FULLTEXT01
FULLTEXT01
FULLTEXT01
Business Administration
Master’s Thesis
30 ECTS
Above all, I am thankful to the Almighty God for the graces, strength, and
perseverance bestowed on me throughout my studies.
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Abstract
There is considerable evidence of the existence of audit expectation gap
between auditors and the public in Sweden. However, conflicting views exist
regarding the role of audit education in narrowing this gap. This thesis,
therefore, aims to investigate if the teaching of audit courses for civilekonom
students contributes in narrowing the expectation gap resulting from the
misunderstanding of audit regulations as contained in ISA and ABL.
The results of the study indicate audit education partially (at α 0.05) had an
impact in reducing the AEG on the responsibilities of auditors especially on
issues related to; auditors’ responsibility in maintaining accounting records,
management’s responsibility for preparing the annual financial statements and
auditors’ judgment in selecting audit procedures. However, audit education
had no impact on auditors’ responsibilities in detecting fraud, audit reliability
and reliability of financial statements, and decision usefulness. Furthermore,
the limited sample size, low response rate and use of convenience sampling
may affect the generalizability of the results. Additionally, the Cronbach Alpha
would have been more reliable if more participants were involved.
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Abbreviations
CS1: First-year Civilekonom Students (Not enrolled for any audit course)
CS2: Firs-year Civilekonom Students (Enrolled for at least one audit course)
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Table of Contents
1. Introduction ................................................................................................. 9
1.1. Background of the Study ...................................................................... 9
1.2. Problem Statement.............................................................................. 12
1.3. Research Aim and Objective .............................................................. 13
1.4. Research Questions ............................................................................ 14
1.5. Significance and Motivation of Study ................................................ 14
1.6. Delimitation of Study ......................................................................... 15
1.7. Structure of Study ............................................................................... 15
2. Theoretical Framework and Hypotheses Development............................. 16
2.1. Definition of the Audit Expectation Gap............................................ 16
2.2. Categorization of the Audit Expectation Gap..................................... 17
2.3. Factors Affecting the Expectation Gap .............................................. 18
2.3.1. The Complication of the Audit Function .................................... 19
2.3.2. The Audit Conflict of Interest .................................................... 19
2.3.3. Hindsight Evaluation of Audit Performance.............................. 20
2.3.4. Time gap to responding to the changing Public’s Audit
Expectation ............................................................................................ 20
2.3.5. The Self-Regulated Nature of the Audit Profession .................. 21
2.3.6. The Unreasonable Expectation of the public ............................. 22
2.4. Remedies to the Audit Expectation Gap ............................................ 22
2.4.1. The Defensive Approach (Education) ....................................... 22
2.4.2. The Constructive Approach ....................................................... 24
2.4.2.1. Expanding the Scope of Audits ....................................... 24
2.4.2.2. Restructuring Audit Methodologies .............................. 25
2.4.2.3 Expanding Auditors’ Responsibilities and Performance 25
2.5. Global Evidence of the Audit Expectation Gap ................................. 26
2.6. Hypotheses Development ................................................................... 28
3. Audit Practice and the Expectation Gap in Sweden .................................. 30
3.1. Audit Background and Practice in Sweden ........................................ 30
3.2 Duties of Auditors based on the Swedish Company Act (ABL) of 2005
................................................................................................................... 33
3.3. Audit Report Format Based on ISA-700 ............................................ 34
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3.4. Audit Expectation Gap in Sweden ......................................................36
4. Methodology ..............................................................................................38
4.1. Research Philosophy and Approach ...................................................38
4.2. Research Design and Strategy.............................................................40
4.3. Data Collection....................................................................................41
4.3.1. Questionnaire .............................................................................41
4.3.2. Sample Population .....................................................................42
4.4. Quality of Instruments ........................................................................43
4.4.1. Validity.......................................................................................43
4.4.2. Reliability ...................................................................................44
4.5. Analysis ...............................................................................................44
4.6. Ethical Considerations ........................................................................45
4.7. Overview of questionnaire Statements for the Audit Expectation Gap
....................................................................................................................45
5. Results ........................................................................................................54
5.1. Demographic Information of Usable Respondents .............................54
5.2. Results from Semantic Differential Belief Statements .......................56
5.2.1. Auditors’ Responsibilities ..........................................................56
5.2.2. Reliability of Audits and Audited Financial Statements ............60
5.2.3. Usefulness of Audited Financial Statements..............................64
5.3. Hypotheses Testing .............................................................................66
6. Discussion ..................................................................................................69
7. Conclusion .................................................................................................75
7.1. Summary .............................................................................................75
7.2. Limitations ..........................................................................................76
7.3. Recommendations ...............................................................................76
References ........................................................................................................77
Appendices .......................................................................................................87
Appendix 1. Spearman’s Rank Correlation Coefficient ............................87
Appendix 2. Cronbach’s Alpha ..................................................................88
Appendix 3. Pilot Survey Instrument .........................................................89
Appendix 4. Survey Instrument .................................................................92
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List of Figures
Figure 1: Categorization of the Audit Expectation-Performance Gap ........... 18
List of Tables
Table 1: Descriptive Statistics of Respondents .............................................. 55
Table 2: Demographic Information of Respondents ...................................... 55
Table 3: Auditors’ responsibility mean distribution (CS1 and CS3) ............. 57
Table 4: Auditors’ responsibility mean distribution (CS1 and CS2) ............. 58
Table 5: Auditors’ responsibility mean distribution (CS3 and CS4) ............. 59
Table 6: Audit reliability mean distribution (CS1 and CS3) .......................... 61
Table 7: Audit reliability mean distribution (CS1 and CS2) .......................... 62
Table 8: Audit reliability mean distribution (CS3 and CS4) .......................... 63
Table 9: Decision Usefulness mean distribution (CS1 and CS3)................... 64
Table 10: Decision Usefulness mean distribution (CS1 and CS2) ................ 65
Table 11: Decision Usefulness mean distribution (CS3 and CS4) ................ 65
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1. Introduction
This chapter presents an overview of this research project which encompasses; the background
of the study, problem statement, research aim and objective, research questions and concludes
with a structure of the thesis.
The audit expectation gap has been in existence for the past century
(Humphrey et al. 1993). Johansson (2005) equates the existence of the AEG
to the period auditing started even though, research in this area started only
some forty-three years back with the work of Liggio (1974), who established
the existence of an expectation gap. Humphrey and Turley (1992) further trace
the audit expectation gap to the 19th century with the commencement of
company auditing. During this period, auditors provided almost absolute
assurance against fraud and intentional mismanagement (Epstein & Geiger
1994). Although the audit profession has evolved from detecting fraud and
error and verifying all transaction, to the provision of reasonable assurance on
the truth and fairness of financial statements, the unreasonable expectations
from users have remained unchanged, thus aggravating the AEG (Fadzy &
Ahmad 2004).
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the credibility of auditors were increasingly being questioned (Porter 1993).
The AEG is related directly to the purpose, nature, value and effects of audits
(Humphrey et al. 1993). Studies conducted in Anglo-Saxon countries such as;
the US, UK, Ireland and Australia (Baron et al. 1977; Humphrey et al. 1993;
Robinson & Lyttle 1991; Monroe & Woodliff 1994) shows the extensive
nature of the AEG. Nonetheless, the AEG is not typical only in Anglo-Saxon
countries with greater audit scrutiny and where auditing is a market demand
but across the globe (Enes et al. 2016).
Recent studies show the existence of an AEG in the Netherlands, Malta, Iran,
Egypt, China, Singapore, Lebanon, Malaysia, Bangladesh (Hassink et al. 2009;
Desira & Baldacchino 2005; Salehi et al. 2009; Dixon et al. 2006; Lin & Chen
2004; Best et al. 2001; Sidani 2007; Fadzly & Ahmad 2004; Siddiqui et al.
2009). The commonality amongst these studies is the perception of the public
about auditors’ independence and auditors’ fraud prevention and detection
responsibilities. Furthermore, several studies (Gometz 1982; Brendahl &
Forsbery 2011; Kristoffersson et al. 2009; Jepsson & Jönsson 2007;
Magnusson & Olofsson 2007; Johnsson & Nilsson 2011; Magnusson &
Olofsson 2007; Lehman & Nordenson 2014; Madsen 2013; Forsberg &
Dellby 2016) have established the existence of an AEG in Sweden between
auditors and financial statement users broadly on issues related to auditors’
responsibilities, reliability of audits and the usefulness of audited financial
statements.
From the audit profession's perspective, the prevalence of the AEG is because
“the investing public expects too much and remains largely ignorant as to the
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precise nature, purpose, and capabilities of the audit functions” (Humphrey et
al. 1993, p.395). As a result, the audit profession focused on correcting users’
expectation as a means of narrowing the AEG (Sweeney 1997). Consequently,
the audit profession faced a backlash from some researchers for taking self-
protective steps rather than proactive measures to close the AEG (Sweeney
1997). It is against this backdrop that, Porter et al. (2005) recommended
determining society’s expectation of auditors, determining reasonable duties
auditors can perform and determining the extent to which such reasonable
expectations can be satisfied as important considerations to narrowing the
expectation gap. Prior exploratory studies on the AEG equally championed
the notion that, the AEG resulted from the “unreasonable expectations” of
the public (De Martinis & Burrowes 1996) prompting Sikka et al. (1998) to
highlight this bias in research on the AEG which advocated that, the surest
means to eliminate the AEG is by transferring auditors’ understanding of their
duties and responsibilities to the public. However, De Martinis and Burrowes
(1996) noted that this bias has been reducing with the emphasis on current
research focusing on issues related to the performance gap of auditors as a
contributing factor to the AEG.
