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
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
3 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.
4 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
5 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
6 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
7 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
8 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
9 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
10 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).
11 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
12 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
13 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
14 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.
15 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
16 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.
17
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.
18 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
19 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
20 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.
21 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
22 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
23 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
24 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
25 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
26 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.
27 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,
28 scope, and limitations of audits compared to first-year students with an inadequate background on auditors’ duties. Thus, the difference in perception stems from the variation in audit knowledge among first-year students with no audit education background and final-year students with an audit education background.
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.
29 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
30 ABL of 1910 prohibited company employees or anyone employed by a board member to become a company’s auditor. The act further clarified and highlighted the rights and obligations of auditors such as; having access to inventory and cash records which some general meetings had previously withheld auditors from access to such information.
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).
31 Auditing before the 1960’s was focused on checking figures, but from the 1960’s onwards the focus changed to internal controls. The advent of the 1970’s was met with the globalization of markets in which audit standards became international. To catch up with such international audit practice, FAR abandoned its item-by-item checking system for a more complex and technical audit process. From 1971 FAR started issuing professional recommendations which were subsequently approved by the ABL of 1975. The 1975 ABL further made it mandatory for auditors to comply with GAAS with the audit profession interpreting such standards. A proposal was equally made in 1975 for all companies to have a certified auditor but the scarcity of auditors at the time prevented it from being implemented. Nevertheless, from 1983 onwards, statutory audits became mandatory with all limited companies required to have an approved or certified auditor (Wallerstedt 2001). From 1985 auditors in Sweden were expected to issue a qualified opinion (Öhman & Wallerstedt 2012.) and report to the authority investigating economic crimes (Widhagen & Damberg 1985) in cases where companies failed to comply with the tax legislation and other legislations (Larsson 2005). Additionally, auditors were empowered to report crimes committed by board members and CEOs (SFS, 1998:760).
Johansson et al. (2005) note that in 1995 after Sweden became a member of the EU, it had to adhere and comply with EU directives especially the 8th directive which regulates audit practice. Thus, in 1995 and 1999 respectively, an Annual Accounts Acts and new laws governing auditors and auditing were enacted. The 1995 ABL mandated an independent authority (National Board of Trade) to deal with issues related to auditing. Meanwhile, the Supervisory Board of Public Accountants was charged with approving auditors, issuing auditing guidelines and resolving resulting complaints. In 2001, Sweden became the first European nation to implement a tool called “the analysis model” which provided auditors the opportunity to monitor their independence. In addition to complying with EU rules, auditors were equally required to perform management audits, a provision which is applicable only in Sweden and Finland.
32 3.2. Duties of Auditors based on the Swedish Company Act (ABL) of 2005.
The 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
33 required to present an audit report at the end of financial year to the general meeting (ABL; 9:5). The audit report is supposed to be presented to the board of directors at least three weeks before the general meeting (ABL, 9:28). The audit report is expected to contain; the name of the entity audited, the coverage period of the auditor’s report, the audit standard system implemented, the signature of the auditor and date of completion of the audit assignment (ABL 9:29). The auditor is further charged with highlighting any inherent limitations experienced in performing the audit, differences in opinion with the board of directors and another auditor, and circumstances which prevent the auditor from expressing an opinion (ABL9:30). In this regard, auditors are to disclose if applicable statutes adhered to in preparing the annual reports and auditors are expected to state whether the entity's accounts present a true and fair view of its financial position and if the administration’s report is consistent with the annual report (ABL 9:31).
Additionally, the auditor is expected to state in the audit report if the annual general meeting should adopt the balance sheet and income statement report (ABL 9:32). In situations where the board of directors or the managing director makes an omission which could result to a liability, the auditor is expected to report on such circumstances (ABL 9:33). Auditors are mandated to disclose all taxation related breach ranging from; failure of the company to make the right deductions, failure of the company to make timely tax payment, failure to comply with the registration requirements contained in chapter 3, section 2, and failure to file tax returns as contained in chapter 10, section 9. Concerning the audit, the auditor is required to provide any criticisms and observations to the board of directors (ABL 9:6). The board is expected to note such objections in its minute or have it documented. Such criticisms are supposed to be deliberated upon not more than four weeks after their initial submission (ABL 9:39). Auditors are expected to maintain a high level of confidentiality by avoiding disclosing any sensitive information about the company which may be detrimental to the company (ABL9:41).
