ACCT 4301 Test 1 Review Questions and Correct Answers

Information asymmetry refers to a. The principal having more information about the "true" financial position and results of operations of a company compared to the agent. b. The agent having more information about the "true" financial position and results of operations of a company compared to the principal. c. The independent external auditor having more information about the "true" financial position and results of operations of a company compared to the agent. d. The principal having more information about the "true" financial position and results of operations of a company compared to independent external auditor. B In the current U.S. capital market system, the external independent auditor is hired and paid by a. The principal b. A government designated clearing house c. The agent d. Audit regulators C The demand for financial statement audits in the U.S. capital market system largely stems from a. Principal needing to monitor the day-to-day activities of the agent. b. A company needing the external auditor to consult on operational improvements. c. The presence of information risk for the principal. d. The agent needing to signal good financial performance to the principal. C CH 2