By purchasing the assurance provided by an audit the

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Unformatted text preview: rs. Suppose a financial statement audit of a given company would cost $500,000. Under such circumstances, it obviously doesn’t make sense for each individual investor to pay for an audit. Instead, the company hires and pays for the auditor because a reputable independent auditor’s opinion can provide assurance to thousands of potential investors. In addition, recall from our previous discussion that the initial demand for auditing comes not from the principal but from the agent. By purchasing the assurance provided by an audit, the company can sell its stocks and bonds to prospective owners and creditors at more favorable prices, significantly reducing the cost of capital. In fact, studies indicate that audits save companies billions of dollars in costs of obtaining capital. Given that the seller of stocks and bonds typically hires the auditor, consider just how crucial a strong reputation is to an independent auditor. Four large, international accounting firms dominate the audits of large publicly traded companies, auditing over 95 percent of the revenue produced by all such companies in the United States. One reason...
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This note was uploaded on 12/08/2012 for the course ACCT 564 at Washington University in St. Louis.

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