Corporate Governance and Financial Reporting

Need for External Audit

• Shareholders provide finance for a company and may or may not be involved in day-to-day operations.
• Directors manage the company on behalf of shareholders to achieve objectives, usually maximizing shareholder wealth.
• Directors must prepare financial statements to inform shareholders about performance and financial position.
• Directors may have incentives to manipulate financial statements, making an independent review necessary.
• External audit ensures financial statements provide a true and fair view.

Benefits of an Audit

• Provides higher quality, more reliable information, improving market reputation.
• Independent scrutiny and verification valuable to management.
• Reduces risk of management bias, fraud, and error, and detects them.
• Enhances credibility of financial statements for tax authorities, lenders, etc.
• Highlights deficiencies in internal control system.

This quiz covers the roles of shareholders and directors in a company, and the importance of financial reporting. It also touches on the potential for manipulation of financial statements.