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Fotoh Lazarus Elad The Impact of Audit Education on the Audit Expectation Gap Evidence from Civilekonom Students in Sweden Business Administration Master’s Thesis 30 ECTS Term: Spring 2017 Supervisor: Dan Nordin

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Page 1: The Impact of Audit Education on the Audit Expectation Gap

Fotoh Lazarus Elad

The Impact of Audit Education on the Audit Expectation Gap

Evidence from Civilekonom Students in

Sweden

Business Administration Master’s Thesis

30 ECTS

Term: Spring 2017

Supervisor: Dan Nordin

Page 2: The Impact of Audit Education on the Audit Expectation Gap
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3

Acknowledgements

I would like to extend my profound gratitude to my supervisor, Ass. Prof. Dan

Nordin for his immense guidance and commitment throughout this thesis

writing process. Dan provided insightful and valuable feedback which had a

positive effect on my critical thinking and analytical skills. I equally owe a debt

of gratitude to Katharina Rahnert for her constructive comments and time

spent in translating my questionnaire to Swedish.

Furthermore, I am thankful to all the survey participants of this thesis.

Without your willingness to participate in this study, this thesis will never have

come to fruition.

I am immensely indebted to my family for all the encouragement and moral

support throughout this thesis writing phase, and throughout the entire

Master’s program in Accounting and Control. Your positive energy enabled

me to assail all obstacles.

Above all, I am thankful to the Almighty God for the graces, strength, and

perseverance bestowed on me throughout my studies.

Karlstad, June 2017.

Fotoh Lazarus Elad

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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.

A survey questionnaire containing seventeen semantic differential belief

statements measured using the five-point Likert scale was completed by four

groups of students; first-year civilekonom students with/without an audit

education background and, final-year civilekonom accounting students

with/without an audit education background (n=137). The questionnaire

covered topics on; auditors’ responsibilities, audit reliability, and decision

usefulness.

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.

This study concludes by calling on educational institutions in Sweden to

update their accounting curriculum to encompass topics related to the nature,

scope, and limitations of audits based on ISA and ABL. Moreover, this study

recommends the audit profession and regulators to design and implement

policies aimed at improving users understanding of the nature, scope, and

limitations of an audit through audit education, refresher courses and other

forms of audit-user communication. This study extends previous studies on

the AEG by ascertaining the role of audit education in narrowing the AEG.

Keywords: Audit Education and Function, Users knowledge, Audit

Expectation Gap, International Standards on Auditing, Swedish Company

Act, Sweden.

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Abbreviations

AEG: Audit Expectation Gap

AICPA: American Certified Public Accountants

ABL: Swedish Company Act

AA: Auditors’ Act (Revisorslag 2001:883)

IESBA: International Ethics Standard Board for Accountants

IAASB: International Auditing and Assurance Standards Board

CS1: First-year Civilekonom Students (Not enrolled for any audit course)

CS2: Firs-year Civilekonom Students (Enrolled for at least one audit course)

CS3: Final-year Civilekonom Student-Accounting (Enrolled for audit courses)

CS4: Final-year Civilekonom Student-Accounting (Not enrolled for any audit

course)

LLC: Limited Liability Company

SRS: Swedish Association of Auditors

FAR: The Swedish Institute of Authorized Public Accountants

GAAS: Generally Accepted Auditing Standards

SMEs: Small and Medium-Sized Enterprises

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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.

1.1. Background of the Study

Over the past three decades, Anglo-Saxon nations have experienced an

increasing rate of audit frauds, financial scandals and corporate failures which

have kept the debate of the audit expectation gap active in the audit

profession, regulatory bodies, financial statement users (Dewing & Russell

2002) and even boardrooms. The Accounting profession faced widespread

criticism from the public between 1970 and 1980 following numerous

corporate scandals, audit failures and lawsuits against many accounting firms

(Ali et al. 2008). The debacles of Enron, WorldCom, Tyco International,

Parmalat, Arthur Andersen, etc. and the financial crisis of 2008 further

exacerbated the audit expectation gap debate bringing it to the global stage

with new waves of questions regarding the duties and responsibilities of

auditors. As such, the audit profession has paid considerable attention to the

AEG considering that it decimates the legitimacy of the audit profession

(Ruhnke & Schmidt 2014).

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).

The numerous corporate scandals, audit failures and lawsuits against

accounting firms were the main catalysts precipitating research on the AEG as

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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.

While Humphrey et al. (1993) underscore auditors’ independence to be at the

heart of the expectation gap, Hassink et al. (2009) on the other hand highlight

auditors’ involvement in fraud cases as being detrimental to the reputation and

image of the profession. In establishing the existence of the AEG in Portugal,

Almeida (2012) underscores users’ dissatisfaction with auditors’ performance

as the underlying reason for the gap. In general, the AEG is particularly far-

reaching on issues related to; auditors’ fraud prevention responsibility,

maintenance of accounting records and auditors’ judgment in selecting audit

procedures (Dixon et al. 2006). Schelluch and Gay (2006) equally note that

often the AEG is centered on auditors’ duties and responsibilities, audit quality

function, the nature and meaning of audit report content, the regulation and

structure of the audit profession and the ability of auditors to communicate

various levels of assurance.

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.

Furthermore, previous studies on the AEG focused on the causes of the

expectation gap. Meanwhile, recent studies focus on areas where the gap is

most intense (Sidani 2007). Such areas of the intensity of the AEG include; the

nature of audit reports and the meaning of audit report messages, the quality

of audit function, the structure and regulatory process of the audit profession,

(Humphrey et al. 1993). Dixon et al. (2006) further note; auditors’ fraud

detection responsibilities, auditors' responsibility for maintaining accounting

books and selecting adequate audit procedures as those areas with an intensity

of AEG. However, several authors (Monroe & Woodliff 1993; Best et al.

2001; Lin & Chen 2004; Fadzly & Ahmad 2004; Siddiqui et al. 2009; Dixon et

al. 2006) have classified the AEG into three parts including; auditors’

responsibilities, reliability of audited financial statements and the usefulness of

audited financial statements. Other vital areas with the expectation gap

include; going concern, independence, and duty of care (Sweeney 1997).

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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.

So far, several studies have proposed measures which could significantly

narrow down this gap. For example, Koh and Woo (1998) recommend the

expanded audit report which gives users a complete understanding as to the

scope, extent, timing and significance of the audit function. They further

recommend the use of decision aids by auditors which further enhances the

quality of audits. Meanwhile, Gay et al. (1998) suggest the improvement of the

wordings of the audit report for it to be more understandable to users and to

provide assurance to the task done by the auditor. Humphrey et al. (1993)

equally recommended the constructive approach of narrowing the AEG which

entails changing audit activities to suit users’ expectation. The authors further

proposed the modification of phrases and the standardization of the audit

report to reduce inconsistencies and complexities of the audit report to make

it more understandable to stakeholders. Lastly, Humphrey et al. (1993)

recommended the defensive approach which entails educating the public

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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.

Despite the aforementioned recommendations and efforts implemented by the

audit profession, there are no signs of the AEG narrowing down (Sidani 2007,

Ali et al. 2008). Consistent with Sidani’s (2007) assertion, Johansson (2005)

highlights the existence of widespread evidence of the AEG widening all the

more. In their thesis, conducted in Sweden, Abrahamsson et al. (2005)

concluded that communication through a natural dialogue between auditors

and clients is the most efficient method of narrowing the expectation gap in

Sweden rather than the extent or level of education. Downplaying the

significance of audit education is a serious claim as several studies have

established the importance of audit education in narrowing the expectation

gap.

1.3. Research Aim and Objective

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.

1.4. Research Questions

Do final-year civilekonom students possess adequate knowledge on the roles

of auditors?

Do first-year civilekonom students possess adequate knowledge on the roles

of auditors?

Does education of students help breach the audit expectation gap?

1.5. Significance and Motivation of Study

This study is performed because of the significant importance currently

attached to the AEG which has been persistent (Fadzly & Ahmad 2004) and

because of its detrimental effects on the audit profession (Ali et al. 2008).

Furthermore, the AEG has been at the center of financial crises such as the

financial crisis of 2007 and accounting scandals such as the scandals of the

early millennium which saw the collapse of giant corporations such as Enron

and WorldCom. Therefore, there is need to analyze the effectiveness of

proposed solutions to narrow the expectation gap.

Audit education is the audit profession’s solution to closing the expectation

gap as the audit profession accuses users of having unreasonable expectations

about the responsibilities of auditors. Several researchers (Pierce &

Kilcommins 1996; Grambling & Schatzberg 1996, Fadzly & Ahmad 2004)

have sided with the audit profession’s narrative by highlighting the significance

of audit education in narrowing the AEG. Porter and Gowthorpe (2004) even

recommended that recent accounting and corporate scandals be included in

the curriculum of academic programs of schools. Siddiqui et al. (2009) further

note such audit courses could play a pivotal role in narrowing the AEG.