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
34 worth noting that, 90% of audit reports have an unqualified audit opinion (Hayes et al. 2005). A standard unqualified opinion usually commences with the title page indicating the audit was performed by an independent auditor. This is followed by the name of the entity being audited, the financial statements being examined and their titles, a summary of accounting policies and other relevant explanatory information implemented in the company, the date, and period of coverage of each financial statement (ISA-700, paragraph22- 23).
The 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).
35 3.4. Audit Expectation Gap in Sweden
The main trigger which brought the debate of the AEG in Sweden was the 1930 collapse of the financial empire of Ivar Krüger. This scandal brought the audit profession into the spotlight with enhanced criticism of the profession which simultaneously resulted in changes in audit regulations and the audit profession. This collapse signaled cracks on the integrity of the audit profession as it significantly affected and changed the role of auditors in Sweden (Carrington 2010). Legislative changes were further enhanced with the adoption of the 1994 ABL which extended the duties and liabilities of auditors to include creditors and other third-party investors and not just business entities (Carrington 2010). The Skandia fraud case often referred to as Sweden’s Enron further exacerbated the criticism on auditors by stakeholders for failing to detect such a fraud and material financial statement omissions which further depleted the confidence stakeholders had in financial statements and auditors (Enevång & Furberg 2007).
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
36 expectation gap from further widening. Meanwhile, Lövgren (1993) stressed the importance of an audit committee in listed companies, the creation of internal quality controls for audit firms and for the audit committee to meet the expectations of stakeholders.
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.
37 4. Methodology
This chapter presents an overview of the research methodology designed to achieve the objectives of this thesis. It presents the research design, data collection method, validity and reliability, limitations of the study, data analysis procedures and an overview of questionnaire statements.
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
38 influence the world around them. Whereas, constructionist view social realities as created through the perceptions and actions of social actors concerned about their existence. Based on this definition, realities of the social world are constructed and continuously evolve through revision (Bryman & Bell 2015). From a constructionist perspective, social phenomena are realized and fulfilled by social actors (Bryman & Bell 2011, p.21). Therefore, constructionists adopt a subjective approach to reality whereas; objectivists adopt an objective interpretation to reality. This study adopted objectivism as the ontological approach with the underlying assumption that, external realities and social events are beyond human influence which runs contrary to the constructionist viewpoint (Bryman & Bell 2015). Our choice of positivism further justifies our choice of the objectivist approach for this study.
The relationship between theory and research could be shown by the research approach implemented (Bryman & Bell 2015). The research approach focuses on the data collection method needed to answer research questions (Saunder et al. 2009, p. 106). The research approach could be classified into the deductive, inductive, and abductive approaches (Bryman & Bell 2015). The deductive approach begins with a general perspective (theory) which forms the basis for the development and testing of hypotheses and ends with a specific conclusion based on premises which explain why it is commonly referred to as the top-down approach (Trochim 1999, p.26). The deductive reasoning is usually associated with the positivist position and is frequently employed in quantitative studies through which hypotheses are deduced based on existing knowledge (Bryman & Bell 2007, p.21). Meanwhile, the inductive approach begins with specific observations and ends with wider generalizations and theories (Saunders et al. 2009, p.125). It is often referred to as the bottom-up approach (Trochim 1999, p.26) since it begins with specific observations and ends with the generalization of a theory. Thus, the inductive approach enables researchers to make generalizations from specific viewpoints. The inductive approach is often implemented in qualitative studies with an interpretivist position (Bryman & Bell 2007, p.29). On the other hand, the abductive approach is a combination of both inductive and deductive methods.
The deductive reasoning was adopted for this study through which, the thesis was guided by existing knowledge and theoretical considerations. Hypotheses were developed and empirically tested. This study couldn’t use the inductive approach because the aim was not to generate theories but test existing theories. The deductive approach was most appropriate for this thesis because
39 there exist a vast theoretical literature on the subject, but little studies have been conducted to test these theories.
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
40 for this study. This study could not adopt the qualitative method because the focus of the study was not on words or gaining an in-depth understanding of people’s perceptions. Furthermore, the qualitative method is too subjective and difficult to replicate (Bryman & Bell 2015).
4.3. 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-
41 point scale is most appropriate (Preston & Colman 2000). Nevertheless, Preston and Colman (2000) prefer the five-point Likert scale considering that it is less demotivating and frustrating to respondents compared to the seven- point Likert scale. Some of the statements contained unreasonable expectations regarding auditors' responsibility and audit reliability.
