Final answer:
Auditors should gather information through predecessor audits, inquiries to management, evaluating risk factors, and discussing concerns with the audit committee. Imperfect information can lead to issues with pricing, resource allocation, and quality which can be mitigated through diligence and transparency.
Step-by-step explanation:
Auditors should utilize a combination of strategies to identify the risk of material misstatement due to fraud. They should consider information provided by a predecessor auditor, as it can give insights into existing problems or areas of risk previously identified. It's also critical to inquire of management regarding their perceptions and preventative measures for fraud risks; this conversation can reveal management's attitude towards fraud and internal controls. Evaluating fraud risk factors is another step, which involves looking at the company's environment and operations to spot potential risks. Discussing concerns with the audit committee helps ensure that there is oversight and that the committee is aware of the risks identified. However, discussing concerns with the SEC (Securities and Exchange Commission) is not typically a step in identifying fraud risk; that step comes later if actual fraud is discovered or strongly suspected.
Regarding the impact of imperfect information, when auditors, management, or investors lack full information, it can lead to mispriced stocks, ineffective resource allocation, and potential quality issues. Reducing the risk of imperfect information involves thorough due diligence, regular audits, and fostering a culture of transparency within the organization.