Lecture 5 Flashcards
(15 cards)
External vs Internal auditors
External:
-Appointed by shareholders
-Independent outside review to provide assurance
-Reduce information assymetry between managers and investors
Internal:
-Detect violations
-Reduce agency costs
Advantages of auditors detecting fraud
-Independent, impartial, professional
-Standardized approach to validate company’s financial reports
-Fresh look at the company’s operation than insiders
Disadvantages of auditors tryting to detect fraud
-Difficult to obtain sensitive data
-Hard to comprehend the complexity of an oranization with time pressure
Determinants of external audit quality
-Audit independence
-Work pressure and fee pressure
Unqualified audit opinion meaning and implication
No material doubt about the company’s ability to continue;
No significant impact to company
Unqualitfied audit opinion with an EOM (emphasis on matter) paragraph meaning and implication
Some doubt exists, but management’s plans seem sufficient.
Investors may be cautious, but no major red flag
Qualified audit opinion meaning and implication
The company may not survive and financial statements may be misleading
Creditors & investors may withdraw support
Adverse audit opinion meaning and implication
Severe doubt and financials are not fairly presented.
Can trigger loan defaults, stock delisting, or bankruptcy proceedings
Disclaimer of opinion audit meaning and implication
Auditor cannot determine if the company is a going concern due to lack of information.
Major red flag; may lead to loss of investor confidence.
Credit rating agencies
-Paid by issuing company
-Provide rating on financial solvency of the company
-Heaviliy regulated since 2008 crisis
Governance rating agencies
-Paid by investors
-Provide rating on the corporate governance quality
ESG rating agencies
-Paid by investors
-Provide rating on ESG impacts firms’ profitability
-Many players in an unregulated market
Single materiality meaning
how environmental and social changes may materially affect firm’s profitability
Double materiality meaning
Company should report not only on financials (Outside-in) but also the Impact (Inside-out)
ESG conflicts of interest
-Selling ESG ratings, data and indices to institutional investors
-Sell consultancy services to companies
-Give higher rating for companies that get consulting services
