The Impact of ISA 701 on the Existing Expectation Gap Between Users of the Financial Statements and the Auditors

Trine Bæk Andersen & Anders Houmann

Student thesis: Master thesis

Abstract

Ever since audit of financial statements started back in the 1900s, there has been a gap between the users of the financial statements expectations to auditors and what the auditors actually do. The expectation gap has become even bigger after the financial crisis took its toll on the economy and forced a large number of companies into bankruptcy. In 2009, the International Federation of Accountants (IFAC) decided that they had to take action in order to reduce the expectation gap and restore the public’s trust in the auditors.
In January 2015, IFAC’s audit standard issuing body IAASB issued some new and revised international audit standards related to the Auditor’s reports in the financial statements. The new and revised audit standards include numerous changes to the auditor’s opinion. The most significant change is the introduction of Key Audit Matters, which is a separate section within the report. In this section, the auditor needs to explain those matters that, in his opinion, were of most significance in the audit of the financial statements. The intention is that this new section is going to provide the user of the financial statements more information about the audit process and create more transparency of auditor’s risk assessment.
The objective of this thesis is to clarify what the different stakeholders view is on the new requirements and finally whether they will reduce the expectation gap.
There seems to be a very positive opinion on the Key Audit Matters from both auditors and users of the financial statements, but the companies, which financial statements are affected by the new requirements are less enthusiastic about it. The companies do not appreciate the fact that the auditors can communicate risks and other key matters in the new Auditor’s reports as they believe they are more capable of communicating this.
The overall conclusion of the thesis is that the purpose of introducing Key Audit Matters in the Auditor’s reports is useful and it has the potential to reduce the expectation gap between the users of the financial statements and the auditors. However, some pitfalls must be avoided in order for it to become a success. All of our elements in the analysis point at the terminology used by the auditors as being the most crucial factor for it to become a success. The auditors have never communicated directly to nonprofessionals and if they do not manage to communicate in a terminology that can be understood by individuals that do not have extensive financial knowledge, the information will not have the intended effect on the expectation gap.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2016
Number of pages137