Thus the auditors verication of the nancial

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Unformatted text preview: that as the amount of capital involved and the number of potential owners increase, the potential impact of accountability also increases. The auditor’s role is to determine whether the reports prepared by the manager conform to the contract’s provisions. Thus, the auditor’s verification of the financial information adds credibility to the report and reduces information risk, or the risk that information circulated by a company will be false or misleading. Reducing information risk potentially benefits both the owner and the manager. Figure 1–1 provides an overview of this agency relationship. FIGURE 1–1 Overview of the Principal—Agent Relationship Leading to the Demand for Auditing Principal provides capital and hires agent to manage resources. Principal (Absentee Owner) Auditor gathers evidence to evaluate fairness of agent’s financial reports. Auditor issues audit opinion to accompany agent’s financial reports, adding credibility to the reports and reducing principal’s information risk. mes25435_ch01_001-0...
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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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