Agent pays auditor to reduce principals information

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Unformatted text preview: 32.indd 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 financial reports. 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.

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