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1.2. Problem Statement
Current audit literature confirms the existence and the prevalence of the AEG
resulting from society’s unreasonable expectations of auditors which most
often exceeds regulatory and standard requirements (Hassink et al. 2009) and
which are frequently unrealistic. The expectation gap between users and
auditors results mainly from ideological differences between users and auditors
regarding the duties of auditors and the objectives of financial statements
(McEnroe & Martens 2001). Some users incorrectly perceive the unqualified
audit opinion to mean the entity is completely free from material error. By the
same token, Salehi (2011) underscores that some users mistakenly perceive the
functions of the auditor to include; interpreting financial statements in a
manner which aids users in investment decisions, digging into the company’s
financial affairs, performing significant surveillance on management and
detecting and preventing fraud. Eden et al. (2003) further emphasize that
financial statement users often expect the auditor to detect fraud and error and
evaluate management’s performance, whereas auditors contend their duties
involves evaluating the truth and fairness of financial statements. Furthermore,
many investors believe auditors should assess all documents and records of a
company with the primary objective of detecting fraud and error (Messier et al.
2011). Sikka et al. (1998, P.299) note that such unreasonable expectations of
the public are detrimental to the credibility and general reputation of auditors.
These misperceptions about the duties of auditors mainly account for the
expectation gap.
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whose expectations about the functions of the auditors are sometimes
unreasonable due to unawareness of the real responsibilities of the auditor.
Prior and contemporary studies (for example, Humphrey et al.; 1992; Sikka et
al., 1992; Porter & Gowthorpe 2004; Hassink et al. 2009; etc.) have highly
recommended education as a means of narrowing the AEG. While some of
these studies focus on educating the public (Hassink et al. 2009), others
concentrate on educating auditors (Porter & Gowthorpe 2004) as a means of
narrowing the AEG. Siddiqui et al. (2009) further underscore that previous
studies recommended; the monitoring of auditors' performance, improving
the audit quality control process, that audit reports should contain a disclosure
of the materiality standard and creating an independent oversight agency. This
recommendation is echoed in the work of Humphrey et al. (1993) in which
they emphasize the setting up of an independent office which deals with
auditors' independence and regulates the appointment of auditors in large
firms.
The AEG has received significant attention from academics and organizations
that have focused on its origin, nature, causes (Enes et al. 2016) and solutions.
So far few studies have empirically tested the effectiveness of the
recommended solutions. In the same vein, Sidani (2007) further notes that the
measures undertaken by professional and regulatory bodies have not received
extensive consideration. Educating the public is the most recommended
techniques to narrowing the AEG. Thus, this study is aimed at investigating
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the impact audit education has in narrowing the AEG in Sweden. More
specifically this study seeks to determine the level of knowledge, first-year and
final-year civilekonom students possess about the responsibilities of auditors.
Furthermore, this study is aimed at determining if material differences exist
between the knowledge first and final year civilekonom students with and
without an audit education possess about the responsibilities of auditors.
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the AEG gap in Sweden. The results of this study establish the extent to which
audit education is an effective means of narrowing the expectation gap.
This thesis principally focuses on the impact of audit education on the AEG in
Sweden. This study is delimited to Sweden since it is based on prior studies
which established the existence of an expectation gap in Sweden. Thus, this
thesis will empirically test the effectiveness of audit education in narrowing the
expectation gap. The expectation gap in this thesis is limited to the
reasonableness gap. Therefore, this study does not encompass the deficient
performance gap and the deficient standard gap. Furthermore, all survey
participants were civilekonom students studying in Swedish Universities,
therefore; we expect their perception of the responsibilities of auditors to be
limited to the practice of auditing in Sweden. Additionally, the theoretical
framework has been delimited to reflect aspects relevant to this thesis.
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2. Theoretical Framework and Hypotheses Development
This chapter presents the conceptual framework of the AEG which includes; the definition of
AEG, Categorization of AEG, factors affecting the expectation gap, remedies to the
expectation gap, international evidence of the expectation gap and hypotheses development.
Similarly, Guy and Sullivan (1988) describe the AEG as the variation between
the public’s beliefs of auditors’ responsibilities and auditors’ beliefs of their
responsibilities. On the same note, Sikka et al. (1998) define the AEG as the
differences between the public’s expectations of an audit and what the audit
profession desires the audit objectives to encompass.
Two prominent and commonly used definitions of the expectation gap are;
AICPA's definition and Monroe and Woodliff's definition. The American
Institute of Certified Public Accountants (AICPA) (1993) defines AEG as “the
difference between what the public and financial statement users believe that
auditors are responsible for and what the auditors themselves believe their
responsibilities are” (AICPA 1993). Another frequently used definition is that
of Monroe and Woodliff (1993) who define AEG as the variation in beliefs
between the public and auditors concerning the duties and responsibilities of
auditors and the audit report content. Dennis (2010) goes an extra mile by
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incorporating the "desire" aspect into the AEG. Thus, he defines the AEG as
the differences in beliefs and desires between users and auditors.
Porter (1993) categorized the performance gap into, the deficient standard gap
and the deficient performance gap. Porter (1993) defined the deficient
standard gap as the difference between the duties society reasonably expects of
auditors, and the current responsibilities of auditors as defined by audit
regulations, laws and other relevant statutes. This gap occurs when society
reasonably expects auditors to perform a task, but there are no current audit
regulations to fulfill these reasonable expectations. The deficient performance,
on the other hand, is the difference between the expected standards of
performance of auditors as required by the law and the perceived level of
performance by society of the auditor. This gap could be narrowed by
expanding and developing audit standards with responsibilities which society
reasonably expects of the auditor. Figure 1 below presents porter’s
categorization of the audit expectation-performance gap.
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Figure 1: Categorization of the Audit Expectation- Performance Gap
Johansson et al. (2005) underscores that, the expectation gap turns to be lower
in owner-managed companies because of the high trust level existing between
the owner and auditor. Such high trust level is cultivated from the owner
developing an enhanced understanding about the audit process. Power (1999)
however underscores that the AEG has benefited auditors by contributing to
the economic success of auditors. Obradovic and Skopljakovic (2013) looks at
the AEG from a positive vantage point by highlighting the positive perception
some users had about the expectation gap. They further argue that small
businesses which possess inadequate knowledge about the duties of the
auditor are less likely to challenge the auditor, unlike large entities. We argue
that this benefit is limited to the extent that a scandal does not occur which
will only worsen the situation.
Prior studies have established factors that affect and contribute to the AEG.
An assessment of the causes of the expectation gap reveals that the gap results
mainly from; the complication of the audit function, the conflicting duties of
auditors, hindsight evaluation of audit performance, the time gap to
responding to the audit expectations of the public, the self-regulated nature of
the audit profession and the unreasonable expectations of the public. In this
section, we establish these factors from different theoretical perspectives to
gain an enhanced understanding of the concept.
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2.3.1. The Complication of the Audit Function
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services (Lee et al. 2009). The provision of such non-audit services confuses
the public as to the actual duties of auditors.
The expectation gap may emerge between the period when the audit
profession identifies and responses to the expectation of the public
(Humphrey et al. 1992). Tricker (1982) further notes that accounting standards
mostly emerge after corporate scandals due to new expectations and
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accountability requirements of the public regarding the audit function.
Humphrey et al. (1992) further note that this demonstrates the audit
profession’s gradual approach in constructively meeting the public’s
expectation. Humphrey (1997) equally highlights that even with the measures
implemented by the audit profession to satisfy the public’s expectations, the
profession is often criticized for failing to meet up with the pace of the rapidly
changing business environment. The audit profession has frequently adopted a
retrospective approach by taking actions mostly after a corporate scandal, or
financial crisis occurs (Lee et al. 2009). Therefore, an expectation gap is bound
to emerge from the period which the public develops an expectation and the
time gap which the audit profession responses to such expectation.
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2.3.6. The Unreasonable expectation of the public
It is imperative that the AEG be narrowed down. As Gray and Stuart (2001)
note, reducing the expectation gap is the only means through which auditors
can regain independence and credibility from society. In this light, Humphrey
et al. (1992) underscore two solutions which could be implemented by the
audit profession to reduce the audit expectation gap which includes; the
constructive, and the defensive approach. The constructive approach is aimed
at changing audit activities to meet the public’s expectations. The constructive
approach could be an important measure to reduce the AEG, but it is quite
costly to implement and requires more audit effort (Sikka et al. 1998). Lee et
al. (2009) note that the constructive approach encompasses; expanding of
audit reports, restructuring audit methodologies, and expanding audit
responsibilities. Meanwhile, the defensive approach involves changing the
public's perception of auditors. The defensive approach is often referred to as
education (Lee et al. 2009).
