Chapter 1 - Demand for Audit

Principal agent model n information risk n the

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Principal – Agent Model n Information Risk: n The likelihood that information is not fairly stated (contains some sort of misstatement: either error or fraud) n Why? n Information asymmetry n Different incentives n Freakonomics example: n Assurance n A reduction of information risk n An increase in the quality of information
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+ Principal – Agent Model Relationship to Audit How to get rid of the problems: Knowledge – mitigate the info asymmetry Independence – mitigate potential differences
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+ Other Types of Audits n In Addition to Financial Statement Audits… n Operational Audit n Evaluates effectiveness and efficiency of any part of an organization’s operating procedures and methods. n Management normally expects recommendations for improving operations. n E.g. payroll, customer satisfaction, marketing, computer operations. n Compliance Audit n Evaluates whether the auditee follows specific rules, procedures, or regulations set by higher authority.
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+ Types of Auditors n External auditors (Big 4) n Independent and competence is important n Usually work for public accounting firm and are CPAs n Primary focus on financial statement audits, but may perform other audit types n Internal auditors n Employees of the company n Usually CPAs or CIA n Perform compliance and operational audits; may help with financial statement audits n Independence issues n Governmental auditors n Work for U.S. Government Accountability Office (GAO) n Could be CPAs n Perform compliance and operational audits
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