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Benefits and Limitations of an Audit

A fellow business student questions the benefits of an audit as follows:

"Why should a company hire auditors? As far as I can tell auditors of public companies charge millions of dollars in audit fees, and it is not clear to me that management receives any benefit for this expenditure. It is just money down the drain. It is also not clear to me that auditors accomplish anything. We have seen a number of material restatements of financial statements. Why should a company pay for audits that are ineffective? I think auditors are just a drain on society."

a. Explain the economic benefits provided by a financial statement audit.
b. Explain the inherent limitations that might prevent auditors from finding every potential material misstatement in financial statements.

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Explain the economic benefits provided by a financial statement audit.

Audits need be seen from the economic benefits they provide organizations with. While audits are carried out for taxation purposes, they are also occasionally requested for by management for internal operational purposes. Audits are known to help a company's efficiency improve and thus enhance profitability and economic performance by helping the management to have a clearer comprehension of their internal working and financial systems. The economic benefits associated with external stakeholders is that by carrying out an audit, they become more assured that any inherent risks in doing business ...

Solution Summary

The solution discusses the benefits and limitations of an audit.