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
42 course. Thus, students belonging to the categories CS2 and CS3 constituted the experimental group of this thesis, meanwhile students belonging to the categories; CS1 and CS4 constituted the control group. The participants of this study were mainly civilekonom students drawn from seven universities in Sweden which included; Karlstad University, Umeå University, University of Borås, Halmstad University, Linnaeus University, Jönköping University and Luleå University of Technology.
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
43 understandable, appropriate and adequately translated to Swedish, considering the difficulty of clarifying questions not understood through the mailed questionnaire method (Bryman & Bell 2011, p.262).
4.4.2. Reliability
Bell (2010 p.119) defines reliability as “the extent to which a test or procedure produces similar results under constant conditions on all occasions." The quality of research could be measured through the extent to which it can be replicated with consistency (Bryman & Bell 2015). The questionnaire was sent to a small group of professors for expert opinion on the survey instrument with the questionnaire being modified as recommended to suit the Swedish context. The reliability of the questionnaire is guaranteed by a test-retest method through which the initial questionnaire was sent to two auditors of a Canadian EY branch with a one-week interval. The Spearman’s rank correlation coefficient was calculated to determine the degree of agreement between both tests. The Spearman’s rank correlation coefficient yielded a value of 0.82. The high correlation between the two respondents provided evidence of the reliability of the survey instrument. The Cronbach’s Alpha was equally calculated to test for internal consistency (Bryman & Bell 2011, p.159) and yielded a value of 0.935. It is worth mentioning that a Cronbach Alpha value of 0.70 is usually considered the acceptable value, while a value of 0.80 is considered good and a value above 0.90 is considered excellent (George & Mallery 2003). Thus, our Cronbach value indicates an excellent internal reliability of the survey instrument.
4.5. Analysis
Data collected for this study is analyzed using the Statistical Package for Social Sciences (SPSS) through which; descriptive statistics, T-test, the test of ANOVA, Cronbach’s Alpha and the Spearman’s rank correlation coefficient to test for internal consistency were obtained. The independent sample T-test is used to derive statistical information related to; the mean, standard deviation, and p-values of respondents. These measures implemented are designed to determine if significant differences exist amongst the various categories of respondents based on the seventeen semantic differential belief statements.
44 4.6. Ethical Considerations
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.
45 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.
46 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
47 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
48 AA requires auditors to maintain and perform audits based on the ethical principles of; impartiality, independence, and objectivity.
Thus, auditors are expected to be objective and unbiased while performing the audit. This statement is subjective and depends on users' perception of the auditor fulfilling this function.
Statement-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
49 circumstance, the auditor’s perception of financial statement users’ needs, and by the size or/and nature of the misstatement (ISA-200, Paragraph 6).
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
50 “present fairly” or “give a true and fair view” in all material aspects based on the financial reporting framework enforced (ISA 700, paragraph 37).
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
51 required to examine the appropriateness of accounting estimates and the reasonableness of management’s accounting estimates. The auditor shall equally state the audit procedure selected which is based on the auditor’s judgment of the risk of material misstatements occurring (paragraph 31). The auditor is expected to equally state the sufficiency and appropriateness of the audit evidence (paragraph 33).
To the auditor and audit profession, the extent of the work performed by the auditor is clearly communicated in the audit report. This position may be disputed by some financial statement users. Therefore, the decision as to whether the task performed by the auditor is clearly communicated depends on subjective opinions.
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.
52 Based on ISA-200, the audited financial statements are expected to give a certain level of assurance to users (paragraph 3). According to ISA-700, in the course of the audit, the auditor is to ensure that, significant accounting policies have been disclosed by management and that such policies are consistent with the relevant financial reporting framework. Furthermore, the auditor is to ensure that, management’s estimates are reasonable (paragraph 13). These duties of auditors are aimed at enhancing the usefulness of financial statements.
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.
53 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.
