Discuss the Conflict Between the Need for an Audit Firm

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The Answer is An audit firm needs to be able to pay its staff in line with their abilities.Otherwise,more qualified staff will seek opportunities elsewhere.If they leave,only less qualified people will remain,thus reducing the quality of audit possible.With less qualified people,the audit firm may be unable to express the correct opinion on the fairness of the financial statements.This would tend to increase investors' information risk.One way to have more money to pay staff appropriately is to reduce the amount of time spent on each assignment.More assignments each with less time spent would permit more profit on each assignment.However,reducing the amount of time spent on each audit engagement would also increase the risk that a material error would be missed in the audit.This increases the information risk to investors,which decreases the value of the audit to them and increases the likelihood that they will sue the auditors to recover any investment losses.
A constant demand by investors for reduction in information risk means that except in the short term,an auditor cannot reduce the quality of its services.By the same token,there is an equilibrium level of profit for audit firms,and compensation for its staff and partners that investors are willing to provide in exchange for their desired reduction in information risk.

Discuss the Conflict Between the Need for an Audit Firm

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