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mes25435_ch01_001-032.indd 7 Information asymmetry
and conﬂicts of interest
lead to information risk
for the principal. Agent is accountable to principal;
provides ﬁnancial reports. Auditor Agent
(Manager) Agent hires auditor
to report on the
fairness of agent’s
Agent pays auditor
to reduce principal’s
information risk. 26/05/11 9:24 PM Conﬁrming Pages 8 Part 1 Introduction to Assurance and Financial Statement Auditing While the setting we’ve outlined is very simple, understanding the basics
of the owner–manager relationship is helpful in understanding the demand
for auditing. The principal–agent model is a powerful conceptual tool that can
be extrapolated to much more complex employment and other contractual
arrangements, and these concepts apply to other relationships that involve the
entity as well. For example, how can a lender prevent management from taking the borrowed funds and using them inappropriately? One way is to place
restrictive covenants in the debt agreement that must be complied with by the...
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This note was uploaded on 12/08/2012 for the course ACCT 564 at Washington University in St. Louis.