The defensive approach entails educating the public whose expectations about
the responsibilities of the auditor are sometimes unreasonable due to
unawareness of the actual duties of auditors (Humphrey at al. 1992).
According to Humphrey et al. (1992), it is imperative to educate and reassure
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the public through various means such as; changing the wordings of the audit
report, publishing professional statements on the actual responsibilities of
auditors, standardizing the audit report to reduce its complexity making it
more understandable. Several studies (Epstein & Geiger 1994; Fadzly &
Ahmad 2004; Hussain 2003; McEnroe & Martens 2001) concur with the
assertion that, education is an effective means of narrowing the AEG. Porter
and Gowthorpe (2004) equally underscored the effectiveness of education in
reducing the performance gap. They further recommended education for
auditors and audit trainees to ensure they understood their responsibilities as
required by the relevant statute.
In a related study, Grambling et al. (1996) observed a similar trend with the
expectation gap reducing after students enrolled for an audit course which
covered topics on auditors’ responsibilities. Similarly, Siddiqui et al. (2009)
observed that traditional audit education plays a vital role in narrowing the
AEG. In a more recent study, Enes at al. (2016) concluded that even though
education does not wholly eliminate the expectation gap, it has the impact of
altering students’ perception about auditors’ fraud prevention and detection
responsibilities. Boyle and Canning (2005) further suggest that teaching and
disseminating information related to financial statement audit may be an
effective means of narrowing the expectation gap. Similarly, Fadzly and
Ahmad (2004) highlighted the importance of using reading materials as an
effective means of correcting some of the misconceptions users have about
auditors’ duties. All these studies raise the fundamental question of whether
audit education plays a significant role in narrowing the AEG through the
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enhancement of users’ understanding of the duties and responsibilities of
auditors as defined by the relevant regulatory framework.
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audit procedures because ISA-700 does not currently oblige additional
requirements of auditors. Thus, users’ understanding may not increase
significantly except ISA mandates auditors to provide additional information
on the purpose and procedures of audits.
It is believed that the AEG narrows down when the public is satisfied with the
auditors’ performance. In this light, Koh and Woo (1998) recommend audit
firms to apply structured methodologies to improve auditors’ performance. In
an earlier study, Purvis (1987) concluded that the use of semi-structured and
structured audit procedures might be cost ineffective and not beneficial to the
audit profession. Lee et al. (2009) concurred with this conclusion emphasizing
that due to the functional and dysfunctional effects of the audit assignment,
there is non-consensus on the effectiveness of this method in narrowing the
expectation gap. However, the effectiveness of this approach in reducing the
expectation gap is still subject to debate, and its effectiveness largely depends
on a case by case basis (Lee et al. 2009).
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auditors and regulates audit fees and the expansion of statutory audit duties as
two measures to improve audit quality. Lee et al. (2009) further note that,
while taking into consideration the expansion of auditors’ responsibilities, the
cost of implementing such audit duties should be given due consideration
given that, most of the public are free riders of such services.
Several studies conducted in the Anglo-Saxon and Western nations reveal the
existence of the AEG. For example, Humphrey et al. (1993) noted the
existence of the expectation gap in the UK between auditors and
“sophisticated users” (investment analysts, financial journalists, financial
directors and bankers) on the nature of auditing, auditors’ fraud detection
responsibilities, auditors’ responsibilities to third parties, the nature of the
balance sheet evaluation and the perception of auditors’ performance. In an
earlier survey conducted in Australia and Singapore, Low (1984) uncovered an
expectation gap between auditors and analysts in the areas of, fraud detection
and the reliability of financial statements. Furthermore, Monroe and Woodliff
(1994) observed the existence of the AEG in Australia between Auditors and
accountants, shareholders, directors, creditors and undergraduate students
based on the wordings of the old report form before AUP 3. They, however,
noted that the modified wordings in AUP 3 significantly affected users’ beliefs
regarding the responsibilities of auditors and management and the nature of
audits, thus eliminating some of the unreasonable expectations.
Furthermore, Baron et al. (1977) observed the existence of the expectation gap
in the US between auditors and financial statement users pertaining to
auditors’ responsibility for detecting illegal acts. Similarly, Lowe (1994)
uncovered an expectation gap in the US between auditors and judges, with
judges having more expectations of auditors. Epstein and Geiger (1994)
equally observed the existence of the expectation gap in the US between
auditors and investors, with more than half of the investors surveyed
expecting absolute assurance that financial statements were free from material
misstatements. Consistent with the study of Epstein and Geiger (1994),
McEnroe and Martens (2001) observed the existence of an expectation gap
between auditors and investors pertaining to auditors’ fraud detection and
reporting responsibilities. Low et al. (1988) observed the existence of the
expectation gap in Singapore between auditors and financial analysts regarding
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the perception of the objectives of an audit particularly; auditors’ fraud
prevention responsibility, assuring the accuracy of financial statements, the
effectiveness of government grants and the effectiveness of management. In a
more recent study, Best et al. (2001) similarly observed the existence of a very
wide expectation gap between auditor, bankers and investors in Singapore
particularly on issues related to auditors’ fraud prevention and detection
responsibilities, auditors’ responsibility for maintaining accounting records and
auditors’ judgment in selecting audit procedures.
Salehi et al. (2009) likewise established the existence of the expectation gap
between auditors and investors in Iran on auditors’ independence. Similarly,
Pourheydari and Abousaiedi (2011) highlighted the existence of the AEG in
Iran between auditors and investors, bankers and brokers particularly on issues
related to auditors’ fraud detection responsibilities, the preparation of financial
statements and the soundness of internal controls. To a lesser extent, the
expectation gap was found to exist on auditors’ fraud prevention
responsibility. Dixon et al. (2006) equally observed the existence of a wide
expectation gap between auditors and financial statement users related to
auditors’ fraud prevention responsibilities, auditors’ role in maintaining
accounting records and auditors’ judgment in selecting audit procedures. To a
lesser extent, the gap was observed on issues related to the reliability of
audited financial statements and the usefulness of financial statements.
Likewise, Lin and Chen (2004) underscored the existence of an expectation
gap between auditors and management, educators, investors and the
government on issues related to; the role of auditors, the objectives of audits
and auditors’ fraud detection role. The reasonableness gap was equally
observed to exist in Lebanon between auditors and financial statement users
(Sidani 2007). A gap between auditors’ understanding of their duties and
financial statement users’ perception was established in Lebanon particularly
regarding auditors’ fraud detection responsibilities.
Desira and Baldacchino (2005) equally underscore the existence of the AEG in
Malta between auditors and jurors related to auditor’s actual duties and
auditors’ responsibilities regarding fraud detection, internal control structure
and maintaining accounting records. Hassink et al. (2009) similarly
underscored the existence of the expectation gap between auditors and
financial managers in the Netherlands about the general fraud responsibilities
of auditors and auditors’ fraud detection responsibility.
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Consistent with most findings on the expectation gap, Fadzly and Ahmad
(2004) observed the existence of an expectation gap between auditors, brokers,
bankers, investors and investor in Malaysia. This gap was found to be wide on
issues related to auditors’ fraud detection and prevention responsibilities,
maintenance of accounting records, internal control and the preparation of
financial statements. Siddiqui et al. (2009) equally observed the existence of the
expectation gap between auditors, bankers and university students regarding
auditors’ responsibilities in Bangladesh.
H1: First-year students (CS1 and CS2) and final-year students who have
not enrolled for any audit course (CS4) have unreasonable expectations
about the duties and responsibilities of Auditors.
We develop (H1) based on the idea that, first-year students and final-year
students who have not enrolled for audit courses will have expectations which
fall out of the scope of duties required of auditors by ISA and ABL.
28
scope, and limitations of audits compared to first-year students with an
inadequate background on auditors’ duties. Thus, the difference in perception
stems from the variation in audit knowledge among first-year students with no
audit education background and final-year students with an audit education
background.
H6: Advanced audit education is the primary factor which results in the
differences in perceptions between First and Final year student.
We consider audit education to be the central factor which accounts for the
expectation gap as only 10% of the respondents had audit related work
experience. Therefore, we assume that any differences in perception of
students resulted from audit education.
It is worth mentioning that, audit experience was taken into consideration for
students who had enrolled for audit courses only. Therefore, there was no
category of students who had not enrolled for audit courses but had the
necessary audit work experience.
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3. Audit Practice and the Expectation Gap in Sweden
This chapter presents an overview of the practice of auditing in Sweden, the duties of auditors
in Sweden based on the Swedish Company Act of 2005, the audit report format based on
ISA-700, and the audit expectation gap in Sweden.
30
ABL of 1910 prohibited company employees or anyone employed by a board
member to become a company’s auditor. The act further clarified and
highlighted the rights and obligations of auditors such as; having access to
inventory and cash records which some general meetings had previously
withheld auditors from access to such information.
