PLO is a pharmaceutical company that was founded three years ago. PLO's stock is listed on a Canadian stock exchange. Last year, Year 1, PLO announced the results of exciting research that suggested its new drug, Seize, would be a permanent cure for the hiccups. By the end of Year 1, PLO's share price had risen 2,000%. Unfortunately, early in Year 2, Seize was found to have serious side effects and research was discontinued. By June, Year 2, the stock was trading for less than $1 and future prospects for the company were bleak. Aurora, an auditor, recently met her friend Paul for lunch. Paul invested in PLO at its peak Year 1, and unfortunately he lost his investment. During lunch, Paul made the following comments: • Every time PLO issued a press release, its stock went up. There was no indication that things were going wrong. • I thought the auditors had a responsibility to the investors to make sure the company was successful. • I don't even understand how the financial statements are useful. They showed that PLO was aggressively investing in research, but the auditors weren't even able to determine whether Seize would become a viable product.

Required: a) Discuss Paul's comments with reference to the expectation gap.

b) What can auditors do to reduce the expectation gap?

Answer rating: 100% (QA)

a Pauls comments reflect the existence of an expectation gap which refers to the difference between what users of financial statements such as investors expect from auditors and what auditors are actu... View the full answer