Reasonableness Gap In Accounting

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The expansion of investment driven businesses has raised the need of assuring the credibility of the financial information that is presented to the shareholders and other users involve in the process. The periodic financial statements prepared by the management of an organization and audited by the auditors are the main source that investors rely upon, therefore; the auditors are expected assure whether the financial statements presented are free from any material misstatements and represent the true and fair view of the company (Ruhnke & Schmidt 2014, p. 572). The corporate collapse cases such as Enron and Pamalat raised the concerns about auditor’s responsibility and the auditor’s service was criticised by the public due to the disparity …show more content…

The existence of ‘reasonableness gap’ which is the gap between what society expect in relation to the auditor’s role in detecting and preventing corporate frauds and what auditors reasonably could be expected to achieve is one of the causes for questioning an auditor’s role (Sidani 2007, p. 289). This raises the concerns related to the capacity of auditors and audit procedures used to detect major frauds and financial distress. Since the corporate collapses and frauds mostly relate to management’s unethical behaviors such as forgery and collusion, which are in non-systematic nature, the auditors may not able to systematically uncover frauds based on the standard auditing procedures (Gracia-Benauand & Humphrey 1992, p. 322). As a result, the auditor may not be responsible for not detecting frauds that resulted in corporate failures (Hassink et al. 2009, p.86) that the society expects them to …show more content…

2009, p.87). This inadequate performance of an auditor may occur due to consideration of auditor as an essential party in corporate oversight, the ineffective corporate governance structure that could detect any fraudulent acts may reflect on the perceived function of the auditor. Also, this interspersed with the auditor’s long-term relationship with the audit client will pose a threat to the independence status of an auditor causing them to perform lower than the expectations of the society (Hassink et al. 2009, p.86). Raghunandan & Rama (1995, p. 51) states that some companies that faced corporate collapses did not receive going-concern modified reports prior to the failure and these circumstances may not bode well for the auditing profession as it indicates the sub-standard performance by the

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