Final answer:
Auditors primarily review a nonpublic entity's internal control to design effective subsequent audit procedures. This is part of corporate governance, which includes oversight by the board of directors, the audit firm, and external investors. Accurate financial information is crucial for market trust, the lack of which can lead to market failures as in the case of Lehman Brothers.
Step-by-step explanation:
Auditors obtain an understanding of a nonpublic entity's internal control primarily to determine the nature, extent, and timing of subsequent audit procedures to be performed. This understanding helps in assessing the risk of material misstatement in the financial statements, which in turn influences the design and implementation of the audit plan. Knowing the internal control structures also aids auditors in deciding whether certain parts of the financial statements may require more attention or if some areas might be more prone to errors or fraud.
In the broader context of corporate governance, the board of directors plays a crucial role in oversight, as they are elected by the shareholders to guide and monitor management. Auditing firms act as a second institution by checking the company's financial records to certify their reasonability. External stakeholders, like large investors, represent the third institution which relies on accurate financial information to make informed decisions. The failure of corporate governance, as seen in the case of Lehman Brothers, can result in the dissemination of misleading financial information, severely impacting investors and the market.