54 Table 1: Descriptive Statistics of respondents Responses received Enrolled for at least one accountin g course
No. % Yes No Participan No. of Usabl unusabl usable Unusabl Usable ts questionnair e e e es sent First year 872 68 13 4.98% .95% 38 30 students Final year 494 69 14 5.05% 1.02% 43 26 students Total of 137 27 10.03 1.97% usable/ % unusable Total 1,366 164 12 % 81 56
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 More than than 6 6 mont mont hs hs No. % No. % No. % No. % First 31 22.6% 37 27% 5 3.6 63 46% 4 1 year % students Final 28 20.4% 41 30% 10 7.3 59 43.1% 5 5 Year %
55 students Totals 59 43% 78 57% 15 10.9 12 89.1% % 2
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
56 statements taken as a whole are free from material resulting from fraud. Interestingly, students with an audit background expected the auditor to detect all fraud compared to students with no audit background which indicates that audit education did not actually have an impact on the perception of students who had enrolled for audit courses. Overall, CS1 were less supportive of management’s responsibility for preparing the annual financial statements simultaneously; they strongly disagreed auditors were responsible for maintaining accounting records. These differences in responses of CS1 indicate the level of uncertainty among CS1 as to their perception of who bears the responsibility for maintaining accounting records and preparing financial statements. On the contrary, CS3 strongly disagreed that auditors were responsible for maintaining accounting records while majority perceived management as responsible for preparing the annual financial reports. Additionally, CS3 strongly perceived (mean=4.419) the auditor as exercising judgment in selecting audit procedures; whereas CS1 slightly agreed that auditors exercised judgment in selecting audit procedures.
However, both CS1 and CS3 were uncertain about auditor’s responsibility for soundness of internal controls and preventing fraud. Both student categories tended to maintain a neutral position in both statements. Furthermore, CS1 tended to concur with CS3 that auditors were unbiased and objective and that management was responsible for all business-related bankruptcy.
Table 3: Auditors’ responsibility mean distribution (CS1 and CS3) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) The auditor is responsible for CS1 30 3.267 1.2015 .049 detecting all fraud CS3 43 3.837 1.1938 .050 The Auditor is responsible for CS1 30 3.067 1.4606 .430 the soundness of internal CS3 43 3.326 1.3042 .440 control structures of the entity. It is the auditor’s responsibility CS1 30 2.367 1.4967 .011 to maintain Accounting CS3 43 1.535 1.2218 .015 Records. It is management’s CS1 30 2.933 1.4368 .000 responsibility for preparing the CS3 43 4.140 1.2068 .000 annual financial statements. The auditor is responsible for CS1 30 3.367 1.1592 .391 preventing fraud. CS3 43 3.116 1.2575 .384 The auditor exercises judgment CS1 30 3.500 .8200 .000 in selecting audit procedures. CS3 43 4.419 .8517 .000
57 The auditor is unbiased and CS1 30 4.233 1.0726 .277 objective. CS3 43 4.465 .7351 .310 Corporate management should CS1 30 3.733 1.2847 .114 be held responsible for all CS3 43 4.140 .8886 .140 business-related bankruptcy cases arising from fraud.
Table 4 presents the mean score of responses and the two-tailed significance level result between first-year students who have enrolled for at least an audit course (CS1) and first-year students who have not enrolled for any audit course (CS2). The results indicate no significant differences in responses between CS1 and CS2 except on the issue regarding auditors’ fraud detection responsibility (statement 1). Consistent with the results of CS3 in Table 3 who had enrolled for audit courses which included the duties of auditors, CS2 likewise expected the auditor to detect all fraud. Consistent with the results in Table 3, CS1 and CS2 maintained a neutral position regarding auditors’ responsibility for the soundness of the internal control structure of the entity (statement 2) and the prevention of fraud (statement 5). No expectation gap was equally observed between CS1 and CS2 on the issue of management’s responsibility for preparing financial statements (statement 4). Both student categories were uncertain if management was responsible for preparing the annual financial reports. Additionally, CS1 and CS2 further agreed that auditors were unbiased and objective (statement 7), that auditors exercised judgment in selecting audit procedures (statement 6) and that management was culpable for business-related bankruptcy resulting from fraud (statement 8).
Table 4: Auditors’ responsibility mean distribution (CS1 and CS2) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) The auditor is responsible for CS1 30 3.267 1.2015 .002 detecting all fraud CS2 38 4.079 .8817 .003 The Auditor is responsible for CS1 30 3.067 1.4606 .183 the soundness of internal CS2 38 3.474 1.0329 .202 control structures of the entity. It is the auditor’s responsibility CS1 30 2.367 1.4967 .519 to maintain Accounting CS2 38 2.605 1.5164 .519 Records. It is management’s CS1 30 2.933 1.4368 .059 responsibility for preparing the CS2 38 3.553 1.2236 .065
58 annual financial statements. The auditor is responsible for CS1 30 3.367 1.1592 .361 preventing fraud. CS2 38 3.632 1.1951 .360 The auditor exercises judgment CS1 30 3.500 .8200 .302 in selecting audit procedures. CS2 38 3.711 .8353 .301 The auditor is unbiased and CS1 30 4.233 1.0726 .507 objective. CS2 38 4.053 1.1377 .504 Corporate management should CS1 30 3.733 1.2847 .768 be held responsible for all CS2 38 3.816 1.0096 .774 business-related bankruptcy cases arising from fraud.