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Auditing before the 1960’s was focused on checking figures, but from the
1960’s onwards the focus changed to internal controls. The advent of the
1970’s was met with the globalization of markets in which audit standards
became international. To catch up with such international audit practice, FAR
abandoned its item-by-item checking system for a more complex and technical
audit process. From 1971 FAR started issuing professional recommendations
which were subsequently approved by the ABL of 1975. The 1975 ABL
further made it mandatory for auditors to comply with GAAS with the audit
profession interpreting such standards. A proposal was equally made in 1975
for all companies to have a certified auditor but the scarcity of auditors at the
time prevented it from being implemented. Nevertheless, from 1983 onwards,
statutory audits became mandatory with all limited companies required to have
an approved or certified auditor (Wallerstedt 2001). From 1985 auditors in
Sweden were expected to issue a qualified opinion (Öhman & Wallerstedt
2012.) and report to the authority investigating economic crimes (Widhagen &
Damberg 1985) in cases where companies failed to comply with the tax
legislation and other legislations (Larsson 2005). Additionally, auditors were
empowered to report crimes committed by board members and CEOs (SFS,
1998:760).
Johansson et al. (2005) note that in 1995 after Sweden became a member of
the EU, it had to adhere and comply with EU directives especially the 8th
directive which regulates audit practice. Thus, in 1995 and 1999 respectively,
an Annual Accounts Acts and new laws governing auditors and auditing were
enacted. The 1995 ABL mandated an independent authority (National Board
of Trade) to deal with issues related to auditing. Meanwhile, the Supervisory
Board of Public Accountants was charged with approving auditors, issuing
auditing guidelines and resolving resulting complaints. In 2001, Sweden
became the first European nation to implement a tool called “the analysis
model” which provided auditors the opportunity to monitor their
independence. In addition to complying with EU rules, auditors were equally
required to perform management audits, a provision which is applicable only
in Sweden and Finland.
32
3.2. Duties of Auditors based on the Swedish Company Act (ABL) of
2005.
The auditor is equally supposed to comply with the provisions of the articles
of association, GAAS, instructions of the general meeting and any relevant
statute in pursuant of the audit (ABL; 9:4). Furthermore, the auditor is
33
required to present an audit report at the end of financial year to the general
meeting (ABL; 9:5). The audit report is supposed to be presented to the board
of directors at least three weeks before the general meeting (ABL, 9:28). The
audit report is expected to contain; the name of the entity audited, the
coverage period of the auditor’s report, the audit standard system
implemented, the signature of the auditor and date of completion of the audit
assignment (ABL 9:29). The auditor is further charged with highlighting any
inherent limitations experienced in performing the audit, differences in
opinion with the board of directors and another auditor, and circumstances
which prevent the auditor from expressing an opinion (ABL9:30). In this
regard, auditors are to disclose if applicable statutes adhered to in preparing
the annual reports and auditors are expected to state whether the entity's
accounts present a true and fair view of its financial position and if the
administration’s report is consistent with the annual report (ABL 9:31).
Additionally, the auditor is expected to state in the audit report if the annual
general meeting should adopt the balance sheet and income statement report
(ABL 9:32). In situations where the board of directors or the managing
director makes an omission which could result to a liability, the auditor is
expected to report on such circumstances (ABL 9:33). Auditors are mandated
to disclose all taxation related breach ranging from; failure of the company to
make the right deductions, failure of the company to make timely tax payment,
failure to comply with the registration requirements contained in chapter 3,
section 2, and failure to file tax returns as contained in chapter 10, section 9.
Concerning the audit, the auditor is required to provide any criticisms and
observations to the board of directors (ABL 9:6). The board is expected to
note such objections in its minute or have it documented. Such criticisms are
supposed to be deliberated upon not more than four weeks after their initial
submission (ABL 9:39). Auditors are expected to maintain a high level of
confidentiality by avoiding disclosing any sensitive information about the
company which may be detrimental to the company (ABL9:41).
34
worth noting that, 90% of audit reports have an unqualified audit opinion
(Hayes et al. 2005). A standard unqualified opinion usually commences with
the title page indicating the audit was performed by an independent auditor.
This is followed by the name of the entity being audited, the financial
statements being examined and their titles, a summary of accounting policies
and other relevant explanatory information implemented in the company, the
date, and period of coverage of each financial statement (ISA-700,
paragraph22- 23).
The audit report must describe the purpose of the audit which is aimed at
obtaining evidence regarding management’s assertions contained in the
financial statements. The auditor’s judgment is the main determinant of the
selected procedure which is often based on the auditor’s risk assessment of the
occurrence of fraud and the strength of internal controls. The audit report is
supposed to contain and opinion paragraph in which the auditor expresses
his/her opinion based on the method of preparation of the financial
statements. Financial statements prepared based on fair presentation have a
standard format for the unmodified opinion (ISA-700, paragraph 34). Auditors
are expected to state the financial reporting framework applied in case
International Financial Reporting Standards (IFRSs), or International Public
Sector Accounting Standards (IPSASs) are not implemented (ISA-700,
paragraph 37). The audit report shall be concluded with the signature of the
auditor, the date of the audit report and the address of the auditor (ISA-700,
paragraph 40, 41, 42).
35
3.4. Audit Expectation Gap in Sweden
The main trigger which brought the debate of the AEG in Sweden was the
1930 collapse of the financial empire of Ivar Krüger. This scandal brought the
audit profession into the spotlight with enhanced criticism of the profession
which simultaneously resulted in changes in audit regulations and the audit
profession. This collapse signaled cracks on the integrity of the audit
profession as it significantly affected and changed the role of auditors in
Sweden (Carrington 2010). Legislative changes were further enhanced with the
adoption of the 1994 ABL which extended the duties and liabilities of auditors
to include creditors and other third-party investors and not just business
entities (Carrington 2010). The Skandia fraud case often referred to as
Sweden’s Enron further exacerbated the criticism on auditors by stakeholders
for failing to detect such a fraud and material financial statement omissions
which further depleted the confidence stakeholders had in financial statements
and auditors (Enevång & Furberg 2007).
36
expectation gap from further widening. Meanwhile, Lövgren (1993) stressed
the importance of an audit committee in listed companies, the creation of
internal quality controls for audit firms and for the audit committee to meet
the expectations of stakeholders.
37
4. Methodology
This chapter presents an overview of the research methodology designed to achieve the
objectives of this thesis. It presents the research design, data collection method, validity and
reliability, limitations of the study, data analysis procedures and an overview of questionnaire
statements.
It is imperative for researchers to know the subject matter (Kvale 1996) and
the objectives of the study before deciding on the method to implement
(Arksey & Knight 1999). It is crucial for the researcher to identify the research
philosophy needed to design and collect data. Research philosophy concerns
knowledge development and the nature of such knowledge. Social sciences
mainly implement two philosophical views; epistemology and ontology.
Epistemology deals with what is considered acceptable knowledge in a given
field. It deals with the methods used to acquire knowledge (Bryman & Bell
2015). The epistemology chosen thus reflects the beliefs and values of the
researcher. Two principal research epistemology exist; positivism and
interpretivism (Saunders et al. 2003, Bryman & Bell 2011, p.15).
Positivism mainly aims to apply natural science methods to the social world
meanwhile; interpretivism makes such distinction between natural science and
social science methods (Bryman & Bell 2015). A clear distinction between
both methods is; positivism focuses on explaining human perception and
behaviours using natural science methods, while interpretivism focuses on
understanding people and institutions. Thus natural science methods are
incompatible with the interpretivism. Interpretivism emphasizes values,
norms, subjective position and human perception and behaviours (Bryman &
Bell 2015). It is worth noting that, the research design implemented in any
study is influenced by the epistemology. Thus, the epistemology used in a
research helps in answering the research questions. This thesis adopted the
positivist approach since the aim was to test natural science methods in the
social world.
38
influence the world around them. Whereas, constructionist view social realities
as created through the perceptions and actions of social actors concerned
about their existence. Based on this definition, realities of the social world are
constructed and continuously evolve through revision (Bryman & Bell 2015).
From a constructionist perspective, social phenomena are realized and fulfilled
by social actors (Bryman & Bell 2011, p.21). Therefore, constructionists adopt
a subjective approach to reality whereas; objectivists adopt an objective
interpretation to reality. This study adopted objectivism as the ontological
approach with the underlying assumption that, external realities and social
events are beyond human influence which runs contrary to the constructionist
viewpoint (Bryman & Bell 2015). Our choice of positivism further justifies our
choice of the objectivist approach for this study.
The relationship between theory and research could be shown by the research
approach implemented (Bryman & Bell 2015). The research approach focuses
on the data collection method needed to answer research questions (Saunder
et al. 2009, p. 106). The research approach could be classified into the
deductive, inductive, and abductive approaches (Bryman & Bell 2015). The
deductive approach begins with a general perspective (theory) which forms the
basis for the development and testing of hypotheses and ends with a specific
conclusion based on premises which explain why it is commonly referred to as
the top-down approach (Trochim 1999, p.26). The deductive reasoning is
usually associated with the positivist position and is frequently employed in
quantitative studies through which hypotheses are deduced based on existing
knowledge (Bryman & Bell 2007, p.21). Meanwhile, the inductive approach
begins with specific observations and ends with wider generalizations and
theories (Saunders et al. 2009, p.125). It is often referred to as the bottom-up
approach (Trochim 1999, p.26) since it begins with specific observations and
ends with the generalization of a theory. Thus, the inductive approach enables
researchers to make generalizations from specific viewpoints. The inductive
approach is often implemented in qualitative studies with an interpretivist
position (Bryman & Bell 2007, p.29). On the other hand, the abductive
approach is a combination of both inductive and deductive methods.
