Question

KPMG served as the independent audit firm of several of the largest sub-prime mortgage lenders. Identify the advantages and disadvantages of a heavy concentration of audit clients in on industry or sub-industry.

Answer 1

Identify the advantages & disadvantages of a heavy competition of audit clients in on industry or sun-industry?

Answer:

Advantages of audit clients due to heavy competition of audit clients:

1. There are number of advantages for audit firms to specialize in auditing certain types of clients. Concentration not only provides economies of scale in terms of audit planning and procedures, it also provides economies of scale in terms of team knowledge and expertise.

2. Specialization also enables an auditor to provide its service at a lower-cost to client if it can leverage the costs of that specialization over a number of accounts.

Disadvantages of audit clients due to heavy competition of audit clients:

1. Specialization also exposes the audit firm to outside influences such as foreign competition and regulatory changes.

2. A poorly diversified client base cloud be an issue in the audit firms ability to grow or remain profitable if large portions of its clients disappear.

3. Specialization may limit the audit firms ability to attract clients outside of its key sphere of influence.