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Basic Ideas of Agency Theory

In: Business and Management

Submitted By peterm
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BASIC IDEAS OF AGENCY THEORY
(Gray & Manson, 2007) suggest that the basic ideas of the agency theory should include the following; * Both owners who are the principals and the managers who are the agents are deemed to be wealth maximizing agents * Individuals falling into different groups will ideally have different information and thus the more informed individuals will make a profit at the expense of the others * Another critical assumption made by agency theory is that for the owners to believe the report prepared by the managers of the business, they will demand to have this report verified by a third independent party. * Agency theory goes on to suggest that the appointment of professional external auditors is the most preferred cost effective way of monitoring the agents. * Under strict agency theory, financial reports are thus regarded as reports to owners of the business who are the principals and the external auditor is seen to act for and on behalf of the owners.

DEFINITION OF AUDIT
STATEMENT OF AUDITING STANDARDS-GLOSSARY OF TERMS issued by the Auditing Practices Board defines an Audit as;
“ An exercise whose objective is to enable auditors to express an opinion whether the financial statements give a true and fair view of the entity`s affairs at the end of a period and its profit or loss for the period then ended and have been properly prepared in accordance with the applicable reporting framework”

PARTIES TO THE AUDIT PROCES
The American Accounting Association suggests that there are four parties to the accountability/audit process;
The Preparer/Source- This refers to those individuals who have control of the resources that have been provided by other parties and have the responsibility for preparing the accounting reports that show the position and results of the activities controlled by them.
Users of accounting

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