However, no study has so far examined the role of audit education in closing

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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.

1.6. Delimitation of Study

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.

1.7. Structure of Study

The remainder of this thesis is organized as follows; Section two presents an

in-depth analysis of the theoretical framework with a focus on the causes and

proposed solutions to narrowing the AEG with emphasis on audit education

and ends with hypotheses development. Section three presents auditing

practice in Sweden and establishes the AEG in Sweden; Section four further

presents the research methodology used in this study. Meanwhile, Section five

presents the results of the survey. Section six presents the discussion of the

findings and Section seven ends with the conclusion, limitations, and

recommendations for future research.

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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.

2.1. Definition of the Audit Expectation Gap

To understand the audit expectation gap concept, it is imperative that we

define the AEG. The AEG was first defined by Liggio (1974) who defined the

gap as, the difference in the performance expectation of the auditor, between

financial statement users and independent accountants. The Cohen

Commission (1978) further emphasizes that the gap involves the difference

between the public’s beliefs and desires and what the auditor can and should

reasonably accomplish. Porter (1993) disagrees with both definitions of the

audit expectation gap by underscoring the shallow nature of both definitions

as auditors may not be able to accomplish Liggio’s (1974) “expected

performance” and the Cohen Commission’s (1978) “can and should

reasonably accomplish” prescription. Porter (1993) thus refers to the AEG as

“audit expectation-performance gap.” Porter (1993) defines this gap as the

expectations society hold of auditors and auditors perceived performance by

society.

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.

A contemporary definition of the AEG is provided by McEnroe and Martens

(2001) who define the AEG as the variation between what users of financial

statements recognize as auditors’ duties and what auditors consider their

responsibilities. In a nutshell, we define the AEG as the differences in beliefs

and desires between the auditor and the public regarding the duties and

responsibilities of auditors. We will use this definition as the working

definition of this thesis since it encompasses the key aspects of the definitions

presented above.

2.2. Categorization of the Audit Expectation Gap

In an attempt to establish the causes of the expectation gap in New Zealand,

Porter (1993) categorized the expectation gap into two major categories, the

reasonableness gap, and the performance gap. Porter defined the

reasonableness gap as the difference between society’s expectation of the

auditor and what auditors can reasonably be expected to achieve. Therefore,

this gap relates to society’s unreasonable expectations of auditors (Siddiqui et

al. 2009). Porter (1993, p.50) further defined the performance gap as the

“difference between what the society expects the auditors to achieve and what

they can reasonably be expected to accomplish.”

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

Source: Porter (1993), p.50

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.

2.3. Factors Affecting the Expectation Gap

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

The general misperception of the public about the responsibilities of auditors

is often a major factor affecting the expectation gap (Ellis & Selley 1988). Lee

and Azham (2008) further suggest that this complexity is as a result of

auditors’ changing role and the changing objectives of auditing. The audit

paradigm has experienced persistent changes over the centuries. For example,

the focus of audit from 1800´s to 1900´s was on detecting fraud and error and

ensuring the accuracy of accounts (Leung et al. 2004). Meanwhile, auditing in

the last 30 years has focused more on enhancing the integrity and credibility of

financial statements and financial information. Today, the audit function not

only focuses on assuming an enhancing role but likewise providing value

added services, reporting on internal controls, financial irregularities and

business risks (Boynton et al. 2005). These changes in the audit function,

results principally from changes in the socioeconomic environment, the

impact of financial crises, corporate scandals leading to the collapse of big

corporations and technological changes. Thus, the substantial changes in audit

practice and the complicated nature of the audit function and objectives of

auditing create confusion for users with limited knowledge and exposure on

the audit function.

2.3.2. The Audit Conflict of Interest

The provision of non-audit services frequently results in a conflict of interest

which further exacerbates the already precarious expectation gap (Lee et al.

2009). Accounting firms today have extended their line of duty to include

consulting services such as; risk assessment services, information reliability

systems and performance measurement for businesses (Leung et al. 2007). By

providing such non-audit services, auditors acts as advisers to management

and an independent reviewer at the same time. The provision of such non-

audit services may result in a conflict of interest as management expects the

auditor to ignore financial irregularities, while shareholders and the public

expect the auditor to report on such inconsistencies (Koo & Sim 1999). Such

circumstances put the auditor in a multi-role dire situation as management can

fire and replace the auditor with a more collaborative auditor. Due to the

lucrative nature of consulting services, auditors may in some cases

compromise their independence to continue benefiting from such consulting

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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.

2.3.3. Hindsight Evaluation of Audit Performance

In an early study, Shaked and Sulton (1982) highlighted that accusations

against the audit profession might result from the inability of the public to

evaluate the audit quality and performance of auditors. This results from the

difficulty of the public in distinguishing between the audit quality of one audit

and the audit quality of another. Audit quality and the performance of auditors

are often associated with events such as financial crises or corporate scandals

and failures. However, this method of evaluating auditors after knowledge of

an event is biased and unfair (Humphrey et al. 1992) since it is based on

information which surfaces after a financial crisis or corporate scandal.

Therefore, it becomes difficult to evaluate auditor´s performance or audit

quality in periods without financial crises or corporate failures. On this same

note, Lee et al. (2009) highlight the unsuitability of the hindsight method of

evaluation by pointing out the current negative media publicity against the

audit profession which is likely to influence public opinion that auditors do

not diligently perform their duties. Lee et al. (2009) further note that, auditors

are not completely to be blamed when corporate failures and bankruptcy

occur because such corporate failures may result from factors external to the

audit function such as; poor strategic decisions, mismanagement, inadequate

oversight by the board of directors, fraud perpetuated by management, and

competition and downturns in the industry. Hence, it is imperative for a

distinction to be made between business failures and audit failure as business

failure is often misconstrued for audit failure (Hourguebie 2004). Therefore,

the misperception of the public regarding the evaluation of the quality of an

audit and auditors’ performance further aggravates the AEG.

2.3.4. Time Gap to responding to the changing Public’s Audit

Expectations

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.

2.3.5. The Self-Regulated Nature of the Audit Profession

The audit profession is self-regulated like most other professions (Humphrey

et al. 1992). In their study, Shaked and Sulton (1982) note that the principal

rationale for self-regulation is the desire of the audit profession to achieve

service quality since the public is unable to measure and evaluate audit quality.

Humphrey et al. (1992) further highlight the downside of self-regulation by

emphasizing that the audit profession is not a selfless, diligent and neutral

body as purported. They further underscore that the audit profession is

economically pro-active even though the profession tries to portray its

members as independent and technically competent in order to achieve the

profession’s self-interest (Lee et al. 2009). Shaked and Sulton (1982) equally

note that when the profession is self-regulated, the service quality of the audit

is usually beneath the public’s expectation. Porter and Gowthorpe (2004) re-

echo this point by pointing to the existence of a deficient performance gap in

the UK resulting from the self-regulated nature of the audit profession.

Consequently, the audit profession explores the loopholes in the self-regulated

disciplinary process to deliver low service quality to the public which expects

high service quality from the auditor (Lee et al. 2009). Therefore, the self-

regulation nature of the audit profession and other factors may result in the

widening of the AEG.

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2.3.6. The Unreasonable expectation of the public

The problem of the expectation gap is often tied to the unreasonable

expectation of the public (Humphrey et al. 1993). The public often

misperceives the purpose and nature of auditing. These unreasonable

expectations may be detrimental to the audit profession’s reputation as the

public may fail to recognize the value of audits (Lee & Azham 2008). The

public being the free rider of audited financial reports may require auditors to

perform some duties which may be illogical or cost ineffective (Lee et al.

2009). This gap may thus be impossible to eliminate considering that, the

public does not pay for such information. Therefore, it may be concluded that

the existence of the expectation gap is as a result of the unreasonable

expectations of the public (Lee et al. 2009).

2.4. Remedies to the Audit Expectation Gap

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).

2.4.1. The Defensive Approach (Education)

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, Monroe and Woodliff (1993) examined the impact of

education on students’ perception on the duties of auditors and the meaning

of the audit report. Their findings confirmed that students’ perception

considerably changed after taking an audit course. Students who had

completed an audit course, perceived the auditor to assume lesser

responsibilities and viewed the financial statements to be more reliable

compared to students who did not enroll for any auditing course. Pierce and

Kilcommins (1996) conducted two surveys on undergraduate students, divided

into five groups as an extension of the work of Monroe and Woodliff (1993).

