How it reduces asymmetry (Mgmt → Shareholders)

Purpose

1. Makes financial information more reliable

An audit gives an independent check on the company’s accounts, so shareholders can trust that the information from management is true and fair.

2. Improves transparency and responsibility

Auditors help make sure management is open about the company’s performance and follows proper rules, which reduces the chance of hiding problems.

3. Builds trust and helps decision-making

When shareholders believe the financial statements are accurate, they can make better decisions about investing and managing the company.

Mechanism	What the audit does	How it reduces asymmetry (Mgmt → Shareholders)	Outcome
Independent assurance	Auditor tests evidence and opines on “true & fair view”	Replaces unverifiable management claims with third-party verification	Higher credibility of financials
Monitoring & discipline	Threat of detection raises cost of misstatement	Deters earnings management, bias, and opportunism	Better stewardship; fewer agency losses
Information risk reduction	Lowers risk that FS are wrong or incomplete	Investors need fewer “skepticism discounts”	Lower cost of equity/debt; higher firm value
Signalling quality	Clean (unmodified) opinion signals reporting quality & controls	Separates high-quality from low-quality reporters (adverse selection falls)	Improved market confidence & liquidity
Contracting support	Audited numbers anchor covenants, compensation, M&A, dividends	Cuts dispute/bargaining costs; enables performance-based contracts	More efficient contracts, fewer renegotiations
Governance & oversight	Findings to Audit Committee/Board highlight control weaknesses	Board can challenge management with evidence	Stronger internal control & remediation
Comparability & transparency	Audits apply ISAs, consistent measurement & disclosure	Investors compare across time and peers with less noise	Better price discovery, fairer valuation
Fraud and error detection	Professional scepticism, risk-based testing, analytics	Raises probability of detecting material fraud/error	Reduced moral hazard; deterrence effect