Extended Audit Report and Audit Expectation Gap - A Case Study of FTSE Companies of United Kingdom

New audit reporting standard (ISA 701) providing for extended audit report disclosing key audit matters in independent auditors report has been mandated in United Kingdom2 for all the listed companies. With this independent auditors report is no more a pass-fail model, instead it has more elaborative information content in the form of key audit matters. The KAMs - key audit matters to be disclosed in the EAR -extended audit report will surely assist different stakeholders in decision-making. The research work was carried out by using the annual reports of six companies from FTSE 350 of United Kingdom and it was examined how the new auditors reporting standard requiring the presentation of extended audit report can reduce the audit expectation gap and the impact of audit firm rotation on reducing audit expectation gap. For this, the financial risk issues or matters covered in audit committee report were considered as audit expectation from independent auditor. A comparison of financial risk issues disclosed in audit committee report (considered as benchmark for audit expectation from independent auditor) with the KAMs disclosed in EAR revealed that there was a wide audit expectation gap for all the six companies included in the study. Audit firm rotation was also not effective in improving the disclosure of KAMs in EAR. For all the six companies audit firm rotation has shown declining ACR percentage (proportion of common financial risk matters in both the reports to the financial risk matters disclosed in audit committee report) - an indicator of high audit expectation gap. Thus, it was concluded that audit firm rotation was not much effective in presenting the KAMs as per the expectation of audit committee. Further, it was concluded that audit firm rotation for all the six companies was not effective in eliminating audit expectation gap; rather it widened the audit expectation gap.