Their findings were consistent with the results of Monroe and Woodliff (1993)

as students who enrolled either in a module or course in auditing had lesser

expectations of auditors.

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.

Lee et al. (2009) note that education may be an impracticable method of

reducing the expectation gap because of the difficulties of education the public

through formal education since some might not have attended formal

education. Similarly, Darnill (1991) highlights the complex nature of auditing

and the disinterest the public may have about auditing. However, more studies

seem to underline the significance of education as a useful tool in narrowing

the expectation gap.

2.4.2. The Constructive Approach

The constructive approach focuses on enhancing auditors’ performance and

expanding auditors’ responsibilities to meet society’s needs. In a report, the

Association of Chartered Certified Accountants (ACCA) (2011) pushed

forward the constructive approach by recommending that audits should

encompass areas such as; corporate governance and risk management. In 2012

this call was extended to Sweden with the Swedish Minister of Financial

Markets recommending internal controls evaluation as a priority area for

auditors (Erhart 2012). As previously mentioned, the constructive approach

encompasses; expanding the scope of audits, restructuring audit

methodologies and expanding auditors’ responsibilities.

2.4.2.1. Expanding the Scope of Audits

There is empirical evidence supporting the effectiveness of the expanded audit

report in narrowing the expectation gap. In studies conducted in the US, the

UK, and Australia (Nair & Rittenberg 1987; Humphrey et al. 1993; and

Monroe & Woodliff 1994) it was observed that the expanded audit report

significantly influenced users’ perception about the responsibilities of auditors

mainly; the purpose of audits, audit procedures, and the responsibilities of

management in preparing financial statements. These studies provide evidence

of the significance of the expanded audit report which aid users in obtaining a

better understanding of the scope, nature, and extent of the audit (Lee et al.

2009). However, Lee et al. (2009) highlight that auditors are reluctant to

provide additional information on issues related to the purpose of audits and

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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.

2.4.2.2. Restructuring Audit Methodologies

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).

2.4.2.3. Expanding Auditors’ Responsibilities and

Performance

Humphrey et al. (1993) equally recommend expanding the existing duties of

auditors as a means of narrowing the expectation gap. Similarly, the Institute

of Chartered Accountants of Australia (ICAA) (2003) recommended the

expansion of the scope of audits to meet the public’s expectation. Regarding

the numerous litigations against the audit profession, ICAA (2003)

recommends the development and evolution of audit services to include core

and expanded audit services. Core audit services mainly include; internal

control services, fraud prevention and detection, and going concern issues.

The expanded audit services, on the other hand, include; “business risk,

management discussion and analysis, quality of accounting policies, corporate

governance, continuous disclosure, performance audits and continuous

audits." (ICAA 2003 p. 6).

Regarding audit quality, Humphrey et al. (1993) recommended the

establishment of an independent office which oversees the appointment of

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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.

2.5. Global Evidence of the Audit Expectation Gap

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.

2.6. Hypotheses Development

In this section, we develop our research hypotheses to enable us to answer the

research questions developed for this study. The hypotheses developed are

based on the above-presented literature and guides the data collection method

used in this study. In total six hypotheses are developed for this study.

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.

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.

This hypothesis is developed based on the premise that, final-year civilekonom

students who have enrolled for audit courses which include the nature, scope,

and limitations of audits possess adequate knowledge of the duties of auditors

as required by ISA and ABL. Thus, they are less likely to have unreasonable

expectations of the auditor.

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.

This hypothesis is premised on the assumption that final-year students who

have enrolled for audit courses possess adequate knowledge of the nature,

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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.

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).

This hypothesis is grounded on the assumption that, the scope of audit

courses at the first-year is introductory in nature and does not cover topics on

auditors’ responsibilities as required by ISA and ABL. Thus, there is bound to

be an insignificant variation in perception between both student categories.

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).

This hypothesis is premised on the same notion as H3. Final-year students

who have not enrolled for audit courses are most likely to misunderstand the

duties of auditors, unlike final-year students who have enrolled for audit

courses. Thus, we hypothesize there is a gap between both student categories

regarding the responsibilities of auditors.

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.

3.1. Audit Background and Practice in Sweden

Due to the separation of ownership and control in LLCs, it is imperative for a

third party to certify that the financial statements presented by management

give a true and fair view of the financial situation of the entity (Agevall &

Jonnergård 2013). Audits were first mandated in Sweden in 1895 following the

proliferation of LLCs after the ABL of 1848 which provided alternative

avenues for raising capital with much reliance on external funding. Thus there

was a separation between ownership and control. Three principal reasons

precipitated the issuance of the 1895 ABL; (1) to protect the public from bad

investments, (2) to protect shareholders from abusive, self-interested and bad

management, (3) to grant minority shareholders more rights (Jönsson 1991).

The auditor was mandated to do an annual review of the entity's financial

statements and issue an opinion thereof (Öhman & Wallerstedt 2012).

Furthermore, auditors had a maximum term limit of two years. The primary

objective of audit at the time was to protect shareholders’ holdings (Morberg

et al. 2014). Today such protection is extended to include a wide range of

stakeholder groups such as; investors, creditors, other interested parties, and

the audited entity. In Sweden, the size of the company is the main determining

factor as to whether an audit is mandatory or optional (Carrington 2010).

Public Limited Companies are obliged to have their financial statements

audited (ABL 9:13).

Öhman and Wallerstedt (2012) present a background history of audit practice

and regulation in Sweden in which they highlight the creation of SRS in 1899

which was primarily made up of individuals with no formal audit experience

and who performed audits as a secondary duty. Later, in 1909, the Stockholm

School of Economics was established and started training auditors with the

first audit graduates in 1911. The creation of the Stockholm School of

Economics subsequently led to the Swedish Chamber of Commerce

authorizing the first auditors in 1912. In the same year, the Federation of

Swedish Industries equally created an audit committee tasked with crafting

audit guidelines. Prior to this, the ABL was updated in 1910 which extended

the duties of auditors to protect shareholders rather than board members. The

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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.

Furthermore, in 1923, FAR was created and was comprised of academically

trained auditors who performed auditing on a full-time basis, unlike SRS

auditors whose members were not very qualified and worked on a part-time

basis. Disputes between SRS and FAR over the legality of which body could

authorize auditors resulted in the creation of a new audit title called “registered

accountant” in 1931. The main differences between the authorized public

accountant (FAR) and the registered accountant (SRS) were that there were

less theoretical and practical requirements for registered accountants

compared to authorized public accountants. Also, authorized public

accountants mostly worked for companies listed on the Swedish Stock

Exchange Market whereas registered accountants mostly worked for LLCs.

Subsequently, FAR began pushing the Stock Exchange market to mandate all

listed companies to have an authorized auditor. This request only came to

fruition with the ABL of 1944 after the 1932 Kruger crash which Larsson

(2005) notes as the most remarkable incident which revolutionized audit

practice in Sweden. FAR tried to distant itself and its members from the

scandal and subsequently drafted a 15-point code of conduct which

encompassed aspects such as; auditors’ independence, professional ethics of

auditors and equally incorporated issue related to price competition.

In 1944, a new ABL was established which mandated listed companies to

have at least one authorized auditor. The act further detailed the duties of

auditors to include auditors' independence. Additionally, financial statements

became clearer and understandable. Moreover, auditors were expected to sign

the balance sheet and the profit and loss statements certifying that they were in

accordance with the company’s books. At the time of the Kruger crash, FAR

through its “Någraord om siffer-granskning” translated as “A few words

about checking figures” limited the duties of auditors to detecting and

preventing misappropriation within a business entity by reviewing financial

statements in a detailed manner. Ensuring adequate internal controls remained

a function of companies. The aim of the 1944 ABL was to prevent a similar

Kruger Scandal from reoccurring by toughening the audit regulatory

framework (Johansson et al. 2005).

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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.

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3.2. Duties of Auditors based on the Swedish Company Act (ABL) of

2005.

The practice of audit in Sweden is mainly in line with the European

Commission’s 8th Directive on Company Law (2006/43/EC). Other statutes

which are binding in Sweden include; Accountants Act (2001:883) - Auditors

Act, Auditor ordinance (1995: 665) and Auditor Board Regulation (RNFS

1996:1, 2001:1, 2001:2). These statutes deal with the duties and responsibilities

of approved auditors and authorized auditors. The ABL of 2005 further

elucidates on the duties and responsibilities of a company elected auditor.