The deductive reasoning was adopted for this study through which, the thesis
was guided by existing knowledge and theoretical considerations. Hypotheses
were developed and empirically tested. This study couldn’t use the inductive
approach because the aim was not to generate theories but test existing
theories. The deductive approach was most appropriate for this thesis because
39
there exist a vast theoretical literature on the subject, but little studies have
been conducted to test these theories.
There are principally five research designs; case study, experimental, cross-
sectional, longitudinal and comparative designs (Bryman & Bell 2007 p.53).
The research design is the plan and strategy used by researchers to achieve the
objectives and aims of the research. The cross-sectional likewise known as the
survey design was adopted in this thesis. Bryman and Bell (2015, p.62) define
the cross-sectional design as a process which involves
the collection of data on more than one case (usually a lot more
than one) and at a single point in time in order to collect a body
of quantitative or quantifiable data in connection with two or
more variables (usually many more than two), which are then
examined to detect patterns of association.
Our choice of this method is method relates directly with the purpose and aim
of this study which is to evaluate the impact audit education has on the AEG.
There are two principal research strategies used in data collection; quantitative
and qualitative methods. The quantitative method follows a systematic
empirical approach involving data quantification with the assistance of
mathematical and statistical tools (Bryman & Bell 2007, p.26). The quantitative
method involves empirically testing data to observe a relationship and make
conclusions based on the results obtained. Meanwhile, the qualitative strategy
focuses on, vocabulary and formulations in the data collection and analysis
phase. Additionally, qualitative research is often influenced by individual
perceptions and interpretation (Bryman 2012).
The quantitative research strategy was used for this study to obtain
quantifiable data which was used to empirically test the hypotheses developed
for this study and make the relevant conclusion. This method is most
appropriate for this thesis as positivism was adopted as the epistemological
approach and objectivism as the ontological approach. Furthermore, the
quantitative approach has the advantage of ensuring consistency and easy
replication of findings overtime (Bryman & Bell 2015). However, even though
some researchers criticize this method for creating a static view about social
outcomes and people’s lives (Bryman & Bell 2015), it was most appropriate
40
for this study. This study could not adopt the qualitative method because the
focus of the study was not on words or gaining an in-depth understanding of
people’s perceptions. Furthermore, the qualitative method is too subjective
and difficult to replicate (Bryman & Bell 2015).
4.3.1. Questionnaire
Each of the statements in the second section is evaluated using the five-point
Likert scale enabling respondents to choose their level of agreement on a scale
of 1-5. Bell (2010) credits the Likert scale for its significance in assessing
perceptions which fall in line with the objectives of this questionnaire.
Furthermore, the five-point Likert scale has the advantage of reducing wrong
responses as respondents without sufficient knowledge on the subject matter
can always choose the neutral option. However, there is a long-standing
debate regarding the optimal number of the scale, whether the five or seven-
41
point scale is most appropriate (Preston & Colman 2000). Nevertheless,
Preston and Colman (2000) prefer the five-point Likert scale considering that
it is less demotivating and frustrating to respondents compared to the seven-
point Likert scale. Some of the statements contained unreasonable
expectations regarding auditors' responsibility and audit reliability.
42
course. Thus, students belonging to the categories CS2 and CS3 constituted
the experimental group of this thesis, meanwhile students belonging to the
categories; CS1 and CS4 constituted the control group. The participants of this
study were mainly civilekonom students drawn from seven universities in
Sweden which included; Karlstad University, Umeå University, University of
Borås, Halmstad University, Linnaeus University, Jönköping University and
Luleå University of Technology.
Validity and reliability are criteria imperative in evaluating the quality of the
data collection method implemented in any research (Bell 2010, p.119). Both
measures enhance the authenticity, credibility, and trustworthiness of the
research findings of any study. This thesis makes use of validity and reliability
measures in the results of this study to minimize ambiguity and bias and to
obtain valid and reliable results.
4.4.1. Validity
43
understandable, appropriate and adequately translated to Swedish, considering
the difficulty of clarifying questions not understood through the mailed
questionnaire method (Bryman & Bell 2011, p.262).
4.4.2. Reliability
Bell (2010 p.119) defines reliability as “the extent to which a test or procedure
produces similar results under constant conditions on all occasions." The
quality of research could be measured through the extent to which it can be
replicated with consistency (Bryman & Bell 2015). The questionnaire was sent
to a small group of professors for expert opinion on the survey instrument
with the questionnaire being modified as recommended to suit the Swedish
context. The reliability of the questionnaire is guaranteed by a test-retest
method through which the initial questionnaire was sent to two auditors of a
Canadian EY branch with a one-week interval. The Spearman’s rank
correlation coefficient was calculated to determine the degree of agreement
between both tests. The Spearman’s rank correlation coefficient yielded a
value of 0.82. The high correlation between the two respondents provided
evidence of the reliability of the survey instrument. The Cronbach’s Alpha was
equally calculated to test for internal consistency (Bryman & Bell 2011, p.159)
and yielded a value of 0.935. It is worth mentioning that a Cronbach Alpha
value of 0.70 is usually considered the acceptable value, while a value of 0.80 is
considered good and a value above 0.90 is considered excellent (George &
Mallery 2003). Thus, our Cronbach value indicates an excellent internal
reliability of the survey instrument.
4.5. Analysis
Data collected for this study is analyzed using the Statistical Package for Social
Sciences (SPSS) through which; descriptive statistics, T-test, the test of
ANOVA, Cronbach’s Alpha and the Spearman’s rank correlation coefficient
to test for internal consistency were obtained. The independent sample T-test
is used to derive statistical information related to; the mean, standard
deviation, and p-values of respondents. These measures implemented are
designed to determine if significant differences exist amongst the various
categories of respondents based on the seventeen semantic differential belief
statements.
44
4.6. Ethical Considerations
As earlier noted, ISA has been enforced in Sweden since January 2011. The
questionnaire adopted for this thesis consists of 17 semantic belief statements
categorized as follows:
45
Auditors’ Responsibility (8 statements)
Statement-2: The Auditors is responsible for the soundness of internal control structures
of the entity.
Paragraph 8 defines the “internal control system” as “all the policies and
procedures (internal controls) adopted by the management of an entity to
assist in achieving management’s objective of ensuring, as far as practicable,
the orderly and efficient conduct of its business, including adherence to
management policies, the safeguarding of assets, the prevention and detection
of fraud and error, the accuracy and completeness of the accounting records,
and the timely preparation of reliable financial information”.
Based on ISA, auditors only have the responsibility of evaluating the internal
control systems of an entity to determine audit risk. Hence, auditors cannot be
held responsible for the soundness of internal control systems. It is
management’s responsibility to maintain a sound internal control system for
the entity.
46
Statement-3: It is the auditor’s responsibility to maintain Accounting Records.
47
influence by management aimed at altering the perception of analysts
regarding the profitability and performance of the entity (Paragraph 4).
ISA-200 requires the auditor to comply with IESBA’s Code of Ethics for
Professional Accountants. This code expects high standards of; independence,
objectivity, integrity, confidentiality, professional competence and due care
and technical standards from auditors. Auditors are required not to let;
prejudice, bias, conflict of interest or any external influence override their
professional judgment while performing the audit. Furthermore, section 20 of
48
AA requires auditors to maintain and perform audits based on the ethical
principles of; impartiality, independence, and objectivity.
Thus, auditors are expected to be objective and unbiased while performing the
audit. This statement is subjective and depends on users' perception of the
auditor fulfilling this function.
Statement-9: Users can have absolute assurance that financial statements are free from
material misstatements.
ISA-240 requires the auditor to obtain only reasonable assurance that the
financial statements taken as a whole are free from material misstatements
resulting from error or fraud (Paragraph 5). It worth noting that, reasonable
assurance is not synonymous to absolute assurance. Auditors cannot provide
absolute assurance that financial statements are free from material
misstatements due to the inherent limitations of audits. Most audit evidence
on which auditors draw conclusions are based on persuasive rather than
conclusive opinions (ISA 200, paragraph 5).
Auditors are expected to apply the materiality concept in both planning and
performing an audit as well as in identifying the impact of identified
misstatements on the audit and uncorrected misstatements on the financial
statements as a whole. Based on ISA-320, materiality is defined as "omissions
and misstatements which could individually or aggregately impact the
economic decisions of users based on the financial statement." Auditors
judgment on materiality is expected to be based on the knowledge of the
49
circumstance, the auditor’s perception of financial statement users’ needs, and
by the size or/and nature of the misstatement (ISA-200, Paragraph 6).
Statement-10: The auditor agrees with the accounting policies used in the financial
statement.
