Accounting 453 Notes - Accounting 453 Notes Chapter 1...

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Accounting 453 Notes Chapter 1 Information can be biased, irrelevant, inaccurate, sensitive, and complex Two reasons to restate financial statements 1. Incentives: motivational forces such as bonuses or contingent compensation that may push a manager to work hard to achieve goals and objectives 2. Ethical Principles: provide a counterweight to perverse incentives by defining norms of behavior and conduct for individuals and organizations that define inappropriate actions and activities Information asymmetry: occurs when one party knows more about the quality of information provided than another party o Adverse selection: exists when a buyer of products and services cannot distinguish between good and bad services (ex. Is a used car reliable?) o Moral hazard: how individuals (managers) behave when their actions cannot be observed by other stakeholders, or when they are not held accountable for their decisions by those who provide them with the resources they manage Shirking: inappropriate behavior (ex. Expensing meals) Agency costs: the costs of inappropriate behavior by the manager and the loss of earnings by the owner Utilitarianism: involves making decisions that will increase the benefits to some while doing no harm to others Golden Rule: involves making decisions that result in treating others in a manner in which the individual making the decision would want to be treated Theory of Rights: suggests that the right of a decision maker and other parties should be equally balanced in making a decision Theory of Justice: suggests that decisions should treat all stakeholders fairly, impartially, and equitably Enlightened Self-Interest: involves pursing long term self-interests and avoiding short- term focus that might harm others Corporate governance: system for dealing with risks that involves oversight of management activities, including establishing strategies, conducting operations to achieve strategic objectives and manage risks, and communicating effectively with key stakeholders Financially literate: an audit committee member must be able to read and understand financial statement of the complexity normally associated with the organization. Financial expert: an audit committee member must have served an accounting role or supervised accountants in a previous or current position such that they would be able to understand the financial statements Internal auditors: primarily responsible for monitoring the effectiveness and efficiency of operations, including the reliability of processes that handle information within the organization Assurance: confident that the information they use for decisions is reliable
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Assurance services: independent professional services that improve the quality of information, or its context, for decision makers Direct reporting agreement: the practitioner measures and values the information directly Attestation: the process of providing assurance of the reliability of information from one
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