Additional evidence for the demand for auditing is also provided by the fact that many private companies and other entities not subject to a statutory audit requirement contract for audits. 1-14 There are two major factors that may make an audit necessary for Greenbloom Garden Centres. First, the company may require long-term financing for its expansion into other cities. Entities such as banks or insurance companies are likely to be the sources of the company’s debt financing. These entities may require audited financial statements before lending significant funds and require audited financial statements during the time period the debt is outstanding. There is information asymmetry between the lender of funds and the owner of the business, and this asymmetry results in information risk to the lender. Even if the business could get funding without an audit, an audit report with an unmodified opinion by a reputable auditor might very well reduce the lender’s information risk and make the terms of the loan more favourable to the owner. Second, as the company grows, the family will lose control over the day-to-day operations of the stores.
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- Summer '10
- Financial audit, Employment contract