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## Need for external audit - Shareholders provide the finance for a company and may or may not be involved in the day-to-day running of the company. - Directors manage the company on behalf of the shareholders in order to achieve the objectives of that company (normally the maximisation of shareho...

## Need for external audit - Shareholders provide the finance for a company and may or may not be involved in the day-to-day running of the company. - Directors manage the company on behalf of the shareholders in order to achieve the objectives of that company (normally the maximisation of shareholder wealth). - The directors must prepare financial statements to provide information on performance and financial position to the shareholders. - The directors have various incentives to manipulate the financial statements and show a different level of performance. - Hence the need for an independent review of the financial statements to ensure they give a true and fair view - the external audit. - In most developed countries, publicly quoted companies and large companies are required by law to produce annual financial statements and have them audited by an external auditor. - Companies that are not required to have a statutory audit may choose to have an external audit because the company's shareholders or other influential stakeholders want one, and because of the benefits of an audit. ## Benefits of an audit - Higher quality information which is more reliable, improving the reputation of the market. - Independent scrutiny and verification may be valuable to management. - Reduces the risk of management bias and fraud and error by acting as a deterrent. An audit may also detect bias, fraud and error. - Enhances the credibility of the financial statements, e.g. for tax authorities or lenders. - Deficiencies in the internal control system may be highlighted by the auditor.