Question

Merriwether Corp. is seeking a line of credit for its operations and the bank has requested audited financial statements. The bank wants to hire an independent auditor to conduct the audit, but Merriwether's CFO knows a local accountant that she would like to use. Which of the following describes the best reasoning in selecting the right individual?

1) An independent auditor will be certain to conduct an audit that is in Merriwether's best interests.
2) An auditor will be most interested in helping Merriwether get the loan they are requesting.
3) An auditor has the training and detailed knowledge to understand technical accounting and disclosure issues necessary to evaluate Merriwether's financial statements.
4) The local accountant is familiar with the company and the area and is in the best position to fairly assess Merriwether's financial statements.

Answer 1

The best choice for Merriwether Corp. when selecting an auditor for its line of credit is an independent auditor with the necessary technical expertise to understand and evaluate the company's financial statements objectively.

Step-by-step explanation:

When Merriwether Corp. is seeking a line of credit for its operations and the bank has requested audited financial statements, the best reasoning in selecting an independent auditor to conduct the audit over a local accountant whom the CFO knows would be option 3: An auditor has the training and detailed knowledge to understand technical accounting and disclosure issues necessary to evaluate Merriwether's financial statements. This option emphasizes the necessity of technical expertise and the benefit of having an unbiased perspective in assessing the company's financial status.

The independence of the auditor is crucial to ensure an objective and fair audit, which provides confidence not only to the bank but also to potential investors, bondholders, and stakeholders. Establishing trust is vital for the company's current and future financing needs, and it becomes less significant to know the individual managers and business plans on a personal basis as long as there is ample information available about the company's performance.