Question 1

A) I) The primary issues are

1. The problems that arise when the desires or goals of the principal and
agent are in conflict, and the principal is unable to verify (because it is
difficult and expensive to do so).
2. The problems that arise when the principal and agent have different
attitudes towards risk tolerance, the principal and agent may be inclined
to take different actions
ii)
Agency Cost
Monitoring
Incentive
Compensation

Residual Loss

Scenario
Harold violating revenue recognition principles by recording
sales for the next year and the current year (GAAP Departure)
Harold records all sales, issues all shipping orders for his own
sales and for his team. This could result in them recording
fictitious sales to receive the maximum bonus due to the lack
of separation of duties.
Recording sales early could result in employee theft or if the
products are not inspected properly it could lead to defective
goods which would result in sales returns and the possible loss
of customers. (Especially being a drug company).