Question

What are the advantages and disadvantages of a firm using the same external auditors year after year? What are the advantages and disadvantages of firms changing external auditors every few years?

Answer 1

Advantages of having the same external auditors

• They already understand all the processes and policies of the business. Therefore, less time is taken to understand the workflow of the business.
• They understand and learn about the company and the industry in which it works
• They know exactly what reports they want and where to get them
• They know all the critical and high-risk areas of the business and where there might be a risk of fraud by employees.

Disadvantages of having same auditors every year:

• The major disadvantage of having the same auditors is that they might lose objectivity of the audit i.e. Independent assessment of the financial position of the company
• There might be a significant increase of familiarity threat of the auditor i.e. the auditor might get familiar with the executives of the company and give biased reviews.
• Pricing; the auditor might offer competitive pricing in order to maintain a long lasting client.

Advantages of changing auditor every few years

• New auditors might find a new shortcoming in the company that the previous auditor might have overlooked. This will give the company a new perspective and opinion.
• This will not let the auditor have familiarity threat with the company and rotation will help them maintain their independent opinion.

Disadvantages of changing auditor every few years

• This might mean that there will be a huge cost and time investment from the company and its employees.
• The new auditor will have to be made to understand all the new policies and procedures.
• It will take time for auditor to understand the business and industry in which the company works in.