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Summary: book " Auditing and Accounting InformationSystems," H1-17Auditing & Accounting Information Systems (Tilburg University)Verspreiden niet toegestaan | Gedownload door Jan BUllens ([email protected])lOMoARcPSD
1 Chapter 1 Assurance and auditing Informed decisions should be based on information that is: 1.Objective 2.Relevant 3.Reliable 4.Understandable Information risks that investors face: 1.Information may be biased to entice an investor in purchase shares in a company that is intentionally overvalued 2.Information may be irrelevant, emphasizing facts that appear important but are unrelated to the prospects of the company 3.Information may be inaccurate (by accident or intentionally) 4.Information may be thought to be sensitive, so a company may decide to hide it from outsiders. Especially if it has a negative impact on the market valuation of the company 5.Information may be complex, hence difficult to understand or decipher The role of the auditor is to reduce these risks for people who use the information. Why is an audit of financial statements important to the stakeholders of an organization? 1.An audit helps keep management honest and motivated since they know that they are being examined 2.Many stakeholders might not have sufficient expertise to evaluate the quality of financial statements 3.Reliable financial reports reduce organization’s cost of capital 4.Investors and creditors want insurance against significant errors or fraud associated with financial statements. Auditors provide a reasonable level of assurance that information received by capital providers is reliable. The quality of decision making at all levels of a firm is directly affected by the quality of information used to make decisions. Managers are subject to two competing forces that will influence the likelihood that they will misstate financial results for their own benefit: 1.Incentives: motivational forces such as bonuses or contingent compensation that may push a manager to work hard to achieve goals and objectives, but may also motivate to lie or employ accounting tricks when goals are not met. Information asymmetry: when one party knows more about the quality of the information provided than another party. Because stakeholders are aware of the possibility that others may misrepresent information or take advantage of circumstances for personal gain, a certain degree of distrust will arise among parties in an economic relationship. °Adverse selection: when a buyer of a product cannot distinguish between good and bad alternatives. “Can I believe the information on the job candidate’s resume? The seller knows more about the product than the buyer does. °Moral hazard: how individuals behave when their actions cannot be observed by other stakeholders, or when they are not held accountable for their decisions by those who provide the resources that they manage. This may lead to shirking. Moral hazard in financial Verspreiden niet toegestaan | Gedownload door Jan BUllens ([email protected])lOMoARcPSD