Auditors are usually appointed by the shareholders during the Annual General

Meeting (AGM) for a period of four years. In appointing the auditor, the

shareholders take into consideration the perspective of other stakeholders

(FAR 2004). Before accepting the audit engagement, auditors are expected to

perform a review under the analysis model to ensure that, there are no pre-

existing situations which could undermine auditors’ independence and

confidence. There are no rules regarding the number of times an auditor can

be elected as a company auditor. Likewise, no provisions exist regulating the

dismissal of the auditor before the term limit expiration (FAR 2004). In

performing the audit function, auditors are required to comply with the

Auditor Act section 19, which requires the auditor to maintain high

professional standards in discharging their duties by adhering to the GAAS

provisions. FAR mostly deals with ethical issues on related to how auditors are

to conduct themselves in an audit (FAR 2004).

As previously mentioned ABL Chapter 9, section 1 (9:1) requires all

companies to have at least one auditor with ABL (3:1) requiring the company

through its Article of Association to state the maximum and the minimum

number of auditors. Companies may equally appoint alternate auditors if they

wish (ABL, 9:2). ABL (9:3) requires the auditor to conduct a detailed and

extensive examination of the entity’s annual financial reports likewise the

management of both the board of directors and managing director. Such

examination must be based on GAAS. The provision further requires the

auditor to examine the group reports, when a parent company is involved.

When such group reports are prepared, the auditor is expected to review the

relationship between companies in the group.

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

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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).

3.3. Audit Report Format Based on ISA-700

Audits in Sweden are performed in accordance with the provisions of ISA.

The content and form of the audit report must meet the requirements of ISA-

700. The European Commission (2010) underscores that such a report could

lead to a report which either states no audit failure or an audit failure. It is

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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 responsibilities of management must be stated in a section highlighting

that, it is the responsibility of management in preparing the financial

statements in accordance with the relevant financial regulation and ensuring

adequate internal controls to safeguard financial statements from material

misstatements (ISA-700, paragraph 26). Likewise, the responsibilities of the

auditor should be stated in a separate section (ISA-700, paragraph 28)

highlighting the duty of the auditor in forming an audit opinion based on the

financial statements audited (ISA-700, paragraph 29). This section must

contain a statement highlighting that the audit was performed in accordance

with ISA with the auditor complying with relevant ethical obligations to obtain

reasonable assurance that the financial statements are free from material

misstatements and error through planning and performing audit procedures

(ISA-700, paragraph 30).

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).

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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).

The fall in confidence of stakeholders is detrimental to the proper functioning

of the capital markets as investors rely on the audited financial statements to

make investment decisions (Agevall & Jonnergård 2013). Other scandals such;

Carnegie, Panaxia, TeliaSonera, HQ Bank, etc. further fueled the debate of the

AEG (Danielsson 2012) which subsequently led to a fall in users’ confidence

and widened the expectation gap. Questions raised after these recent scandals

have focused on the role of auditors rather than the actual audit which further

expands the expectation gap as society’s perception of auditors' duty to include

fraud detection is advanced (Balans 2007). The former chairman of FAR SRS,

Peter Clemdtson highlights statutory audits and frameworks designed for

entities ranging from small to multinational entities as the two principal

institutional factors affecting the expectation gap (Balans 2007).

Early evidence of the existence of the expectation gap in Sweden is published

in Balans, a journal issued by FAR. Gometz (1982) for example established the

existence of the expectation gap in Sweden and attributed its existence to two

principal reasons; misunderstanding of the role of auditors by the public and

the disputed claims of the role of auditors. Moreover, he highlighted the

misunderstanding of the role of auditors as an existential threat to the audit

profession as the public often expects the auditor to perform tasks which do

not fall within the scope of the audit. In noting the existence of the

expectation gap, Strandin (1992) however recommended the need for the audit

report to communicate clearly what auditing is all about to prevent the

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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.

Recent studies conducted in Sweden have established the expectation gap in

even more specific areas. For example, Brendahl and Forsbery (2011) found

the existence of an expectation gap between auditors and investors resulting

from poor communication and new standards. Meanwhile, Kristoffersson et

al. (2009) note the existence of the expectation gap between companies and

auditors even though they underscored gap is not as wide as perceived by

auditors. In a related study, Jepsson and Jönsson (2007) highlight the existence

of an expectation gap between journalists and companies regarding auditors’

fraud detection and prevention responsibilities. Journalists turn to have less

confidence in the auditor compared to companies, even though companies

believe there are lapses in auditors’ competence.

From a more specific perspective, Magnusson and Olofsson (2007) observed a

high expectation gap within small and SMEs entities with a greater proportion

of the gap from small companies. In another study, Johnsson and Nilsson

(2011) highlighted that the expectation gap was higher for small companies

which chose to relinquish its auditor compared to small firms which retained

or maintained its auditor. Poor information and inadequate knowledge were

the prime causes for this high expectation gap (Magnusson & Olofsson 2007).

Lehman and Nordenson (2014) further found the existence of an expectation

gap between business students and audit practitioners in Sweden. Meanwhile,

Madsen (2013) observed the existence of the expectation gap between

commercial loan officers and auditors. The gap was substantive in areas

related to auditors’ fraud detection and prevention responsibilities, internal

control and the preparation of financial statements. Additionally, Forsberg and

Dellby (2016) observed the existence of the expectation gap between chief

executive officers, chief finance officers, and auditors.

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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.

4.1. Research Philosophy and Approach

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.

Ontology, on the other hand, focuses on a researcher’s views of the nature of

reality which could be either subjective or objective (Bryman & Bell 2015).

Objectivism is a normative position which asserts that social phenomena and

entities exist independently from social actors. Thus, social actors cannot

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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

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there exist a vast theoretical literature on the subject, but little studies have

been conducted to test these theories.

4.2. Research Design and Strategy

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

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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. Data Collection

Data collection is an essential component of every research. Bell (2010)

emphasizes that the procedure through which data is collected should be

evaluated to determine the extent of its reliability and validity. Data can be

principally collected through primary and secondary sources. Primary data is

data which is originally collected. Meanwhile, secondary data is data which has

already been compiled by others (Bryman & Bell 2015). Primary data was the

main data source for this thesis and was obtained through the survey

questionnaire technique.

4.3.1. Questionnaire

This study adopted the questionnaire approach consistent with previous

studies on the AEG (Porter 1993; Monroe & Woodliff 1993; Pierce &

Kilcommins 1996; Best et al. 2001; Lin & Chen 2004; Fadzly & Ahmad 2004;

Siddiqui et al. 2009; Dixon et al. 2006; Pourheydari & Abousaiedi 2011). The

questionnaire was mainly divided into two sections; the first section contained

demographic questions (gender, age, and experience). The second section

contained 17 semantic differential belief statements. Statements 1-8 focused

on auditors’ responsibilities, statements 9-14 focused on audit reliability,

meanwhile statements 15-17 focused on decision usefulness. All statements

were randomly arranged.

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-

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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.

The questionnaire was developed based on examination of previous literature

in the domain. The questions were modified through expert opinion from

some accounting professors to suit the local situation in Sweden. The

questionnaire technique is an efficient means of collecting data from a large

respondent group and has the advantage of avoiding respondents bias

(Bryman & Bell 2015). The questionnaires were designed to ensure that the

precise data needed for this study was collected to achieve the objectives of

this study. The questionnaires were electronically sent to respondents with all

questions being close ended which facilitated data encoding. Respondents

were equally promised anonymity and confidentiality of their responses. The

questionnaire was translated to Swedish to ensure maximum understandability

from respondents who may not understand some of the audit terminologies in

English. The survey questionnaire used for this study is justified considering

that; the AEG concerns differences in opinion.

4.3.2. Sample population

The research population of this thesis is civilekonom students in Sweden. In

order to obtain the right information, this thesis applied the judgmental

sampling approach by deliberately selecting first-year civilekonom students

who have and have not taken any formal course in auditing and final-year

civilekonom students who have and have not enrolled in auditing courses.

Convenience sampling was equally implemented for this study because it was

based on the willingness of respondent institutions to let their students

participate by providing us with the relevant contact details. To attain the

objectives of this study, which is to investigate the impact audit education has

on the AEG, the students used as respondents of this study were categorized

into four groups; CS1, CS2, CS3, and CS4. Students belonging to CS1 were

first-year students who had not enrolled for any audit courses whereas CS2

were first-year students had enrolled for at least one audit course. CS3

students were final-year students who had enrolled for audits courses

meanwhile, CS4 were final-year students who had not enrolled for any audit

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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.

The choice of civilekonom Accounting students is justified by the fact that,

most audit firms in Sweden employ civilekonom graduates upon completion

of their studies. Furthermore, civilekonom students are the most suitable

population set to test the impact of audit education on the expectation gap

considering that they enroll for accounting and auditing courses as part of

their program.