Table 5 presents the results of the mean differences, and the significance level of responses between final-year students who have enrolled for audits courses (CS3) and final-year students have not registered for any audit course (CS4). The result shows no significant differences in responses for majority (7) of the statements. However, there was a significant difference between CS3 and CS4 regarding whether auditors exercise judgment in selecting audit procedures (Statement 6). Final-year students who had enrolled for audit courses strongly perceived (4.419) auditors as exercising judgment in selecting audit procedures meanwhile; final-year students who had not enrolled for audit courses perceived auditors as exercising judgment in selecting audit procedures. However, the significance between both groups stemmed from the fact that, while CS3 strongly agreed, CS4 simply agreed to auditors exercising judgment in selecting audit procedures.
No expectation gap was observed between CS3 and CS4 on issues related to auditors’ responsibility for the soundness of the internal control structures of the entity (statement 2) and preventing fraud (statement 5). Furthermore, CS3 and CS4 students tended to agree that auditors were responsible for detecting all fraud (statement 1), that management was responsible for preparing the annual financial reports (statement 4) and not auditors (statement 3). Additionally, CS3 and CS4 accepted that auditors were unbiased and objective (statement 7) and that corporate management were to be held responsible for all business-related bankruptcy cases resulting from fraud (statement 8).
Table 5: Auditors’ responsibility mean distribution (CS3 and CS4) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) The auditor is responsible for CS3 43 3.837 1.1938 .417
59 detecting all fraud CS4 26 4.077 1.1635 .415 The Auditor is responsible for CS3 43 3.326 1.3042 .691 the soundness of internal CS4 26 3.462 1.4760 .700 control structures of the entity. It is the auditor’s responsibility CS3 43 1.535 1.2218 .793 to maintain Accounting CS4 26 1.615 1.2354 .793 Records. It is management’s CS3 43 4.140 1.2068 .962 responsibility for preparing the CS4 26 4.154 1.1897 .962 annual financial statements. The auditor is responsible for CS3 43 3.116 1.2575 .135 preventing fraud. CS4 26 3.577 1.1721 .130 The auditor exercises judgment CS3 43 4.419 .8517 .032 in selecting audit procedures. CS4 26 3.962 .8237 .032 The auditor is unbiased and CS3 43 4.465 .7351 .706 objective. CS4 26 4.385 1.0228 .728 Corporate management should CS3 43 4.140 .8886 .564 be held responsible for all CS4 26 4.269 .9190 .568 business-related bankruptcy cases arising from fraud.
A peculiarity among all student groups was the agreement that, auditors exercised judgment in selecting audit procedures and were unbiased and objective, and that corporate management was culpable for all business-related bankruptcy cases resulting from fraud. Furthermore, no expectation gap was observed among all four student categories on issues related to; auditors' responsibility for the soundness of internal control structures of entities and preventing fraud since all student categories maintained a neutral standpoint. Additionally, all student groups disagreed the auditor was responsible for maintaining accounting records.
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
60 trustworthy and reliable. There were considerable similarities in perceptions between CS1 and CS3 regarding the reliability of audits and audited financial statements compared to the responsibility statements. Table 6 to 8 presents the mean score of responses, standard deviation, and two-tailed significance level. From the results in Table 6, no expectation gap was found between CS1 and CS3.
Both CS1 and CS3 agreed that audited financial statements were completely free from material misstatements (statement 9) though CS3 had a higher mean agreement level (though not statistically significant) compared to CS1. Similarly, CS1 and CS3 relatively agreed that financial statements give a true and fair view (statement 11). Additionally, both CS1 and CS3 agreed that the extent of assurance (statement 12) and the extent of the task performed (statement 13) by the auditor were clearly communicated. Moreover, the level of mean agreement between CS1 and CS3 was highest on the issue of auditors’ agreement with the accounting policies used in preparing the financial statements (statement 10) and auditors being trustworthy and reliable (statement 14).
