Audit Expectation Gap and Its Implication on Investment Decision-Making of Public Listed Companies

Abstract

Audit is a fundamental accounting concept in contemporary corporate environments. This research examines into the prevalent expectation gap that exists between the auditing profession and the broader public. In the context of a developing nation like Sri Lanka, characterized by an evolving financial market, audited financial reports assume paramount significance for stakeholders seeking to make informed investment decisions. Hence, this study primarily seeks to investigate the correlation between the audit expectation gap and the decision-making processes of investors in publicly listed companies operating in Sri Lanka. Within this study, independent variables were identified as the auditor's responsibilities, the reliability factor, the nature and significance of audit report communications, and audit independence. The central thrust of this investigation revolves around examining the audit expectation gap within publicly listed firms and discerning distinctions between shareholder expectations concerning audited financial reports and the auditors' perceptions of their roles. Thus, responsibility factors, reliability factors, nature and meaning of audit report messages and independence factors contributed towards the audit expectation gap in the public listed companies. The correlation analysis shows that there is a positive correlation between audit expectation and investment decision making. This basically explains the hypothesis of how shareholders will have a look on the audited financial statement to allocate their investment resources. Keywords: Audit, Audit expectation Gap, Investment Decision Making DOI: 10.7176/RJFA/14-17-03 Publication date: September 30 th 2023