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CMA Intermediate · Corporate Accounting and Auditing · Nature, Scope, Objectives and Significance of Auditing

Sundaram Textiles Ltd. applied for a term loan, and the bank relied on audited financial statements to assess the company's creditworthiness. This illustrates which significance of auditing?

This shows that audited accounts give lenders and other third parties credible information for decisions such as granting loans. The audit adds reliability to the statements, but it neither guarantees repayment nor removes management's responsibility for preparing them.

  1. AAudited accounts serve as credible information for lenders and other third partiesCorrect
  2. BAuditing eliminates the need for internal control
  3. CAuditing guarantees that the company will repay the loan
  4. DAuditing replaces the need for the board's responsibility for accounts

Explanation

Audited statements lend credibility to the financial information and help banks, investors and regulators in decisions. It does not guarantee repayment, and the management stays responsible for preparing the statements.

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