Professional Documents
Culture Documents
AGENCY
Delegate Power
Principal Engage Agent
Agency Problem
• The desires / goals of the principal and agent
have a conflict; and
• It is difficult or expensive for the principal to
verify what the agent is actually doing (whether
he is working appropriately)
COMPANY
Delegate Power
Shareholder Engage BOD
• Wide ownership base, • Delegated the task to run
(listed - stock exchanges) the company
• Lack of interest in the • Does not share the
management - limited risk Principal's motive of profit
and liability maximization – more
• Short term motive - Capital interested in remuneration
gains in stock market
INFORMATION
Elect
Shareholder B.O.D
Information
A
• Information is ASYMMETRIC U • Shareholder
(One way) D
appoints Ext.
I
• Principal cannot monitor T Auditor
whether their interest is served • Auditor give an
External Auditor OPINION
Independent
Shareholder Information BOD
External Auditor I
N
F
Independent O
R
M
Internal Auditor A
T
I
O
• External auditor appointed by N
shareholders
• Internal auditor appointed by BOD
(Audit Committee) Employees
POLICEMAN THEORY
• Is an auditor responsible for discovering
fraud, like a policeman?
• The theory suggests that Auditor is responsible
for searching, discovering and preventing fraud.
• The theory is now redundant as it is established
that audit is “Verification of truth and fairness
of the financial statements” and not preventing
frauds and errors.
LEVELS OF ASSURANCE
Absolute Not used in cases of FS