Therefore, the auditor must agree with management’s accounting policies for
an unmodified audit opinion to be issued.
50
“present fairly” or “give a true and fair view” in all material aspects based on
the financial reporting framework enforced (ISA 700, paragraph 37).
Statement-12: The extent of assurance given by the auditor is clearly indicated in the
audit report.
Users may have different viewpoints on the extent of assurance given by the
auditor. Therefore, the extent of users’ perception of assurance given by the
auditor is subjective.
Statement-13: The extent of the work performed by the auditor is communicated clearly.
51
required to examine the appropriateness of accounting estimates and the
reasonableness of management’s accounting estimates. The auditor shall
equally state the audit procedure selected which is based on the auditor’s
judgment of the risk of material misstatements occurring (paragraph 31). The
auditor is expected to equally state the sufficiency and appropriateness of the
audit evidence (paragraph 33).
To the auditor and audit profession, the extent of the work performed by the
auditor is clearly communicated in the audit report. This position may be
disputed by some financial statement users. Therefore, the decision as to
whether the task performed by the auditor is clearly communicated depends
on subjective opinions.
Though ISA, ABL and AA advocate for high ethical standards from auditors,
the degree of trust the public has regarding auditors is subjective.
Statement-15: The audited financial statements are useful for monitoring the entity’s
performance.
Statement-16: The audited financial statements are useful for decision making.
52
Based on ISA-200, the audited financial statements are expected to give a
certain level of assurance to users (paragraph 3). According to ISA-700, in the
course of the audit, the auditor is to ensure that, significant accounting policies
have been disclosed by management and that such policies are consistent with
the relevant financial reporting framework. Furthermore, the auditor is to
ensure that, management’s estimates are reasonable (paragraph 13). These
duties of auditors are aimed at enhancing the usefulness of financial
statements.
Based on ISA, the scope of financial statement audits does not extend to how
well management manages the entity. ISA-200 unambiguously states that the
audit opinion is not a guarantee of assurance of the future viability of the
entity or on the effectiveness and efficiency on how management runs the
affairs of the entity.
Therefore, based on ABL, the auditor is to state how well the entity is
managed.
53
5. Results
This chapter presents a summary of the results of the mailed questionnaire and likewise
contains the result of our tested hypotheses.
The results from Table 1 indicate that a total of 164 responses were received
representing a 12% response rate. However, just 137 responses were usable
for this study representing 10.03% of the total population of the study. Final-
year students had a higher response rate (5.05%) compared to the first-year
students (4.98%). However, the general response rate of both respondent
groups is low. This low response rate could be attributed to the unwillingness
of some target survey participants to respond to the survey. Nonetheless,
approximately 20 per cent of the total responses resulted from reminders.
Bean and Roszkowski (1995) underscore that a low response rate could lead to
bias in the sample population especially if there is inequality of non-
respondents in the target sample. Nevertheless, Dey (1997) present a different
perspective, by noting that, a low response rate might be fairly representative
of respondents if the survey respondents are similar to the non-respondents.
Based on the argument of Dey (1997), the respondents and non-respondents
of this study form a homogenous group considering that both respondents
and non-respondents have taken similar courses; thus their responses were
most likely to be similar. Notwithstanding, the non-response bias was tested
for this study by comparing early responses to late responses. This comparison
was based on Oppenheim (1966) who observed similarities between late
respondents and non-respondents. No significant differences were observed
between early and late respondents; thus there was an unlikelihood of non-
response bias.
54
Table 1: Descriptive Statistics of respondents
Responses received Enrolled
for at
least one
accountin
g course
No. % Yes No
Participan No. of Usabl unusabl usable Unusabl Usable
ts questionnair e e e
es sent
First year 872 68 13 4.98% .95% 38 30
students
Final year 494 69 14 5.05% 1.02% 43 26
students
Total of 137 27 10.03 1.97%
usable/ %
unusable
Total 1,366 164 12 % 81 56
55
students
Totals 59 43% 78 57% 15 10.9 12 89.1%
% 2
Table 3-11 contain the results of the seventeen semantic differential belief
statements. The tables present the nature and extent of the perceptions CS1,
CS2, CS3, and CS4 have about auditors’ responsibilities, the reliability of audits
and audited financial statements, and the decision usefulness of audited
financial statements. The measures of analysis used to evaluate the statements
are; the mean, standard deviation, and significance (P) value. For this study, we
assume α at 0.05.
The results indicate that in Sweden, CS3 believe the auditor is responsible for
detecting all fraud compared to CS1 who had no prior audit knowledge and
maintained a neutral position. It is worth mentioning that, ISA- 200 only
requires the auditor to provide reasonable assurance that the financial
56
statements taken as a whole are free from material resulting from fraud.
Interestingly, students with an audit background expected the auditor to detect
all fraud compared to students with no audit background which indicates that
audit education did not actually have an impact on the perception of students
who had enrolled for audit courses. Overall, CS1 were less supportive of
management’s responsibility for preparing the annual financial statements
simultaneously; they strongly disagreed auditors were responsible for
maintaining accounting records. These differences in responses of CS1
indicate the level of uncertainty among CS1 as to their perception of who
bears the responsibility for maintaining accounting records and preparing
financial statements. On the contrary, CS3 strongly disagreed that auditors
were responsible for maintaining accounting records while majority perceived
management as responsible for preparing the annual financial reports.
Additionally, CS3 strongly perceived (mean=4.419) the auditor as exercising
judgment in selecting audit procedures; whereas CS1 slightly agreed that
auditors exercised judgment in selecting audit procedures.
However, both CS1 and CS3 were uncertain about auditor’s responsibility for
soundness of internal controls and preventing fraud. Both student categories
tended to maintain a neutral position in both statements. Furthermore, CS1
tended to concur with CS3 that auditors were unbiased and objective and that
management was responsible for all business-related bankruptcy.
57
The auditor is unbiased and CS1 30 4.233 1.0726 .277
objective. CS3 43 4.465 .7351 .310
Corporate management should CS1 30 3.733 1.2847 .114
be held responsible for all CS3 43 4.140 .8886 .140
business-related bankruptcy
cases arising from fraud.
Table 4 presents the mean score of responses and the two-tailed significance
level result between first-year students who have enrolled for at least an audit
course (CS1) and first-year students who have not enrolled for any audit
course (CS2). The results indicate no significant differences in responses
between CS1 and CS2 except on the issue regarding auditors’ fraud detection
responsibility (statement 1). Consistent with the results of CS3 in Table 3 who
had enrolled for audit courses which included the duties of auditors, CS2
likewise expected the auditor to detect all fraud. Consistent with the results in
Table 3, CS1 and CS2 maintained a neutral position regarding auditors’
responsibility for the soundness of the internal control structure of the entity
(statement 2) and the prevention of fraud (statement 5). No expectation gap
was equally observed between CS1 and CS2 on the issue of management’s
responsibility for preparing financial statements (statement 4). Both student
categories were uncertain if management was responsible for preparing the
annual financial reports. Additionally, CS1 and CS2 further agreed that
auditors were unbiased and objective (statement 7), that auditors exercised
judgment in selecting audit procedures (statement 6) and that management
was culpable for business-related bankruptcy resulting from fraud (statement
8).
58
annual financial statements.
The auditor is responsible for CS1 30 3.367 1.1592 .361
preventing fraud. CS2 38 3.632 1.1951 .360
The auditor exercises judgment CS1 30 3.500 .8200 .302
in selecting audit procedures. CS2 38 3.711 .8353 .301
The auditor is unbiased and CS1 30 4.233 1.0726 .507
objective. CS2 38 4.053 1.1377 .504
Corporate management should CS1 30 3.733 1.2847 .768
be held responsible for all CS2 38 3.816 1.0096 .774
business-related bankruptcy
cases arising from fraud.
Table 5 presents the results of the mean differences, and the significance level
of responses between final-year students who have enrolled for audits courses
(CS3) and final-year students have not registered for any audit course (CS4).
The result shows no significant differences in responses for majority (7) of the
statements. However, there was a significant difference between CS3 and CS4
regarding whether auditors exercise judgment in selecting audit procedures
(Statement 6). Final-year students who had enrolled for audit courses strongly
perceived (4.419) auditors as exercising judgment in selecting audit procedures
meanwhile; final-year students who had not enrolled for audit courses
perceived auditors as exercising judgment in selecting audit procedures.
However, the significance between both groups stemmed from the fact that,
while CS3 strongly agreed, CS4 simply agreed to auditors exercising judgment
in selecting audit procedures.
No expectation gap was observed between CS3 and CS4 on issues related to
auditors’ responsibility for the soundness of the internal control structures of
the entity (statement 2) and preventing fraud (statement 5). Furthermore, CS3
and CS4 students tended to agree that auditors were responsible for detecting
all fraud (statement 1), that management was responsible for preparing the
annual financial reports (statement 4) and not auditors (statement 3).
Additionally, CS3 and CS4 accepted that auditors were unbiased and objective
(statement 7) and that corporate management were to be held responsible for
all business-related bankruptcy cases resulting from fraud (statement 8).
