Chapter 1 - Demand for Audit

N see figure 1 3 what is auditing n an investigation

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n See Figure 1-3
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+ What is Auditing? n An investigation performed by professionals to establish whether things are as they are supposed to be. n Financial Statement Audit:
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+ Why Do We Need Auditing? 1. Meet regulations (SEC) 2. Provides value - reduces risk which makes them more attractive for loan n Information Risk – inaccurate info given to decision makers in which the decision risk was made. - auditing can significantly reduce this risk n Causes of information risk: 1. Volume of data/transactions 2. Bias/motifs of management 3. Complex Transactions 4. Remoteness (hard to find). Think of on global stage. Info passed from office to office could get lost/screwed up
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+ Reducing Information Risk n It requires a cost/benefit analysis: n Small Company – don’t have the resources to reduce the risk n Larger Company n For large companies, 3 main ways to reduce information risk: 1. Users verifies info 2. User shares info risk with management 3. Audited Fin. Stmts are provided (most beneficial) - assuming audit is accurate, complete, unbiased, and independent
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+ Examples: Why Do We Need Auditing? n Start-up company n Single ownership n Management = owner n IPO n Public company n Multiple owners n Management ≠ owner n Owners are not involved in day to day operations n Management has all the information n Different interests in manager and owner n Incentives for management to misstate n Opportunity for misstatement n Pressure to perform from outside (analysts, financial market)
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