Lesson 1

Lesson 1 - Name: Jay Patadia Enrollment Number: 688430...

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Name: Jay Patadia Enrollment Number: 688430 Course Number: ACCT 3222Z Lesson 1 1-4 Why is independence such an important requirement for auditors? How does independence relate to the agency relationship between owners and managers? - Auditors are the people who verify the financial statements prepared by the managers of the business. - Need for independence in auditing of financial results arise from I.), information asymmetry and II.), conflict of interest between agency owner and manager - Manager of the business generally has the more information about the business than the owners of the business. Financial statements prepared by managers may have misstatements of income. In this case auditors verify the financial statements and provide true picture of financial statements to the owner of the business. - When owner and manager of the business seek to maximize their self interest, the manager may not always act in the best interest of the owner. For example, manager may use company funds to buy personal benefits. - Independence is necessary for the auditors when they are verifying financial results to solve issue of information asymmetry and conflict of interest. Independence adds credibility in the financial report audit and reduces the owner’s information risk. 1-7 Define audit risk and Materiality. How are these concepts reflected in the auditor’s report? - Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. -
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Lesson 1 - Name: Jay Patadia Enrollment Number: 688430...

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