4.4. Quality of Instruments

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

Validity measures the extent to which the data collection method or

instrument used in a study accurately measures what it purports to measure

(Saunder et al. 2007, Bell 2010). The validity of a study measures the extent to

which the findings of the sample population are generalizable to the whole

population (Bryman & Bell 2015). The validity of the questionnaire used for

this study is believed to be adequate considering that, previous studies in this

area have tested and validated similar questions as well. Furthermore, the

validity of this study was established through face validity (Bryman & Bell

2011, p.160) by sending out the questionnaire to two audit professors with

advanced knowledge on the AEG. The aim of sending out the survey

instrument to these professors was to ensure that the questions were

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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.

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4.6. Ethical Considerations

Researchers are expected to adhere to high ethical principles related to norm,

values, and codes of conduct while performing research. Ethical

considerations play a vital role in research since it relates directly to the

integrity of the study (Bryman & Bell 2015). This study takes into account the

four ethical principles of Bryman and Bell (2011, p.128-138) which include;

harm to participants, lack of informed consent, invasion of privacy and

deception.

Harm to participants was significantly avoided by designing the questionnaire

to guarantee anonymity and confidentiality. Therefore, no private data was

collected from respondents through the questionnaire. Furthermore, lack of

informed consent of respondents was avoided by explaining the aims and

objectives of the study to participants who subsequently willingly participated

in the study. Additionally, the study implemented the non-invasion of privacy

of participants by using the mail survey method and ensuring that, the survey

instrument guaranteed anonymity and confidentiality. Moreover, deception

was avoided by clearly stating the purpose of the study and objectively

presenting the results and analysis of the study. Besides, the literature used for

this study was properly quoted and referenced to avoid plagiarism.

4.7. Overview of questionnaire statements for the Audit Expectation

Gap

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:

A) Auditors’ Responsibility (8 statements)

B) Audit Reliability (6 statements)

C) Decision Usefulness (3 statements)

An explanation of these semantic belief statements about ISA, ABL, and AA

is imperative in gaining a deeper understanding of the responsibilities of

auditors and the AEG in Sweden.

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Auditors’ Responsibility (8 statements)

Statement-1: The auditor is responsible for detecting all fraud.

Based on ISA-240, financial statement misstatements can principally result

from either fraud or error (Paragraph 2). The term “fraud” is defined as an

intentional act through deception by an individual or group of individuals

among management or charged with governing the entity, employees or third

parties with the objective of obtaining an illegal or unjust advantage.

Even though fraud is a broad legal concept which is difficult to distinguish

from error, auditors are nevertheless concerned with fraudulent activities

which could result in material misstatements of financial statements

(Paragraph 3). Therefore, auditors are charged with providing reasonable

assurance that financial statements taken as a whole are free from material

misstatements resulting from fraud and error (paragraph 5). ISA-200 defines

reasonable assurance as a high level of assurance (paragraph 5). Due to the

inherent limitations of audits, there is an unavoidable risk that, auditors will

not detect some material misstatements (Paragraph 5).

Therefore, auditors are not responsible for detecting all fraud.

Statement-2: The Auditors is responsible for the soundness of internal control structures

of the entity.

ISA-400 requires the auditor to obtain sufficient understanding of the entity

audited in order to plan and develop an effective audit approach (paragraph 2).

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.

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Statement-3: It is the auditor’s responsibility to maintain Accounting Records.

Based on ISA-200, the auditor is responsible for expressing an opinion on the

financial statements (paragraph 7) while management is responsible for

preparing and fairly presenting the financial statements based on the relevant

financial reporting framework (paragraph 4).

ISA-700 further requires a section in the audit report stating management’s

responsibility in preparing the financial statements (paragraph 25), and another

section stating the auditor’s responsibility in expressing an opinion on the

financial statements based on the audit (paragraph 29).

Therefore, auditors are not responsible for maintaining accounting records.

Statement-4: It is management’s responsibility for preparing the annual financial

statements.

According to ISA-700, management is charged with preparing the financial

statements. In preparing financial statements, management makes accounting

estimations and judgments and determines the accounting principles and

methods most suitable for preparing financial statements. Such determination

is based on the relevant financial reporting framework enforced. In

circumstances where financial statements are prepared based on the fair

presentation framework, the audit report must contain a statement affirming

management’s responsibility in ensuring that financial statements present a

true and fair true of the financial situation of the entity (paragraph 27).

Therefore, management is responsible for preparing the financial statements.

Statement-5: The auditor is responsible for preventing fraud.

According to ISA-240, those responsible for the governance and management

of the entity bear the duty of preventing and detecting fraud. It is worth

noting that, the responsibilities of those charged with governance and those

charged with the management of an entity differs from country to country.

However, it is necessary for management together with those in the

governance body responsible for oversight to set the appropriate tone by,

creating and maintaining a culture of honesty and high ethical principles, and

establishing control measures to detect fraud and error within the entity.

Oversight measures by those responsible for governance should include,

evaluating the potentials of overriding controls and other inappropriate

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influence by management aimed at altering the perception of analysts

regarding the profitability and performance of the entity (Paragraph 4).

Therefore, auditors are not responsible for preventing fraud.

Statement-6: The auditor exercises judgment in selecting audit procedures.

ISA-200 requires the auditor to exercise professional judgment in planning and

performing financial statement audits (paragraph 16). Professional judgment

plays a crucial role in audit as it facilitates auditors’ interpretation of ethical

requirements, ISAs and making informed decisions based on relevant known

knowledge and experience. The exercise of professional judgment is relevant

in decisions involving; materiality and audit risk, determining the nature,

timing, and extent of audit procedures to gather audit evidence relevant to

complying with the requirements of ISA. Furthermore, professional judgment

is relevant in evaluating whether sufficient appropriate audit evidence has been

obtained, in assessing whether management’s judgment in applying the entity’s

financial reporting framework and decisions are based on appropriate audit

evidence (ISA 200, A23).

For professional judgment to be effective, it must be based on the evaluation

of relevant facts and circumstances known to the auditor and a competent

implementation of the appropriate accounting and audit principles (ISA 200,

A26). The auditor is equally expected to document professional judgment such

that, an experienced auditor without prior connection to the entity audited can

understand the professional judgment made in arriving at significant audit

conclusions reached during the audit (ISA 230, paragraph 8).

Therefore, auditors are expected to exercise professional judgment during the

audit. This statement is subjective and depends on users' perception of the

auditor fulfilling this function.

Statement-7: The auditor is unbiased and objective.

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

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49

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-8: Corporate management should be held responsible for all business-related

bankruptcy cases arising from fraud.

Based on ABL 29:1, a founder, board of directors or managing director are

held accountable and liable to compensate for damages in the entity resulting

from an intentional or negligent act in performing their duties.

Thus, ABL puts the responsibility on management in bankruptcy cases

resulting from fraud only when the damage results from an intentional or

negligent act. Therefore management liability to business-related fraud cases

depends on a case-by-cases basis.

Audit Reliability (6 Statements)

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

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50

circumstance, the auditor’s perception of financial statement users’ needs, and

by the size or/and nature of the misstatement (ISA-200, Paragraph 6).

Thus, auditors cannot provide absolute assurance to users that financial

statements are entirely free from material errors.

Statement-10: The auditor agrees with the accounting policies used in the financial

statement.

Based on ISA-200 it is the responsibility of management in preparing the

financial statements in accordance with the relevant financial reporting

framework (paragraph 4). Thus, the auditor’s responsibility is limited to

forming an opinion on whether the financial statements are prepared in all

material aspects according to the relevant financial reporting framework (ISA

700, paragraph10). The auditors' opinion is based on the audit evidence

gathered (ISA 700, paragraph 6) on the assessment that, accounting practices

do not reflect management’s bias, significant accounting policies applied have

been disclosed and are consistent with the financial reporting framework of

the entity. Furthermore, in forming an opinion, auditors are expected to

assess if the accounting estimates are reasonable, whether financial statements

as a whole are relevant, reliable, understandable and comparable, and whether

adequate disclosures have been made to enable users to understand the

content of financial statements (ISA 700, paragraph 13).

The auditor forms an unmodified opinion when in agreement with the

accounting policies implemented by management (ISA 700 paragraph 16).

When the auditor is not in agreement with such accounting policies, a

modified audit opinion is issued (ISA 700, paragraph 17).

Therefore, the auditor must agree with management’s accounting policies for

an unmodified audit opinion to be issued.

Statement-11: The financial statements give a true and fair view.

Where financial statements are prepared based on fair presentation, a

statement is expected to be included in the management’s responsibilities

section highlighting management’s role in ensuring that the financial

statements prepared, give a true and fair view (ISA 700, paragraph 27).

In expressing an opinion on financial statements prepared based on fair

presentation, the auditor is expected to state whether the financial statements

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51

“present fairly” or “give a true and fair view” in all material aspects based on

the financial reporting framework enforced (ISA 700, paragraph 37).

