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<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems.
Independence: Fundamental in Auditing Profession
What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.
Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.
Public Expectations
Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework.
People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report.
Audit at the Crossroad
Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.
Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.
Questionable Role of Auditor
There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession.
Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence.
Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report.
The Expectation Gap
Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.
Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap.
The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.
Bridging the Expectation Gap
Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness.
Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.
Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.
Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work.
Reporting
The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements.
To Conclude
Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession.
In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession.
(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'title' => 'Credibility Question In Accounting Profession',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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'content' => '<div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong><br />
By Paramananda Adhikari, FCA <br />
<br />
</strong></span></div>
</div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the past decade, increased litigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crisis in their profession. The reputation of accountancy profession comes under question for the reliability of their services. This issue in auditing profession is termed audit expectation gap which denotes the difference between the public's and auditors perceptions of the role of an audit function. The gap is critical to the auditing profession because the greater the unfulfilled expectations from the public, the lower is the credibility associated with the function of the auditor. The increase in litigation and criticism against the auditors can be attributed to the expectation gap. The gap arises from the misconceptions on the part of users, the nature and objective of audit, unreasonable expectations from public and performance below standard of profession by the auditors too. The accountancy profession, like other professions, exists only through wide public acceptance. The perceived need in auditing is an independent reporting function. Once the auditor has examined the entity's books of accounts and financial statements, the public understands that there are no problems. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Independence: Fundamental in Auditing Profession<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">What is independence? Why is it necessary for Professional Accountants? How is it maintained? These are some of the issues raised with respect to auditors. The term independence has no concrete meaning. However, integrity, objectivity and trustworthiness are the key elements in independence. The concept of auditors independence has been accepted from the very beginning when the accounting came into being as a profession. During the late 19th and early 20th centuries, the perception of independence in accounting profession changed due to modern capitalist economy, a system of economy designed to allocate resources using market mechanism. Independence is fundamental to the reliability of auditors reports. Investors, creditors and public would have little confidence in auditor's report, if they were not independent from the management in both fact and appearance.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Without independence, an auditor's opinion is suspect and the users of financial statements believe that there is no need for external auditors, if independence has not been maintained. Third parties acceptance implies that the role of external auditors is an independent financial control within the corporate entity. Auditor must be conscious to maintain independence on audit planning execution and reporting. He must strive to ensure that the audit quality is not compromised under any circumstances.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Public Expectations<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over a decade, audit is at the center of a heated debate. How and why for audit were the questions.. People were of the view that the responsibility of any wrongdoing in any entity is on the auditors among others. There has been disparity in the people's expectations from auditors, especially with regard to their duties, responsibilities and objectives of audit. There are misconceptions that it is the auditor's role to prepare financial statements in compliance with accounting standards and statutory requirements. However, the auditor's responsibility is to express an opinion whether the financial statements generated from the books of accounts give a true and fair picture in accordance with the financial reporting framework. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">People may have expectations from auditors that go beyond the professional responsibility such as audits would provide absolute assurance on the accuracy of the company's financial statements. The users of financial statements may question why the auditors did not detect material irregularities and disclose them in their report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Audit at the Crossroad <br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Given the growing list of financial reporting scandals, audit is once again at a crossroad. The significant number of big corporate failures/scandals over the past decade all over the world creates an audit crisis in the marketplace. The large payouts resulting from audit litigation in the developed countries have adversely affected the quality of audit services. Some of the big corporate failures/scandals over the past decade were, Enron (USA), WorldCom (USA), Lehman Brothers (USA), Merrill Lynch (USA), Fannie Mae (USA), Parmalat (Italy), Maxwell (UK), Flowtex (Germany), Vivendi (France), Baan (Netherlands), Satyam (India). These failures/scandals came one after another. After the widely publicised auditing failures in USA and later in Europe, the users have started losing confidence in auditing profession and raised the voice where were the auditors? What was the role of watchdog? These cases clearly map out people's expectations with respect to the duties and responsibilities of auditors. Regulating and oversight agencies have been investigating the performance status of the accounting profession worldwide.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Over the days, in Nepal too, people have witnessed and become victims of companies going bust due to poor corporate governance by the management. In such a situation, effective corporate governance structures that should have detected any unlawful or unethical behavior by the dominant party may have been missing. Due to the cases of unethical conduct of management, inappropriate accounting system, disparity in maturity pattern of assets and liabilities, over-valuation of collateral that may be running amuck and pitch in some of the cases like Nepal Development Bank (Liquidation), Samjhana Finance Ltd, Nepal Share Markets and Finance Ltd, Gurkha Development Bank, United Development Bank, Vibor Bikas Bank, Peoples Finance Ltd, World Merchant Banking and Finance Ltd, CMB Finance Ltd. From these few instances, we are also witnessing corporate failures, scandals, or liquidity crunch in recent days that may raise questions about credibility on the auditors report and sustainability of businesses. Now is the time for the audit profession to be more proactive to lead the debate.