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Unformatted text preview: 24 PM Conﬁrming Pages Chapter 1 An Introduction to Assurance and Financial Statement Auditing 7 The Role of Auditing
Of course, reporting in accordance with an agreed-upon set of accounting
principles doesn’t solve the problem by itself. Because the manager is responsible for reporting on the results of his or her own actions, which the absentee owner cannot directly observe, the manager is in a position to manipulate
the reports. Again, the owner adjusts for this possibility by assuming that the
manager will manipulate the reports to his or her beneﬁt and by reducing the
manager’s compensation accordingly. It is at this point that the demand for
auditing arises. If the manager is honest, it may very well be in the manager’s
self-interest to hire an auditor to monitor his or her activities. The owner likely
will be willing to invest more in the business and to pay the manager more
if the manager can be held accountable for how he or she uses the owner’s
invested resources. Note...
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This note was uploaded on 12/08/2012 for the course ACCT 564 at Washington University in St. Louis.