Question

Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:

Answer 1

An independent auditor will conduct their own audit to provide an independent verification of Hanlon Corp.'s financial records, offering an objective check on corporate governance.

Step-by-step explanation:

When Hanlon Corp. maintains a large internal audit staff with reports showing that the system is functioning properly and that the accounting records are reliable, an independent auditor will likely conduct their own audit to provide an independent verification of the financial records. Although the internal auditors work diligently and report to the chief financial officer, the independent auditor's role is to offer an objective viewpoint and ensure that external corporate governance standards are being met. This additional scrutiny is vital as seen in cases like Lehman Brothers, where corporate governance mechanisms, unfortunately, did not prevent the dissemination of inaccurate financial information to investors.