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9 Cards in this Set
- Front
- Back
Audits
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Reinforce trust and confidence in financial reporting
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agency relationship
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1. Principals engage agent (or steward)
2. Information asymmetries and self- interest |
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Mechanisms to align interests and the role of audit
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1.Remuneration packages and incentives
2. Market-hiring, firing 3.Basic salary +bonuses+options 4. An audit provides an independent check on the work of agents and of the information provided by an agent, which helps to maintain confidence and trust. |
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History
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1.Audits developed as a means of protecting shareholders’ interests
2.Guild members and in the mid nineteenth century principals acted as auditors. 3.May have no sufficient expertise skills turn to expert auditors 4.Auditors appointed by shareholders |
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Complicating factors
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1.Auditors as agents affect ==>objectivity independence.
2. Information asymmetry- Differing incentives- limit scope of an audit 3. Reputation- incentive to maintain independence to protect their reputation and thereby help them to retain and win audits. |
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Regulators
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1. Can compensate for the weak rights of principals
2. Benefits whole market, less volatility 3. SEC -1933 |
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Stakeholders
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1.Creditors, lenders, credit agencies, customers and employees may claim an interest in the audit.
2. |
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The shareholders in many private companies are also the directors. no principal-agent problem
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1. Still want an audit
2. Price for limited liability 3. Unconscious bias (the self-review threat) =>subjective nature of financial statements. 4. Improve internal decision-making and can act as a check on errors in financial information as well as encouraging the careful preparation and recording of financial information by employees |
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Summary and implications
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confidence trust statements.
agency theory audit ensure shareholders’ best interests agency model cannot provide a complete explanation. regulators, creditors and lenders interest auditors are agents too opinion to existing shareholder |