Table 6: Audit reliability mean distribution (CS1 and CS3) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) Users can have absolute CS1 30 3.467 1.1366 .619 assurance that financial CS3 43 3.605 1.1780 .617 statements are free from material misstatements. The auditor agrees with the CS1 30 4.367 .7184 .208 accounting policies used in the CS3 43 4.140 .7740 .203 financial statement. The financial statements give a CS1 30 3.833 .8339 .592 true and fair view. CS3 43 3.721 .9083 .587 The extent of assurance given CS1 30 3.733 .9444 .428 by the auditor is clearly CS3 43 3.930 1.0997 .416 indicated in the audit report. The extent of the work CS1 30 3.800 .8867 .489 performed by the auditor is CS3 43 3.628 1.1344 .470 communicated clearly. Auditors are trustworthy CS1 30 4.200 .8052 .753 (reliable). CS3 43 4.140 .8042 .753
61 Table 7 presents the mean responses, standard deviation, and p-values for CS1 and CS2. The results in Table 7 are very similar to the results in Table 6 as no expectation gap was found between CS1 and CS2. There were no significant differences in responses on the reliability of audits and audited financial statements between CS1 and CS2. CS1 and CS2 relatively agreed that audited financial statements were free from material misstatements (statement 9) though CS2 had a higher mean score (though not statistically significant) compared to CS1. Furthermore, both CS1 and CS2 perceived the financial statement to give a true and fair view (statement 11), and that the level of assurance (statement 12) and the extent of the work performed (statement 13) were clearly communicated. Consisted with the results on Table 6, CS1 and CS2 had the highest level of agreement on issues related to auditors’ trustworthiness and reliability (statement 14) and auditors’ being in conformity with the accounting policies contained in audited financial statements (statement 10).
Table 7: Audit reliability mean distribution (CS1 and CS2) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) Users can have absolute CS1 30 3.467 1.1366 .510 assurance that financial CS2 38 3.658 1.2142 .506 statements are free from material misstatements. The auditor agrees with the CS1 30 4.367 .7184 .143 accounting policies used in the CS2 38 4.079 .8505 .135 financial statement. The financial statements give a CS1 30 3.833 .8339 .844 true and fair view. CS2 38 3.789 .9630 .841 The extent of assurance given CS1 30 3.733 .9444 .296 by the auditor is clearly CS2 38 3.474 1.0587 .290 indicated in the audit report. The extent of the work CS1 30 3.800 .8867 .081 performed by the auditor is CS2 38 3.368 1.0761 .074 communicated clearly. Auditors are trustworthy CS1 30 4.200 .8517 .630 (reliable). CS2 38 4.105 .7983 .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
62 mean responses between CS3 and CS4; hence no expectation gap was observed between both categories.
Furthermore, CS3 and CS4 agreed that audited financial statements were absolutely free from material errors (statement 9). Additionally, both CS3 and CS4 agreed that, audited financial statements were true and fair (statement 11). Moreover, both CS3 and CS4 believed that, the extent of assurance given by the auditor was clearly indicated in the audit report (statement 12). Furthermore, both CS3 and CS4 believed the extent of the task performed by the auditor is clearly communicated (statement 13). Consistent with the other reliability results, CS3 and CS4 considered the auditor to be trustworthy and reliable (statement 14) and that the auditor agreed with the accounting policies used in the audited financial statement (statement 10).
Table 8: Audit reliability mean distribution (CS3 and CS4) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) Users can have absolute CS3 43 3.605 1.1780 .571 assurance that financial CS4 26 3.769 1.1422 .569 statements are free from material misstatements. The auditor agrees with the CS3 43 4.140 .7740 .444 accounting policies used in the CS4 26 3.962 1.1482 .488 financial statement. The financial statements give a CS3 43 3.721 .9083 .897 true and fair view. CS4 26 3.692 .8376 .895 The extent of assurance given CS3 43 3.930 1.0997 .141 by the auditor is clearly CS4 26 3.538 .9892 .132 indicated in the audit report. The extent of the work CS3 43 3.628 1.1344 .734 performed by the auditor is CS4 26 3.538 .9047 .719 communicated clearly. Auditors are trustworthy CS3 43 4.410 .8042 .907 (reliable). CS4 26 4.115 .8638 .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
63 assurance given by auditors likewise, the extent of the task performed by the auditor. In general, all student categories considered auditors to be reliable and trustworthy.
