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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.