59
detecting all fraud CS4 26 4.077 1.1635 .415
The Auditor is responsible for CS3 43 3.326 1.3042 .691
the soundness of internal CS4 26 3.462 1.4760 .700
control structures of the entity.
It is the auditor’s responsibility CS3 43 1.535 1.2218 .793
to maintain Accounting CS4 26 1.615 1.2354 .793
Records.
It is management’s CS3 43 4.140 1.2068 .962
responsibility for preparing the CS4 26 4.154 1.1897 .962
annual financial statements.
The auditor is responsible for CS3 43 3.116 1.2575 .135
preventing fraud. CS4 26 3.577 1.1721 .130
The auditor exercises judgment CS3 43 4.419 .8517 .032
in selecting audit procedures. CS4 26 3.962 .8237 .032
The auditor is unbiased and CS3 43 4.465 .7351 .706
objective. CS4 26 4.385 1.0228 .728
Corporate management should CS3 43 4.140 .8886 .564
be held responsible for all CS4 26 4.269 .9190 .568
business-related bankruptcy
cases arising from fraud.
A peculiarity among all student groups was the agreement that, auditors
exercised judgment in selecting audit procedures and were unbiased and
objective, and that corporate management was culpable for all business-related
bankruptcy cases resulting from fraud. Furthermore, no expectation gap was
observed among all four student categories on issues related to; auditors'
responsibility for the soundness of internal control structures of entities and
preventing fraud since all student categories maintained a neutral standpoint.
Additionally, all student groups disagreed the auditor was responsible for
maintaining accounting records.
The six statements on the reliability of audits and audited financial statements
deal with issues related to; the extent of assurance provided by the auditor that
financial statements are free from material misstatements, the accounting
policies used in preparing financial statements, the extent of assurance the
auditor provides that financial statements give a true and fair view, the
effectiveness of audit reports in communicating the level of assurance, and the
extent of the work performed and whether the auditor is regarded as
60
trustworthy and reliable. There were considerable similarities in perceptions
between CS1 and CS3 regarding the reliability of audits and audited financial
statements compared to the responsibility statements. Table 6 to 8 presents
the mean score of responses, standard deviation, and two-tailed significance
level. From the results in Table 6, no expectation gap was found between CS1
and CS3.
Both CS1 and CS3 agreed that audited financial statements were completely
free from material misstatements (statement 9) though CS3 had a higher mean
agreement level (though not statistically significant) compared to CS1.
Similarly, CS1 and CS3 relatively agreed that financial statements give a true
and fair view (statement 11). Additionally, both CS1 and CS3 agreed that the
extent of assurance (statement 12) and the extent of the task performed
(statement 13) by the auditor were clearly communicated. Moreover, the level
of mean agreement between CS1 and CS3 was highest on the issue of auditors’
agreement with the accounting policies used in preparing the financial
statements (statement 10) and auditors being trustworthy and reliable
(statement 14).
61
Table 7 presents the mean responses, standard deviation, and p-values for CS1
and CS2. The results in Table 7 are very similar to the results in Table 6 as no
expectation gap was found between CS1 and CS2. There were no significant
differences in responses on the reliability of audits and audited financial
statements between CS1 and CS2. CS1 and CS2 relatively agreed that audited
financial statements were free from material misstatements (statement 9)
though CS2 had a higher mean score (though not statistically significant)
compared to CS1. Furthermore, both CS1 and CS2 perceived the financial
statement to give a true and fair view (statement 11), and that the level of
assurance (statement 12) and the extent of the work performed (statement 13)
were clearly communicated. Consisted with the results on Table 6, CS1 and
CS2 had the highest level of agreement on issues related to auditors’
trustworthiness and reliability (statement 14) and auditors’ being in conformity
with the accounting policies contained in audited financial statements
(statement 10).
Table 8 provides details of the mean score, standard deviation and p-values for
the reliability statements between CS3 and CS4. The same trend observed in
Table 6 and 7 is observed in Table 8. There were no significant differences in
62
mean responses between CS3 and CS4; hence no expectation gap was
observed between both categories.
Furthermore, CS3 and CS4 agreed that audited financial statements were
absolutely free from material errors (statement 9). Additionally, both CS3 and
CS4 agreed that, audited financial statements were true and fair (statement 11).
Moreover, both CS3 and CS4 believed that, the extent of assurance given by
the auditor was clearly indicated in the audit report (statement 12).
Furthermore, both CS3 and CS4 believed the extent of the task performed by
the auditor is clearly communicated (statement 13). Consistent with the other
reliability results, CS3 and CS4 considered the auditor to be trustworthy and
reliable (statement 14) and that the auditor agreed with the accounting policies
used in the audited financial statement (statement 10).
In summary, all student categories agreed that users could have absolute
assurance that, audited financial statements were free from material
misstatements, that auditors agreed with the accounting policies contained in
audited financial reports and that audited financial statements presented a true
and fair view of the financial situation of the entity. Furthermore, all student
categories believed audited financial statements clearly contained the extent of
63
assurance given by auditors likewise, the extent of the task performed by the
auditor. In general, all student categories considered auditors to be reliable and
trustworthy.
The results in Table 9 indicates no significant gap between CS1 and CS3
concerning the usefulness of financial statements in monitoring an entity’s
performance (statement 15), and decision making (statement 16). Both CS1
and CS3 had a higher level of agreement on the usefulness of audited financial
statements in monitoring an entity’s performance and in decision usefulness.
Furthermore, CS1 and CS3 agreed that audited financial statements indicated
whether the entity was well managed. However, the mean response rate for
statement 17 was lower compared to the other two statements.
The results on Table 10 follow the same pattern as Table 9 with no significant
differences observed between CS1 and CS2. Both CS1 and CS2 accepted that
audited financial statements were useful in monitoring an entity’s performance
(statement 15) and useful in decision making (statement 16). Consistent with
the results in Table 9 it was observed that the mean response of statements 15
64
and 16 was higher compared to statement 17. However, CS1 had a higher
mean score (though not statistically significant) to all three statements
compared to CS2. CS1 and CS2 agreed that audited financial statements were
somewhat useful in evaluating whether an entity was well managed.
The results in Table 11 indicate no significant gap between CS3 and CS4 on all
three decision usefulness statements. Both CS3 and CS4 agreed that, the
audited financial statements were useful in monitoring an entity’s performance
(statement 15), useful in decision making (statement 16) and indicated if the
entity was well managed (statement 17). Furthermore, CS3 slightly had a
higher mean response rate (though not statistically significant) compared to
CS4 on the usefulness of audited financial statements in monitoring an entity’s
performance.
However, statement 17 had the least mean response level compared to the
other two statements. All student categories were slightly certain on the issue
of if audited financial statements indicated whether an entity was well
managed. Nonetheless, ABL requires auditors to make an assessment on
whether the entity is well managed as part of the audit.
65
The audited financial CS3 43 3.953 .8438 .832
statements are useful for CS4 26 4.000 .9381 .837
decision making.
The entity is well managed. CS3 43 3.698 .7411 .977
CS4 26 3.692 .7884 .978
H1: First-year students (CS1 and CS2) and final-year students who have not enrolled for
any audit course (CS4) have unreasonable expectations about the duties and responsibilities
of Auditors.
Based on Table 5, CS4 believe auditors are responsible for detecting all fraud.
Furthermore, they were uncertain if auditors are responsible for the soundness
of the internal control structure of an entity and preventing fraud. As per
Table 8 CS4 are of the opinion that audited financial statements are completely
free from material misstatements. These uncertainties and misperceptions of
CS1, CS2, and CS4 fall outside the provisions of ISA and ABL. Therefore, we
fail to reject this hypothesis and conclude that first-year students and final-year
students without an audit education have unreasonable expectations of
auditors.
66
H2: Final-year civilekonom students specializing in accounting who have enrolled for audit
courses do not have unreasonable expectations about the duties and responsibilities of
Auditors.
As per Table 3, CS3 slightly believe auditors are responsible for detecting all
fraud and are uncertain if auditors are responsible for the soundness of
internal controls. Furthermore, CS3 believe users can obtain absolute
assurance that financial statements are free from material misstatements.
H3: There is a significant difference in perception between first-year students with no audit
education (CS1) and final-year students with audit education (CS3) regarding the
responsibilities of auditors.
Based on these differences between CS1 and CS3, we fail to reject H3.
H4: There is no significant difference in perception between first-year students with no audit
education (CS1) and first-year students with audit education (CS2).
Based on Table 4 a significant gap exists only on the issue of auditors' role in
detecting all fraud. CS2 had a higher expectation of the auditor in detecting all
fraud while CS1 were somewhat uncertain with this assertion. Table 7 and 10
shows no significant differences in responses between CS1 and CS2.
Therefore, we fail to reject H4.
H5: There is a significant difference in perception between final-year students who have
enrolled for audit courses (CS3) and final-year students who have not enrolled for any audit
course (CS4).
67
procedures. However, there were no significant differences in mean responses
between CS3 and CS4 for the remaining sixteen statements.
H6: Advanced audit education is the main factor which results in the differences in
perceptions between First and Final year student.