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 N Mean Standard Sig. (2- Education deviation tailed) The audited financial CS1 30 4.267 .6397 .942 statements are useful for CS3 43 4.256 .6208 .943 monitoring the entity’s performance. The audited financial CS1 30 4.067 .6915 .546 statements are useful for CS3 43 3.953 .8438 .532 decision making. The entity is well managed. CS1 30 3.600 .8944 .613 CS3 43 3.698 .7411 .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
64 and 16 was higher compared to statement 17. However, CS1 had a higher mean score (though not statistically significant) to all three statements compared to CS2. CS1 and CS2 agreed that audited financial statements were somewhat useful in evaluating whether an entity was well managed.
Table 10: Decision usefulness mean distribution (CS1 and CS2) Statement Level of N Mean Standard Sig. (2- Education deviation tailed) The audited financial CS1 30 4.267 .6397 .278 statements are useful for CS2 38 4.079 .7491 .269 monitoring the entity’s performance. The audited financial CS1 30 4.067 .6915 .258 statements are useful for CS2 38 3.842 .8861 .245 decision making. The entity is well managed. CS1 30 3.600 .8944 .460 CS2 38 3.447 .7952 .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 N Mean Standard Sig. (2- Education deviation tailed) The audited financial CS3 43 4.256 .6208 .595 statements are useful for CS4 26 4.154 .9672 .633 monitoring the entity’s performance.
65 The audited financial CS3 43 3.953 .8438 .832 statements are useful for CS4 26 4.000 .9381 .837 decision making. The entity is well managed. CS3 43 3.698 .7411 .977 CS4 26 3.692 .7884 .978
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.
66 H2: Final-year civilekonom students specializing in accounting who have enrolled for audit courses do not have unreasonable expectations about the duties and responsibilities of Auditors.
As per Table 3, CS3 slightly believe auditors are responsible for detecting all fraud and are uncertain if auditors are responsible for the soundness of internal controls. Furthermore, CS3 believe users can obtain absolute assurance that financial statements are free from material misstatements.
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
67 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.
68 6. Discussion
This chapter contains an analysis of the results provided in Chapter 5 which enables us to answer our research questions and make inferences from the tested hypotheses.
The results of this study indicate that audit education is partially influential in narrowing the AEG in Sweden especially on issues related to auditors’ responsibilities particularly; auditors’ role in maintaining accounting records, management’s responsibility for preparing the annual financial statements and auditors’ judgment in selecting audit procedures. Similarly, Pierce and Kilcommins (1996) noted that audit education was influential in narrowing the AEG. In a related study, Grambling et al. (1996) highlighted that; students gained a better understanding of the responsibilities and duties of auditors with more exposure to audit courses. Thus, they concluded that audit education was influential in narrowing the AEG. The results of our study are partially in line with the findings of Pierce and Kilcommins (1996) and Grambling et al. (1996).
Furthermore, the results of this study indicate that students have a differing understanding of auditors’ responsibility to detect fraud. All student categories expected the auditor to detect all fraud except for first-year students without an audit education who were uncertain about auditors performing this role. Surprisingly, final-year students who had enrolled for audit courses expected auditors to detect all fraud. In general, students seem to expect more from auditors than presently required by ISA, ABL, and AA. It is worth highlighting that, Best et al. (2001), Schelluch (1996), Fadzly and Ahmad (2004), etc. all observed an expectation gap on this issue. However, Humphrey et al. (1992) noted that the subject of auditors detecting all fraud has been one of those contentious issues with the longest misunderstanding in the history of the AEG. Similarly, the findings of Robinson and Lyttle (1991) confirmed that the fraud detection responsibility of auditors had the widest misunderstanding even within the audit profession as some auditors considered fraud detection as one of their duties. This misunderstanding even within the audit profession indicates that no matter the level of audit education acquired, there is bound to be some misunderstanding on the auditor’s fraud detection responsibility.
Furthermore, even though, all student categories agreed that auditors were not responsible for maintaining accounting records, an expectation gap was observed between first and final year students. It is worth highlighting that, Best et al. (2001) similarly found an expectation gap on this issue. While final-
69 year students strongly disagreed on auditors’ role in maintaining accounting records, first-year students simply disagreed. This resulting pattern could be explained by the fact that, first-year students, in general, have not enrolled for any courses encompassing auditors’ responsibilities, which resulted to them simply disagreeing. Whereas, final-year students who had enrolled for audit courses were aware auditors were not responsible for maintaining accounting records based on the knowledge obtained from audit courses. Additionally, final-year students who had not enrolled for any formal audit courses equally strongly disagreed on the auditors’ responsibility for maintaining accounting records. They possibly obtained such knowledge from other sources different from university taught audit course, considering that some of them are preparing to get to the audit job market.
