1. Why is studying Auditing different from studying other accounting topics? 2.
ID: 2505841 • Letter: 1
Question
1. Why is studying Auditing different from studying other accounting topics?
2. How might understanding auditing concepts prove useful for consultants, business managers, and other business decision makers?
3.Discuss why there is a demand for auditing services in a free- market economy. what evidence suggests that auditing would be demanded even if it were not required by government regulation?
4. What is meant by the statement, "The agency relationship between absentee owners and managers produces a natural conflict of interest'?
5. Why is independence such an important requirement for for auditors? How does independence relate to the agency relationship between owners and managers?
Explanation / Answer
1.Accounting is process of identifying, measuring, and communicating economic information to various users.
The main goal of accounting is to provide a company with clear, comprehensive, and reliable information about its economic activities and status of its assets and liabilities. This information is presented in the form of accounting reports like the balance sheet, income statement, statement of changes in equity (also calledshareholders' equity statement), and statement of cash flows (also called cash flow statement). By means of accounting reports it is possible to perform the following (list non-inclusive):
Internal users of accounting reports are managers, owners, and employees. External users of accounting reports are investors, creditors, and government.
Audit is independent appraisal performed by an independent expert of an activity or event. There are operational, technical, ecological and other types of audit. Most commonly, nevertheless, this term refers to audits of financial statements.
Audit of financial statements is the process of examining the financial statements and the underlying records of the company in order to render an opinion as to whether the statements are fairly presented. Most commonly financial audits are performed on a company's request for the benefit of financial information users (i.e. internal and external). Auditors analyze and compare accounting reports and confirmation documents as well as verify conformity of a company's accounting with established standards and regulations (e.g. US GAAP, IFRS). Therefore, the main goal of an audit is to perform thorough evaluation of a company's financial records and reports and provide a company with improvement recommendations based on that evaluation.
As we can see, accounting provides financial information to users of such information, and auditing is a means to ensure such information is reliable and comforts with established rules and regulations.
2.Understanding auditing can improve the decision making ability of consultants, business
managers, and accountants by providing a framework for evaluating the usefulness and
reliability of information.
3.There is a demand for auditing in a free-market economy because the agency
relationship between an absentee owner and a manager produces a natural conflict of interest
due to the information asymmetry that exists between the owner and manager. As a result, the
agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a
cost-effective form of monitoring.
The empirical evidence suggests auditing was demanded prior to government regulation
such as statutory audit requirements. Additionally, many private companies and other entities
not subject to government auditing regulations also demand auditing.
4.The agency relationship between an owner and manager produces a natural conflict of
interest because of differences in the two parties
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