Thus, an unmodified opinion based on the fair presentation requirement must

state that the financial statements give a true and fair view or present fairly.

Hence audit reports which do not follow the fair presentation requirement are

not expected to have the fair presentation statement.

Statement-12: The extent of assurance given by the auditor is clearly indicated in the

audit report.

ISA-240 paragraph 5 requires the auditor to obtain reasonable assurance that,

the financial statements taken as a whole are free material misstatements

resulting from fraud or error. Thus, the auditor gives reasonable assurance and

not absolute assurance about the financial statements being free from error.

Reasonable assurance refers to high-level assurance (ISA-200, paragraph 5).

Therefore, there is inevitable subjectivity in defining what constitutes high

assurance.

Furthermore, ISA-700 requires auditors to clearly state their opinion of the

audited financial statements (paragraph 6b).There are standardized wordings

for the auditor’s opinion for an unmodified audit opinion. In the case of a

modified audit opinion, the auditor is expected to describe the circumstances

resulting to this based on ISA 705.

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.

Based on ISA-700, the audit report is expected to contain a section titled

“auditor’s responsibility” (paragraph 28). This section shall underscore the

auditor’s responsibility in expressing an opinion on the financial statements

based on the audit (paragraph 29). The report is equally to highlight that; the

audit was performed based on ISA which requires the auditor comply with

ethical considerations and to plan and perform the audit to obtain reasonable

assurance that, the financial statements are free from material error resulting

from fraud or error (paragraph 30). Furthermore, the audit report shall

indicate the purpose of an audit which is to obtain audit evidence regarding

the numbers and disclosures in the financial statements. The auditor is equally

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52

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.

Statement-14: Auditors are trustworthy (reliable).

ISA-200 requires the auditor to comply with ethical requirements and

independence guidelines (paragraph 14) which are aimed at enhancing the trust

the public has for the auditor. Furthermore, ISA-200 requires auditors to

comply with IESBA’s high ethical principles of independence, objectivity, and

integrity. Additionally, section 20 of the AA requires audit activities to be

organized to ensure impartiality, independence, and objectivity. The auditor is

expected to maintain these standards while performing the audit.

Though ISA, ABL and AA advocate for high ethical standards from auditors,

the degree of trust the public has regarding auditors is subjective.

Decision Usefulness (3 statements)

Statement-15: The audited financial statements are useful for monitoring the entity’s

performance.

Based on ISA-200 the financial statements (Balance Sheet, Income Statement,

Cash Flow Statements, Statement of Changes in Owner’s Equity and related

notes), are aimed at providing information regarding the financial position,

performance and cash flow situation of the entity (paragraph A8).

Therefore, audited financial statements are useful in monitoring the

performance of the entity.

Statement-16: The audited financial statements are useful for decision making.

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53

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.

Moreover, the auditor is to ensure that the information contained in the

financial statements are relevant, reliable, comparable, and understandable

(paragraph 13d). These qualitative characteristics of accounting information

are designed to enhance the quality and usefulness of financial statements in

decision making.

Therefore, audited financial statements are useful for decision making.

Statement-17: The entity is well managed.

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.

However, ABL (9:3) requires the auditor to conduct a detailed examination of

the administration of both the board of directors and managing director.

Therefore, based on ABL, the auditor is to state how well the entity is

managed.

Page 54: The Impact of Audit Education on the Audit Expectation Gap

54

5. Results

This chapter presents a summary of the results of the mailed questionnaire and likewise

contains the result of our tested hypotheses.

5.1. Demographic Information of Usable Respondents

The survey was mailed to 1366 civilekonom students in their first-year of

studies and final-year students specializing in Accounting. Table 1 presents the

distribution of responses for each respondent group; meanwhile, Table 2

displays the demographic information of the usable information.

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.

Page 55: The Impact of Audit Education on the Audit Expectation Gap

55

Table 1: Descriptive Statistics of respondents

Responses received

Enrolled

for at

least one

accountin

g course

No. % Yes No

Participan

ts

No. of

questionnair

es sent

Usabl

e

unusabl

e

usable Unusabl

e

Usable

First year

students

872 68 13 4.98% .95% 38 30

Final year

students

494 69 14 5.05% 1.02% 43 26

Total of

usable/

unusable

137 27 10.03

%

1.97%

Total 1,366 164 12 % 81 56

Majority of the respondents (59 %) had taken courses in auditing thus

indicating their familiarity with the issues studied and were thus likely to

respond to the survey adequately. This study was initially aimed at taking into

consideration audit education and work experience. However, the results in

Table 2 indicate that just 10.9% of the respondents had actual work

experience. The majority (9) of those with work experience had less than six

months of professional experience, a period too short to meaningfully impact

the AEG. Thus, work experience did not play a significant role in this study.

Table 2: Demographic information of Usable respondents

Sex Audit Experience Duration of

experience

Male Female Yes No Less

than

6

mont

hs

More

than

6

mont

hs

No. % No. % No. % No. %

First

year

students

31 22.6% 37 27% 5 3.6

%

63 46% 4 1

Final

Year

28 20.4% 41 30% 10 7.3

%

59 43.1% 5 5

Page 56: The Impact of Audit Education on the Audit Expectation Gap

56

students

Totals 59 43% 78 57% 15 10.9

%

12

2

89.1%

5.2. Results from Semantic Differential Belief Statements

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.

5.2.1. Auditors’ Responsibilities

A total of eight responsibility statements on auditors’ responsibility addressing

issues related to; fraud detection, internal control, preparation of financial

statements, auditors’ objectivity and judgment, and management’s culpability

in fraud-related business failures were posed to respondents. The results in

Tables 3, 4 and 5 are based on education as the independent variable. Table 3

shows the mean distribution of the responses and the two-tailed significance

level. The results show a significance difference in responses and an

expectation gap between CS1 and CS3 particularly concerning; auditors’ fraud

detection responsibility (statement 1), auditors’ responsibility in maintaining

accounting records (statement 3), management’s responsibility for preparing

financial statements (statement 4) and auditors’ duty in exercising judgment in

selecting audit procedures (statement 6). The largest difference (p=0) was

related to statement 4 and 6 with CS1 less supportive of management’s

responsibility for preparing the annual financial reports and somewhat unsure

if auditors exercised judgment in selecting audit procedures compared to CS3.

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

Page 57: The Impact of Audit Education on the Audit Expectation Gap

57

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.

Table 3: Auditors’ responsibility mean distribution (CS1 and CS3)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The auditor is responsible for

detecting all fraud

CS1

CS3

30

43

3.267

3.837

1.2015

1.1938

.049

.050

The Auditor is responsible for

the soundness of internal

control structures of the entity.

CS1

CS3

30

43

3.067

3.326

1.4606

1.3042

.430

.440

It is the auditor’s responsibility

to maintain Accounting

Records.

CS1

CS3

30

43

2.367

1.535

1.4967

1.2218

.011

.015

It is management’s

responsibility for preparing the

annual financial statements.

CS1

CS3

30

43

2.933

4.140

1.4368

1.2068

.000

.000

The auditor is responsible for

preventing fraud.

CS1

CS3

30

43

3.367

3.116

1.1592

1.2575

.391

.384

The auditor exercises judgment

in selecting audit procedures.

CS1

CS3

30

43

3.500

4.419

.8200

.8517

.000

.000

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58

The auditor is unbiased and

objective.

CS1

CS3

30

43

4.233

4.465

1.0726

.7351

.277

.310

Corporate management should

be held responsible for all

business-related bankruptcy

cases arising from fraud.

CS1

CS3

30

43

3.733

4.140

1.2847

.8886

.114

.140

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).

Table 4: Auditors’ responsibility mean distribution (CS1 and CS2)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The auditor is responsible for

detecting all fraud

CS1

CS2

30

38

3.267

4.079

1.2015

.8817

.002

.003

The Auditor is responsible for

the soundness of internal

control structures of the entity.

CS1

CS2

30

38

3.067

3.474

1.4606

1.0329

.183

.202

It is the auditor’s responsibility

to maintain Accounting

Records.

CS1

CS2

30

38

2.367

2.605

1.4967

1.5164

.519

.519

It is management’s

responsibility for preparing the

CS1

CS2

30

38

2.933

3.553

1.4368

1.2236

.059

.065

Page 59: The Impact of Audit Education on the Audit Expectation Gap

59

annual financial statements.

The auditor is responsible for

preventing fraud.

CS1

CS2

30

38

3.367

3.632

1.1592

1.1951

.361

.360

The auditor exercises judgment

in selecting audit procedures.

CS1

CS2

30

38

3.500

3.711

.8200

.8353

.302

.301

The auditor is unbiased and

objective.