68
6. Discussion
This chapter contains an analysis of the results provided in Chapter 5 which enables us to
answer our research questions and make inferences from the tested hypotheses.
The results of this study indicate that audit education is partially influential in
narrowing the AEG in Sweden especially on issues related to auditors’
responsibilities particularly; auditors’ role in maintaining accounting records,
management’s responsibility for preparing the annual financial statements and
auditors’ judgment in selecting audit procedures. Similarly, Pierce and
Kilcommins (1996) noted that audit education was influential in narrowing the
AEG. In a related study, Grambling et al. (1996) highlighted that; students
gained a better understanding of the responsibilities and duties of auditors
with more exposure to audit courses. Thus, they concluded that audit
education was influential in narrowing the AEG. The results of our study are
partially in line with the findings of Pierce and Kilcommins (1996) and
Grambling et al. (1996).
Furthermore, the results of this study indicate that students have a differing
understanding of auditors’ responsibility to detect fraud. All student categories
expected the auditor to detect all fraud except for first-year students without
an audit education who were uncertain about auditors performing this role.
Surprisingly, final-year students who had enrolled for audit courses expected
auditors to detect all fraud. In general, students seem to expect more from
auditors than presently required by ISA, ABL, and AA. It is worth highlighting
that, Best et al. (2001), Schelluch (1996), Fadzly and Ahmad (2004), etc. all
observed an expectation gap on this issue. However, Humphrey et al. (1992)
noted that the subject of auditors detecting all fraud has been one of those
contentious issues with the longest misunderstanding in the history of the
AEG. Similarly, the findings of Robinson and Lyttle (1991) confirmed that the
fraud detection responsibility of auditors had the widest misunderstanding
even within the audit profession as some auditors considered fraud detection
as one of their duties. This misunderstanding even within the audit profession
indicates that no matter the level of audit education acquired, there is bound to
be some misunderstanding on the auditor’s fraud detection responsibility.
Furthermore, even though, all student categories agreed that auditors were not
responsible for maintaining accounting records, an expectation gap was
observed between first and final year students. It is worth highlighting that,
Best et al. (2001) similarly found an expectation gap on this issue. While final-
69
year students strongly disagreed on auditors’ role in maintaining accounting
records, first-year students simply disagreed. This resulting pattern could be
explained by the fact that, first-year students, in general, have not enrolled for
any courses encompassing auditors’ responsibilities, which resulted to them
simply disagreeing. Whereas, final-year students who had enrolled for audit
courses were aware auditors were not responsible for maintaining accounting
records based on the knowledge obtained from audit courses. Additionally,
final-year students who had not enrolled for any formal audit courses equally
strongly disagreed on the auditors’ responsibility for maintaining accounting
records. They possibly obtained such knowledge from other sources different
from university taught audit course, considering that some of them are
preparing to get to the audit job market.
70
students who had enrolled for audit courses as they strongly agreed auditors’
exercised judgment in selecting audit procedures.
71
effect on the perception of students who had enrolled for audit courses.
Similarly, the statements on auditors’ trustworthiness had the highest mean
response from all student categories indicating the high esteem students hold
for auditors. In addition, the statement on auditors agreeing to the accounting
policies of the entities received a high mean response as well. It is worth
highlighting that ISA-700, paragraph 16 requires the auditor to be in
conformity with the accounting policies implemented by the entity before
issuing an unmodified audit opinion. Thus all students possessed the necessary
knowledge regarding this issue.
A possible explanation for the observed trend between first-year students with
no education background in auditing and final-year students with an audit
background education is that most advanced audit courses do not cover in
depth the duties and responsibilities of auditors based on ISA and ABL. A
possible explanation for the high expectation of final-year students specializing
in accounting could be that such high expectations resulted from the "desire"
perspective for auditors to perform certain duties as explained by Dennis
(2010) rather than as mandated by law. In such scenarios, final-year students
with an audit education perceived a deficient performance gap or a deficient
standard gap. Thus no amount of audit education could change students’
perception on this issue as it was based on strong beliefs and the notion that
such duties were reasonable and achievable.
72
Moreover, the high expectations of student could have resulted from a lack of
proper orientation on the duties of auditors. We thus recommend that
advance audit courses for the civilekonom program should be updated to
include the nature, scope, and extent of auditors' responsibilities. It was
surprising to observe that there were final-year accounting civilekonom
students who had not enrolled for any audit courses. Thus, we recommend the
incorporation of mandatory audit courses for the civilekonom program in
accounting. Such courses will equip students with the necessary knowledge set
about the duties of auditors.
The most eminent area of expectation gap among all students was on the issue
that, audited financial statements gave users complete assurance that such
statements were free from material errors. Audit education had a limited
effect on this issue as students who had enrolled for audit courses believed
audited financial statements signified the entity audited was completely free
from error. It is worth highlighting that, the provisions of ISA 200 only
require the auditor to provide reasonable assurance and not absolute assurance
that financial statements are free from error.
At the center of the findings of this study is that, final-year students who had
enrolled for audit courses had lesser misunderstandings of the duties of
auditors compared to the other student categories, even though the mean
response of final-year students with audit background was higher than those
of first-year students with no audit background on the issue of auditors’ fraud
detection responsibility. Furthermore, the findings of this study indicate that
73
the eight statements on auditors’ responsibilities had the widest gap compared
to issues related to audit reliability and usefulness of financial statements.
74
7. Conclusion
This chapter presents the summary of findings, practical implications of the study, limitations
of the study and recommendations for future research.
7.1. Summary
The aim of this thesis is to evaluate the impact of audit education in narrowing
the AEG in Sweden. The study reveals that audit education plays a significant
role in narrowing the AEG in Sweden on issues related to auditors’
responsibility especially on management’s responsibility in preparing the
annual financial statements, auditors’ exercising judgment in selecting audit
procedures and auditors’ role in maintaining accounting records. Audit
education thus played a significant role in altering final-year students with an
audit background’s perception on the duties of auditors. Furthermore, the
results of this thesis confirm that students who had not enrolled for audit
courses had unreasonable expectations of the auditor. The findings of this
study indicate a major setback for accounting at the civilekonom level in
Sweden as final-year students who had enrolled for audit courses, perceived
auditor’s responsibility to include detecting all fraud and that absolute
assurance could be obtained that audited financial statements signified no
material misstatements. However, the lapses in academic training accounted
for the high expectations of final-year students who had enrolled for audit
courses and for no significant differences between first and final year students
who had not enrolled for audit courses. Additionally, the results of this study
indicate, the accounting profession enjoys a high reputation and trust from
students in Sweden. Addditionally, students concurred that audited financial
statements were useful in decision making.
75
nature, scope, and limitations of an audit through audit education, refresher
courses and other forms of audit-user communication.
7.2. Limitation
This study is limited in the scope of coverage as just 137 responses were used
for analysis and discussion. A more persuasive evidence might have been
obtained had the sample size been larger. Furthermore, the usable response
rate of 10 percent was relatively low. A larger sample size and a higher
response rate might have yielded a result different from what we had. Also,
there is a possibility that, the results obtained are not representative of the
whole student population since this study made use of convenience sampling
to make generalizations about the student population of Sweden.
Additionally, a more reliable result of the Cronbach Alpha should have been
obtained if more respondents complied with the request the complete the pilot
survey.
7.3. Recommendations
Due to the inherent limitations of this study resulting from a small sample
size, limited duration to perform the studies and financial constraints, this
study could not answer all the questions raised by previous research on the
extent of impact audit education has in narrowing the AEG. To adequately
examine the effect audit education has on the AEG, we recommend a
longitudinal research be carried out with a larger sample size through which
the impact education has on the AEG can be examined before students enroll
for an audit course which includes the duties, responsibilities and ethical issues
as required by ISA, ABL, and AA and after students enroll for such a course.
Furthermore, future research could equally dwell on the nature, content, and
scope of advanced accounting courses for the civilekonom program at
Swedish Universities. In addition, future research could empirically test the
effectiveness of other recommended measures to narrowing the AEG such as;
expanding the scope of audits, restructuring audit methodologies, and
expanding auditors’ duties and responsibilities based on the Swedish context.
76
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Appendices
Appendix 1. Spearman’s Rank Correlation Coefficient
Correlations
001 002
N 17 17
N 17 17
Correlations
N1 N2
N 17 17
N 17 17
Correlations
001 002 N1 N2
N 17 17 17 17
N 17 17 17 17
N 17 17 17 17
N 17 17 17 17
**. Correlation is significant at the 0.01 level (2-tailed).
87
Appendix 2. Cronbach’s Alpha
Excludeda 0 ,0
Total 17 100,0
Reliability Statistics
Cronbach's
Alpha Based on
Cronbach's Standardized
Alpha Items N of Items
,935 ,944 4
Item Statistics
Mean Std. Deviation N
Item-Total Statistics
Squared Cronbach's
Scale Mean if Scale Variance Corrected Item- Multiple Alpha if Item
Item Deleted if Item Deleted Total Correlation Correlation Deleted
88
Scale Statistics
Mean Variance Std. Deviation N of Items
89
90
91
Appendix 4. Survey Instrument
92
93
94
95
96