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Questionable Role of Auditor<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">There are many reasons for reducing the independence of the auditor. Among others, these are economic dependence on the client, market competition in audit, other non-audit services, close relationship with client's executives, acceptances of goods and services from clients in concessional rate or free of cost, worry about their re-appointment etc. Due to these factors, auditors may be unable to produce fair and reliable reports in certain cases and the independence, of course, is curtailed. If auditors are perceived not independent, the report would be below the standards of the profession and would damage overall image of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Auditors may be found guilty of gross negligence in examining the financial and other records. Gross negligence means failure to exercise minimum due care when material errors or irregularities that should have been detected by the application of professional standards go unnoticed. Material amount of fictitious sales recorded at the year-end to inflate income and failure to detect this intentional mis-statement is one of the examples. A similar mis-statement by understating several expenses by a small amount or charging expenses in capital account and failure to detect them by the auditor is also considered as gross negligence. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Cases finding fault with auditors about the application of professional standards, practices and inadequate disclosure have occurred over time, raising questions over auditors' performance. Some of the cases of non-compliance of standards are revenue recognition, fictitious receivables, failure to disclose related party transactions, verification of cash/bank balances and, failure to obtain third-party confirmation, inadequate collateral of loan, non-accounting of major transactions, failure to assess the client’s business risk etc. The standard also requires auditors to indicate any substantial doubt about the entity’s existence as a going concern, In such a case, the auditor must add an explanatory paragraph following the opinion paragraph to his report. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>The Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Expectation gap in audit is the difference between what the public/users of financial statement perceive about auditors responsibilities to be, and what exactly the auditors responsibilities are. Therefore, it is a gap between what is required by regulation and what market/public need is. The auditor's responsibility for detecting fraud is one of the major areas contributing to the expectation gap. The users of the financial statements believe that unqualified audit report means, the auditor has detected all material errors/irregularities. However, this perception is not in line with the professional standards, which hold the auditor responsible only for exercising due care in the conduct of examination.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Another area for difference overrides the control structure and conceals the facts, perhaps at the behest of management. In such a case, auditor's exercise of due care fails to detect irregularities in the error-free financial statements produced by the management. This will result in significant misrepresentations in financial statement not detected by the auditor and further widen the expectation gap. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">The next area of difference is perception about the entity's ability to continue as a going concern. The users believe that an unqualified audit report is a guarantee that the entity is a healthy one. However, immediately or some time later, the entity is found either in a financial crisis to sustain or in the liquidation process. In such a situation, people may not be trust unqualified audit reports and many corporations either collapsed or were bailed out within a short period of receiving unqualified audit reports. These facts may attract substantial doubt that the auditors lack the expertise to render an independent opinion on financial statements and corporate affairs.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>Bridging the Expectation Gap<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Preparation and presentation of financial statements is the prerogative of the management. Audit is performed on test basis from the sample drawn on the population of a class of transactions. Due to inherent limitation of internal control system adopted by the management, auditors can not detect all the irregularities. The auditor examines the financial statements and provides reasonable assurance that the financial statements are free from material mis-statements. As a result, the expectation gap continues to exist in audit including fraud, internal controls, illegal acts and other non-compliances. Here we analyse the possible remedial actions that may narrow expectation gap and improve the audit effectiveness. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Firstly, the auditor shall report the cases of mis-representations, non-compliance of rules, regulations and professional standards to bridge the gap to some extent. If the auditors are found grossly negligent to discharge their duties, they may be liable to action under various Acts and Regulations, such as Nepal Chartered Accountants Act 1997, Companies Act 2006, Bank and Financial Institutions Act 2006.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Secondly, compliance of Nepal Standard on Quality Control (NSQC) and implementation of Peer Review System, i.e. auditing the auditors helps narrow the expectation gap.</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Thirdly, educating the public about the objectives of audit, auditor's duties and responsibilities are important elements to bridge the expectation gap. Reducing unreasonable expectations requires creating awareness about the objective and limitations of audit and the auditor's work. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div>
<span style="font-size:12px;"><strong>Reporting <br />
<br />
</strong></span></div>
<div>
<span style="font-size:12px;">The auditor has the duty to report, after careful scrutiny of all the documentary evidences and information, every item of importance. He must demonstrate to the public that it is independent from the management and will provide high quality of audit and assurance services. Auditor, as a "public watchdog" reports the effectiveness of internal control, non-compliance of professional standards, mis-statements contained in financial statements, mis-statements resulting from management/employee fraud and illegal activities/operations, if any. Further, the auditor has to report about the entity's ability to continue as a going concern for a reasonable period from the date of audited financial statements. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><strong>To Conclude<br />
<br />
</strong></span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">Users of financial statements are of the opinion that the auditor should not only provide an opinion but also interpret the financial statements in such a manner that it evaluates the overall performance of the entity. The users expect from auditors to report in-depth information of the company’s affairs, watching the management surveillance and detecting illegal acts/frauds on the part of management. These are the high expectations on the part of users of financial statements that create gap between auditors and users expectations from auditing. There has been considerable debate about the nature and scope of audit and the audit expectation gap. The differences between what auditors actually do and what third parties think auditors do or should do remain. The expectation gap may never be eliminated. However, it may be reduced to a standard of profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
</span></div>
<div style="text-align: justify;">
<span style="font-size:12px;">In recent years, the regulatory framework for professional accountants has changed. At present, we have peer review concept, quality control standards and the disciplinary mechanism. Failing in compliance or departures from the set conduct by the members may make them liable to disciplinary action. All this has been done with a view to gaining public confidence and to enhancing credibility of the accounting profession. </span></div>
<div style="text-align: justify;">
<span style="font-size:12px;"><br />
<br />
</span></div>
<div style="text-align: justify;">
<strong><span style="font-size:12px;">(Adhikari is Technical Director at the Institute of Chartered Accountants of Nepal (ICAN) and General Secretary of the Association of Chartered Accountants of Nepal)<br />
<br />
<br />
</span></strong></div>',
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