CS1

CS2

30

38

4.233

4.053

1.0726

1.1377

.507

.504

Corporate management should

be held responsible for all

business-related bankruptcy

cases arising from fraud.

CS1

CS2

30

38

3.733

3.816

1.2847

1.0096

.768

.774

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).

Table 5: Auditors’ responsibility mean distribution (CS3 and CS4)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The auditor is responsible for CS3 43 3.837 1.1938 .417

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60

detecting all fraud CS4 26 4.077 1.1635 .415

The Auditor is responsible for

the soundness of internal

control structures of the entity.

CS3

CS4

43

26

3.326

3.462

1.3042

1.4760

.691

.700

It is the auditor’s responsibility

to maintain Accounting

Records.

CS3

CS4

43

26

1.535

1.615

1.2218

1.2354

.793

.793

It is management’s

responsibility for preparing the

annual financial statements.

CS3

CS4

43

26

4.140

4.154

1.2068

1.1897

.962

.962

The auditor is responsible for

preventing fraud.

CS3

CS4

43

26

3.116

3.577

1.2575

1.1721

.135

.130

The auditor exercises judgment

in selecting audit procedures.

CS3

CS4

43

26

4.419

3.962

.8517

.8237

.032

.032

The auditor is unbiased and

objective.

CS3

CS4

43

26

4.465

4.385

.7351

1.0228

.706

.728

Corporate management should

be held responsible for all

business-related bankruptcy

cases arising from fraud.

CS3

CS4

43

26

4.140

4.269

.8886

.9190

.564

.568

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.

5.2.2. Reliability of Audits and Audited Financial Statements

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

Page 61: The Impact of Audit Education on the Audit Expectation Gap

61

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).

Table 6: Audit reliability mean distribution (CS1 and CS3)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

Users can have absolute

assurance that financial

statements are free from

material misstatements.

CS1

CS3

30

43

3.467

3.605

1.1366

1.1780

.619

.617

The auditor agrees with the

accounting policies used in the

financial statement.

CS1

CS3

30

43

4.367

4.140

.7184

.7740

.208

.203

The financial statements give a

true and fair view.

CS1

CS3

30

43

3.833

3.721

.8339

.9083

.592

.587

The extent of assurance given

by the auditor is clearly

indicated in the audit report.

CS1

CS3

30

43

3.733

3.930

.9444

1.0997

.428

.416

The extent of the work

performed by the auditor is

communicated clearly.

CS1

CS3

30

43

3.800

3.628

.8867

1.1344

.489

.470

Auditors are trustworthy

(reliable).

CS1

CS3

30

43

4.200

4.140

.8052

.8042

.753

.753

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62

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 7: Audit reliability mean distribution (CS1 and CS2)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

Users can have absolute

assurance that financial

statements are free from

material misstatements.

CS1

CS2

30

38

3.467

3.658

1.1366

1.2142

.510

.506

The auditor agrees with the

accounting policies used in the

financial statement.

CS1

CS2

30

38

4.367

4.079

.7184

.8505

.143

.135

The financial statements give a

true and fair view.

CS1

CS2

30

38

3.833

3.789

.8339

.9630

.844

.841

The extent of assurance given

by the auditor is clearly

indicated in the audit report.

CS1

CS2

30

38

3.733

3.474

.9444

1.0587

.296

.290

The extent of the work

performed by the auditor is

communicated clearly.

CS1

CS2

30

38

3.800

3.368

.8867

1.0761

.081

.074

Auditors are trustworthy

(reliable).

CS1

CS2

30

38

4.200

4.105

.8517

.7983

.630

.630

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

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63

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).

Table 8: Audit reliability mean distribution (CS3 and CS4)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

Users can have absolute

assurance that financial

statements are free from

material misstatements.

CS3

CS4

43

26

3.605

3.769

1.1780

1.1422

.571

.569

The auditor agrees with the

accounting policies used in the

financial statement.

CS3

CS4

43

26

4.140

3.962

.7740

1.1482

.444

.488

The financial statements give a

true and fair view.

CS3

CS4

43

26

3.721

3.692

.9083

.8376

.897

.895

The extent of assurance given

by the auditor is clearly

indicated in the audit report.

CS3

CS4

43

26

3.930

3.538

1.0997

.9892

.141

.132

The extent of the work

performed by the auditor is

communicated clearly.

CS3

CS4

43

26

3.628

3.538

1.1344

.9047

.734

.719

Auditors are trustworthy

(reliable).

CS3

CS4

43

26

4.410

4.115

.8042

.8638

.907

.909

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

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64

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.

5.2.3. Usefulness of audited financial statements

Three statements about the usefulness of financial statements were posed to

respondents covering issues related to; decision usefulness, performance

monitoring and determining if the entity was well managed. Table 9 to 11

provides the mean responses, standard deviation and the two-tailed

significance level for CS1 and CS3 for all student categories.

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.

Table 9: Decision usefulness mean distribution (CS1 and CS3)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The audited financial

statements are useful for

monitoring the entity’s

performance.

CS1

CS3

30

43

4.267

4.256

.6397

.6208

.942

.943

The audited financial

statements are useful for

decision making.

CS1

CS3

30

43

4.067

3.953

.6915

.8438

.546

.532

The entity is well managed. CS1

CS3

30

43

3.600

3.698

.8944

.7411

.613

.625

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

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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.

Table 10: Decision usefulness mean distribution (CS1 and CS2)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The audited financial

statements are useful for

monitoring the entity’s

performance.

CS1

CS2

30

38

4.267

4.079

.6397

.7491

.278

.269

The audited financial

statements are useful for

decision making.

CS1

CS2

30

38

4.067

3.842

.6915

.8861

.258

.245

The entity is well managed. CS1

CS2

30

38

3.600

3.447

.8944

.7952

.460

.466

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.

Table 11: Decision usefulness mean distribution (CS3 and CS4)

Statement Level of

Education

N Mean Standard

deviation

Sig. (2-

tailed)

The audited financial

statements are useful for

monitoring the entity’s

performance.

CS3

CS4

43

26

4.256

4.154

.6208

.9672

.595

.633

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66

The audited financial

statements are useful for

decision making.

CS3

CS4

43

26

3.953

4.000

.8438

.9381

.832

.837

The entity is well managed. CS3

CS4

43

26

3.698

3.692

.7411

.7884

.977

.978

5.3. Hypotheses Testing

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 the results on Table 3 CS1 maintain a neutral position regarding

auditors' responsibility for preventing and detecting fraud, management's

responsibility for preparing the annual financial reports and auditors'

responsibility for the maintenance of internal control structures of entities.

Table 6 equally indicates that CS1 slightly believe users can have absolute

assurance that financial statements are free from material misstatements.

Furthermore, based on Table 4, CS2 have a high expectation of auditors to

detect all fraud. Additionally, they seemed uncertain about auditors'

responsibility for ensuring the soundness of internal controls structures of

entities and preventing fraud, and management's responsibility in preparing the

annual financial reports. Also, based on Table 7, CS2 believe audited financial

statements give users absolute assurance that financial statements are free

from material errors.

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.

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67

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.

Based on these unreasonable expectations and uncertainties of final-year

students specializing in accounting, we reject H2 and conclude that CS3

slightly have some unreasonable expectations about auditors’ duties and

responsibilities.

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.

As indicated in Table 3, significant differences exist between CS1 and CS3

regarding auditors’ responsibilities especially on the issues of; auditors’

responsibility for detecting fraud, auditors’ responsibility for maintaining

accounting records, management’s responsibility for preparing the annual

financial statements and auditors’ judgment in selecting audit procedures.

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).

Based on Table 5, there is a significant difference between CS3 and CS4 on

the issue of the auditor exercising judgment in selecting audit procedures. CS3

tended to trust the auditor more in exercising judgment in selecting audit

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68

procedures. However, there were no significant differences in mean responses

between CS3 and CS4 for the remaining sixteen statements.

Therefore, we reject H5 as no significant differences exist between CS3 and

CS4.

H6: Advanced audit education is the main factor which results in the differences in

perceptions between First and Final year student.

The impact of audit education was most evidenced on issues related to

auditors’ responsibilities most especially between CS1 and CS3. CS3 strongly

disagreed that, auditors were responsible for maintaining accounting records

compared to CS1 who simply disagreed. Furthermore, CS3 strongly believed

management was responsible for preparing the annual financial statements,

whereas CS1 were somewhat uncertain about this assertion. Additionally, CS3

perceived auditors as exercising judgment in selecting audit procedures

compared to CS1 and CS4. However, it was observed that CS3 had a higher

expectation of the auditor detecting all fraud compared to CS1.

