Final answer:
In auditing, confirming with an outside agent helps to gather evidence for assertions like Existence, Rights and obligations, and Completeness of investment securities. Corporate governance entities like the board of directors and auditing firms oversee financial transparency. Complete and accurate financial information is vital for investors like bondholders and shareholders.
Step-by-step explanation:
When an auditor is confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, they are most likely gathering evidence to support several financial statement assertions. These assertions typically include Existence, regarding whether the securities actually exist at the reporting date; Rights and obligations, pertaining to the client's legal rights to the securities; and Completeness, ensuring that all securities that should be included in the financial statements are appropriately recorded.
Corporate governance plays a crucial role in ensuring that the management's financial statements are transparent and accurate. The board of directors, the auditing firm, and outside investors all contribute to scrutinizing the company's financial records. Despite these mechanisms, cases such as Lehman Brothers demonstrate that corporate governance can sometimes fail, leading to misinformation regarding a firm's operations.
As a company becomes established and its information about products, revenues, costs, and profits becomes widely available, outside investors who do not know the managers personally, like bondholders and shareholders, are often more willing to invest. This transition underscores the importance of reliable and complete financial information for investment decisions.