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Understanding Audit Quality Essay

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Updated: Jul 16th, 2021

The efficient market hypothesis holds that the prevailing prices of assets such as stocks reflect the know-how as well as expectations of investors. In this context, it is unlikely that a particular market participant could use the available information to manipulate asset prices with the goal of self-enrichment. This concept states that business organizations provide various types of information such as straight-line depreciation, FIFO/LIFO, inventory, and cash flows (Ţiţan, 2015). The efficient market hypothesis is an essential principle for managers and investors to comprehend since it describes how funds that are managed passively can outperform those that are actively administered (Ţiţan, 2015). Notably, passively managed funds are preferred to actively administered assets since they are associated with lower costs such as expense ratios as well as management fees.

Financial statement analysis describes the process of comprehending a firm’s financial statements that can help investors make decisions. In addition, the process assists individuals to know the financial health of an organization. Financial statement analysis cannot be performed in ways that benefit all investors because they understand the information such as market solvency and pricing strategies differently. On the other hand, the process can be conducted to offer critical advantages to investors if professionals in the industry adopt analytic programs as well as systems to explain the information contained in financial statements to market participants. Seminars and conferences would be the best avenues where people would be taught the implications of financial statements of companies before they commit their funds in making investments (Christensen, Glover, Omer, & Shelley, 2016). This approach would ensure that all shareholders derive advantages from the information in these statements.

References

Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), 1648-1684.

Ţiţan, A. G. (2015). The efficient market hypothesis: Review of specialized literature and empirical research. Procedia Economics and Finance, 32(3), 442-449.

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IvyPanda. "Understanding Audit Quality." July 16, 2021. https://ivypanda.com/essays/understanding-audit-quality/.

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IvyPanda. 2021. "Understanding Audit Quality." July 16, 2021. https://ivypanda.com/essays/understanding-audit-quality/.

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IvyPanda. (2021) 'Understanding Audit Quality'. 16 July.

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