The differences in perception between first-year students and final-year

students were mostly attributed to education as a pattern was observed among

students who had enrolled for audit courses and students who had not

enrolled for audit courses. Based on the results above, we fail to reject H6.

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69

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-

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70

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.

Similarly, first-year students, in general, maintained a neutral position regarding

managements’ responsibility for preparing the annual financial statements. It is

worth mentioning that a neutral position is indicative of uncertainty on the

path of first-year students. Meanwhile, final-year students (with and without

formal audit education) affirmed management’s responsibility in preparing the

annual financial reports. An expectation gap was thus observed between final-

year students and first-year students on this issue which is consistent with the

findings of Best et al. (2001). The explanation for the existence of this gap is

similar to the explanation above. Final-year students with an audit education

possessed the relevant knowledge, whereas; final-year students, who had not

enrolled for any formal audit course, had obtained the relevant knowledge

about this issue from different sources. On the contrary, the doubt expressed

by first-year students could be explained by the fact that, they had not enrolled

for any audit courses which could furnish them with the necessary knowledge

set.

Furthermore, a gap was identified on the issue of auditors exercising judgment

in selecting audit procedures. First-year students slightly agreed that auditors

exercised judgment in selecting audit procedures, while final-year students with

no audit education agreed and final-year students with audit education strongly

agreed to this statement. It is worth mentioning that, this statement is

subjective with no right or wrong answers but based on students’ perception.

However, ISA-200 requires the auditor to exercise judgment in planning and

selecting audit procedures. Nonetheless, though being a subjective statement,

audit education was observed to be influential on the perception of final-year

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students who had enrolled for audit courses as they strongly agreed auditors’

exercised judgment in selecting audit procedures.

Concerning auditors’ responsibility for the soundness of the internal control

structure of the entity and preventing fraud, all student categories expressed

uncertainty as to whether auditors were expected to perform such duties.

Previous studies such as Best at al. (2001) and Fadzly and Ahmad (2004)

similarly observed an expectation gap concerning auditors’ responsibility for

maintaining the internal control structure of the entity. Improving the

wordings of the audit report could be a solution of narrowing this gap as

suggested by Schelluch (1996). Consistent with the findings of Best at al.

(2001) and Schelluch (1996), this study equally observed an expectation gap

regarding auditors’ fraud prevention responsibility. Similar to the findings of

Schelluch (1996) it was observed that audit education had a limited influence

on students’ perception regarding both statements as final-year students with

an audit education background tended to be uncertain if auditors were

responsible for the soundness of internal controls and preventing fraud. It is

worth noting that, Low et al. (1988) equally observed that auditors’ fraud

prevention responsibility has been an area of contention over time.

All students perceived auditors as being unbiased and objective. This

statement was subjective in nature. However, ISA-200 requires auditors to

maintain ethical standards. Furthermore, section 20 of AA necessitates

auditors to be; impartial, independent, and objective. These provisions

affected the perception of final-year students with an audit education as they

had the highest mean agreement score compared to other student categories.

This statement had the highest mean response score among all student

categories compared to other audit responsibility statements signifying the

high esteem students have for auditors. Similarly, all students affirmed

management’s liability for business-related bankruptcy resulting from fraud. It

is worth highlighting that, ABL 29:1 requires management to be liable for

business-related bankruptcies only if they were intentional or resulted from

management’s negligence.

No significant differences were observed on the reliability and decision

usefulness statements among all four student categories. However, all students

slightly agreed that audited financial statements provided users assurance that

the financial statements were completely free of material misstatements.

Shockingly, final-year students who had enrolled for audit courses slightly

agreed with this assertion. This was equally an area which education had less

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72

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.

Concerning the decision usefulness of audited financial statements, the

statement on audited financial statements being useful in monitoring an

entity’s performance received the highest mean response followed by the

statement on the usefulness of audited financial statements in monitoring the

performance of an entity. This was an indication that, most students possessed

the necessary knowledge regarding the usefulness of audited financial

statements. However, the statement on whether audited financial statements

indicated if an entity was well managed, received the lowest response rate. All

student categories slightly agreed that audited financial statements indicated

whether an entity was well managed. Final-year students who had enrolled in

audit courses were expected to overwhelmingly agree with this statement.

However, no significant difference was observed between final-year students

with an audit education background and the other three student categories. It

is worth noting that, ABL (9:3) requires auditors to perform a detailed

examination of the administration of the board of directors and management.

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.

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73

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.

Furthermore, no significant differences were observed between first-year

students who had enrolled for an audit course and those who had not enrolled

for an audit course as hypothesized. A possible explanation for this could be

that most audit courses at the introductory level do not encompass topics

which cover the duties and responsibilities of auditors as required by ISA and

ABL. Additionally, no significant differences were observed between final-year

students who had enrolled for audit courses and those who had not enrolled

for such courses. The sole difference observed was on the issue of auditors

exercising judgment in selecting audit procedures. The reason for no

significant differences between final-year students with an audit education and

those without any audit education results from the high expectations both

student categories had of the auditors. Furthermore, both student categories

had obtained some knowledge about the responsibilities of auditors from

formal university taught audit courses and from other sources.

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

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74

the eight statements on auditors’ responsibilities had the widest gap compared

to issues related to audit reliability and usefulness of financial statements.

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75

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.

The implication of this study is broader as it brings to the limelight the

loopholes of the civilekonom accounting program. This study equally

recommends measures which could be implemented to reduce the lapses

identified in the accounting curriculum of most civilekonom programs. These

measures include; the updating of current accounting civilekonom programs to

include compulsory advanced courses in auditing. Furthermore, these

advanced courses in auditing should encompass topics which deal in depth

with auditors’ responsibilities and ethical standards as required by ISA, ABL

and AA. Additionally, the audit profession and the regulator (IAASB) should

design and implement policies aimed at improving users understanding on the

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76

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.

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Appendices

Appendix 1. Spearman’s Rank Correlation Coefficient

Correlations

001 002

Spearman's rho 001 Correlation Coefficient 1,000 ,948**

Sig. (2-tailed) . ,000

N 17 17

002 Correlation Coefficient ,948** 1,000

Sig. (2-tailed) ,000 .

N 17 17

**. Correlation is significant at the 0.01 level (2-tailed).

Correlations

N1 N2

Spearman's rho N1 Correlation Coefficient 1,000 ,691**

Sig. (2-tailed) . ,002

N 17 17

N2 Correlation Coefficient ,691** 1,000

Sig. (2-tailed) ,002 .

N 17 17

**. Correlation is significant at the 0.01 level (2-tailed).

Correlations

001 002 N1 N2

Spearman's rho 001 Correlation Coefficient 1,000 ,948** ,724** ,766**

Sig. (2-tailed) . ,000 ,001 ,000

N 17 17 17 17

002 Correlation Coefficient ,948** 1,000 ,690** ,789**

Sig. (2-tailed) ,000 . ,002 ,000

N 17 17 17 17

N1 Correlation Coefficient ,724** ,690** 1,000 ,691**

Sig. (2-tailed) ,001 ,002 . ,002

N 17 17 17 17

N2 Correlation Coefficient ,766** ,789** ,691** 1,000

Sig. (2-tailed) ,000 ,000 ,002 .

N 17 17 17 17

**. Correlation is significant at the 0.01 level (2-tailed).

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Appendix 2. Cronbach’s Alpha

Case Processing Summary

N %

Cases Valid 17 100,0

Excludeda 0 ,0

Total 17 100,0

a. Listwise deletion based on all variables in the

procedure.

Reliability Statistics

Cronbach's

Alpha

Cronbach's

Alpha Based on

Standardized

Items N of Items

,935 ,944 4

Item Statistics

Mean Std. Deviation N

001 3,3529 1,45521 17

002 3,2941 1,31171 17

N1 3,4118 1,83912 17

N2 3,3529 1,53872 17

Inter-Item Correlation Matrix

001 002 N1 N2

001 1,000 ,957 ,783 ,806

002 ,957 1,000 ,724 ,843

N1 ,783 ,724 1,000 ,741

N2 ,806 ,843 ,741 1,000

Item-Total Statistics

Scale Mean if

Item Deleted

Scale Variance

if Item Deleted

Corrected Item-

Total Correlation

Squared

Multiple

Correlation

Cronbach's

Alpha if Item

Deleted

001 10,0588 18,559 ,914 ,936 ,896

002 10,1176 19,860 ,903 ,938 ,906

N1 10,0000 16,875 ,786 ,681 ,948

N2 10,0588 18,559 ,845 ,757 ,916

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Scale Statistics

Mean Variance Std. Deviation N of Items

13,4118 32,132 5,66854 4

Appendix 3. Pilot Survey Instrument

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Appendix 4. Survey Instrument

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