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
70 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
71 effect on the perception of students who had enrolled for audit courses. Similarly, the statements on auditors’ trustworthiness had the highest mean response from all student categories indicating the high esteem students hold for auditors. In addition, the statement on auditors agreeing to the accounting policies of the entities received a high mean response as well. It is worth highlighting that ISA-700, paragraph 16 requires the auditor to be in conformity with the accounting policies implemented by the entity before issuing an unmodified audit opinion. Thus all students possessed the necessary knowledge regarding this issue.
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.
72 Moreover, the high expectations of student could have resulted from a lack of proper orientation on the duties of auditors. We thus recommend that advance audit courses for the civilekonom program should be updated to include the nature, scope, and extent of auditors' responsibilities. It was surprising to observe that there were final-year accounting civilekonom students who had not enrolled for any audit courses. Thus, we recommend the incorporation of mandatory audit courses for the civilekonom program in accounting. Such courses will equip students with the necessary knowledge set about the duties of auditors.
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
73 the eight statements on auditors’ responsibilities had the widest gap compared to issues related to audit reliability and usefulness of financial statements.
74 7. Conclusion
This chapter presents the summary of findings, practical implications of the study, limitations of the study and recommendations for future research.
7.1. Summary
The aim of this thesis is to evaluate the impact of audit education in narrowing the AEG in Sweden. The study reveals that audit education plays a significant role in narrowing the AEG in Sweden on issues related to auditors’ responsibility especially on management’s responsibility in preparing the annual financial statements, auditors’ exercising judgment in selecting audit procedures and auditors’ role in maintaining accounting records. Audit education thus played a significant role in altering final-year students with an audit background’s perception on the duties of auditors. Furthermore, the results of this thesis confirm that students who had not enrolled for audit courses had unreasonable expectations of the auditor. The findings of this study indicate a major setback for accounting at the civilekonom level in Sweden as final-year students who had enrolled for audit courses, perceived auditor’s responsibility to include detecting all fraud and that absolute assurance could be obtained that audited financial statements signified no material misstatements. However, the lapses in academic training accounted for the high expectations of final-year students who had enrolled for audit courses and for no significant differences between first and final year students who had not enrolled for audit courses. Additionally, the results of this study indicate, the accounting profession enjoys a high reputation and trust from students in Sweden. Addditionally, students concurred that audited financial statements were useful in decision making.
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
75 nature, scope, and limitations of an audit through audit education, refresher courses and other forms of audit-user communication.
7.2. Limitation
This study is limited in the scope of coverage as just 137 responses were used for analysis and discussion. A more persuasive evidence might have been obtained had the sample size been larger. Furthermore, the usable response rate of 10 percent was relatively low. A larger sample size and a higher response rate might have yielded a result different from what we had. Also, there is a possibility that, the results obtained are not representative of the whole student population since this study made use of convenience sampling to make generalizations about the student population of Sweden. Additionally, a more reliable result of the Cronbach Alpha should have been obtained if more respondents complied with the request the complete the pilot survey.
7.3. Recommendations
Due to the inherent limitations of this study resulting from a small sample size, limited duration to perform the studies and financial constraints, this study could not answer all the questions raised by previous research on the extent of impact audit education has in narrowing the AEG. To adequately examine the effect audit education has on the AEG, we recommend a longitudinal research be carried out with a larger sample size through which the impact education has on the AEG can be examined before students enroll for an audit course which includes the duties, responsibilities and ethical issues as required by ISA, ABL, and AA and after students enroll for such a course. Furthermore, future research could equally dwell on the nature, content, and scope of advanced accounting courses for the civilekonom program at Swedish Universities. In addition, future research could empirically test the effectiveness of other recommended measures to narrowing the AEG such as; expanding the scope of audits, restructuring audit methodologies, and expanding auditors’ duties and responsibilities based on the Swedish context.
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86 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).
87 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 Based on Cronbach's Standardized Alpha 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 Squared Cronbach's Scale Mean if Scale Variance Corrected Item- Multiple Alpha if Item Item Deleted if Item Deleted Total Correlation Correlation 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
88
Scale Statistics Mean Variance Std. Deviation N of Items 13,4118 32,132 5,66854 4
Appendix 3. Pilot Survey Instrument
89
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91 Appendix 4. Survey Instrument
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96