Final answer:
An auditor observes client employees to obtain knowledge of the design and implementation of relevant internal controls. This contributes to ensuring the accuracy of financial records and strengthens corporate governance by verifying that the controls are effectively implemented and followed. Option b is the correct answer.
Step-by-step explanation:
When an auditor observes client employees while obtaining an understanding of internal control, their main objective is to obtain knowledge of the design and implementation of relevant controls. This process involves assessing how the controls are designed to prevent, detect, and correct errors or fraud. Observation is one of several methods an auditor might use to gather necessary information, which could also include surveys, interviews, reviewing documentation, and performing walkthroughs.
In the context of corporate governance, the board of directors serves as a primary overseer of a company's operations and strategies. Auditors complement this by providing an independent review of the company's financial records to ensure they reflect the company's financial position accurately. Outside investors, particularly significant shareholders, rely on these controls and the information provided by the auditors to make informed decisions.
Failures in corporate governance, such as those seen in the case of Lehman Brothers, illustrate the vital role auditors and internal controls play in maintaining investor confidence. Therefore, by observing employees, auditors contribute directly to the strengthening of the company's corporate governance by ensuring that the internal controls are not only well designed but are also being properly implemented and adhered to by the employees.