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Basic Ideas Of Agency Theory Essay

980 words - 4 pages

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 ...view middle of the document...

They include; management, shareholders, labour, government and consumers.
The Auditor- The auditor examines the accounting reports as prepared by the agents and issues an audit report to the users following this examination.
The regulators- The number of indivuals or organisations that exercise a regulatory role on the actions of the auditor has been on the rise.

THE AUDIT EXPECTATIONS GAP
This describes the difference between the expectations of those who rely on the audit reports regarding what auditors do and what they are perceived to do.
1. A Reasonableness Gap.
This arises since the users of the audit report expect more from the audit that it can be able to give in terms of practicability. There is a belief that an auditor examines each and every transaction whereas in practice auditors examine a sample of transactions when forming conclusions about the population from which the sample is drawn
2. A Performance Gap.
This exists between what can reasonably be expected of auditors and what the profession and law asks them to do.

AUDITOR`S INDEPENDENCE
Goldman and Barlev-writing in 1974- identified possible areas of conflict between different groups of people associated with the organization and postulated that;
* Conflict of interest between the auditor and the client organization because the audit report may not be seen as being in the interest of management or shareholders or either.
* Conflict between the auditor`s professional duty and self interest.
* Conflict between the managers and shareholders, the managers may wish to mislead shareholders for their own reasons
* Conflict between the client organization and third parties.
Shockley-1992- identified various independence factors that that may positively or negatively affect the power of firms or auditors;
* Provision of non-audit services.
* Competition in the auditing profession
* Tenure over which the auditor has held the position
* Size of the audit firm
* The flexibility of accounting stds.
* The degree of severity of professional sanctions and their application
* The extent of auditors legal liability to...

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