified so as to give a clear cut to the auditors and the users of financial statement. The result of the second hypothesis revealed that the cause of the audit expectation gap can be investigated. The result conforms to the findings of Enyi et al. (2012), Uadiale et al. (2011) that the causes of the audit expectation gap result from the users of financial statement lack understanding about the auditing profession. This means that the users of financial statement are actually not aware of what is expected of auditors they believe auditor to guarantee the going concern of a company as well as ensure that financial statements are accurate. Therefore, there is a need to educate users of financial statement about the responsibilities of an auditor as well as limitation in the audit process. The result of the third hypothesis revealed the reasons why the audit expectation gap exists are specific.

The result conforms to the findings of Enyi et al. (2012) that the reasons for the audit expectation gap are deficient performance of auditors and unreasonable expectation of users of financial statement. This means that many of the users’ of financial statement expectation of the auditors are ‘unreasonable expectations’ and that are reasonably expected to carry out responsibilities which are not currently required by statute books and other documents issued by professional bodies. Therefore, new auditing standards have to be formulated, which should cover the responsibilities that can reasonably be expected of auditors but are not required by current standards. The fourth hypothesis revealed that the steps taken can bridge the audit expectation gap. The result is consistent with the findings of Ojo (2006), Uadiale et al. (2011), Enyi et al. (2012) that the audit expectation gap can only be bridged as it can’t be eliminated. The steps taken to bridge the audit expectation gap vary from issuing an expanded report that will inform users of what auditors actually do, carry out education of the public on the duties of an auditor, broaden the role of auditors in the area of fraud detection and stregthen the independence of the auditor through mandatory rotation of auditors. Therefore, there should be improvement on the steps taken to bridge the audit expectation gap and more steps should be introduced.

5.3 Conclusions

Various stuaies, regulatory bodies, auditing standard-setting bodies and even the auditing firms have responded differently to the audit expectation gap. The literature shows that audit expectation gap and misconceptions in the areas of auditors’ responsibility in relation to fraud detection in Nigeria, in that users of financial statement generally have unreasonable expectations of auditors responsibility and that most auditors would consider reasonable. That is, the auditor is expected to go beyond what is allowed by statute. This has contributed to the litigation and misunderstanding against auditors. The audit expectation gap is detrimental to the auditing profession as it has negative influences on the value of auditing and the regulation of auditors in the modern society. Misconceptions and differences in expectation gap will persist unless effective and timely solutions are implemented.

5.4 Recommendations

Based on the findings of this study, the following recommendations were made:

There is the need for continued sensitization of the public, by both the auditing profession and other stake holders on the role and duties of the auditor to avoid unreasonable expectation by the public. A system of monitoring the performance of the auditors in their audit work should be encouraged by the professional firms. Although there is mandatory professional training and points are earned by the auditors and professional members, there seems to be no enforcement or sanction on the part of the professional bodies on those members that do not comply.

There should be improved communication and feedback system by the auditing profession on how the public views its activities. Specifically, the communication between and within the auditing environment will greatly assist in monitoring and reducing the possibilities of the audit expectation gap created by the deficient performance audit.

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