Problem: 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."
Q1. Explain the economic benefits provided by a financial statement audit.
Q2. Explain the inherent limitations that might prevent auditors from finding every potential material misstatement in financial statements.