Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is auditing?
A systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicating the results to
interested users.
What is audit risk?
Audit risk is the risk that the auditor mistakenly expresses a clean audit opinion when the
financial statements are materially misstated
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is materiality?
the magnitude of an omission or misstatement of accounting information that, in light of
surrounding circumstances, make it probable that the judgement of a reasonable person
relying on the information Ould have been changed or influenced by the omission or
misstatement
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is the principal-agent problem?
Information asymmetry and conflicts of interest lead to information risk for the principal
Why is there a demand for audit services?
Auditing is demanded because it plays a valuable role in monitoring the contractual
relationships between the entity and its stockholders, managers, employees, and debt
holders. Certified public accountants have been charged with providing audit services
because of their traditional reputation of competence, independence, objectivity, and
concern for the public interest. As a result, they are able to add credibility to information
produced and reported by management to outside parties.
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
How does information asymmetry and conflicts of interest between managers and investors
rest in the demand for auditing?
In this setting, the managers serve as agents for the owners (who are sometimes referred to
as principals) and fulfill a stewardship function by managing the corporation's assets.
Accounting and auditing play important roles in this principal-agent relationship. We first
explain the roles of accounting and auditing from a conceptual perspective. Then we'll use
an analogy involving a house inspector to illustrate the concepts. First, it is important to
understand that the relationship between an owner and manager often results in information
asymmetry between the two parties. Information asymmetry means that the manager
generally has more information about the "true" financial position and results of operations
of the entity than does the absentee owner.
The owner likely will be willing to invest more in the business and to pay the manager more
if the manager can be held accountable for how he or she uses the owner's invested
resources. As the amount of capital involved and the number of potential owners increase,
the potential impact of accountability also increases. The auditor's role is to determine
whether the reports prepared by the manager conform to the contract's provisions. Thus, the
auditor's verification of the financial information adds credibility to the report and reduces
information risk, or the risk that information circulated by a company's management will be
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is auditing?
A systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicating the results to
interested users.
What is audit risk?
Audit risk is the risk that the auditor mistakenly expresses a clean audit opinion when the
financial statements are materially misstated
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is materiality?
the magnitude of an omission or misstatement of accounting information that, in light of
surrounding circumstances, make it probable that the judgement of a reasonable person
relying on the information Ould have been changed or influenced by the omission or
misstatement
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is the principal-agent problem?
Information asymmetry and conflicts of interest lead to information risk for the principal
Why is there a demand for audit services?
Auditing is demanded because it plays a valuable role in monitoring the contractual
relationships between the entity and its stockholders, managers, employees, and debt
holders. Certified public accountants have been charged with providing audit services
because of their traditional reputation of competence, independence, objectivity, and
concern for the public interest. As a result, they are able to add credibility to information
produced and reported by management to outside parties.
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
,Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
4301 Exam
ACCT1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdfACCT 4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
How does information asymmetry and conflicts of interest between managers and investors
rest in the demand for auditing?
In this setting, the managers serve as agents for the owners (who are sometimes referred to
as principals) and fulfill a stewardship function by managing the corporation's assets.
Accounting and auditing play important roles in this principal-agent relationship. We first
explain the roles of accounting and auditing from a conceptual perspective. Then we'll use
an analogy involving a house inspector to illustrate the concepts. First, it is important to
understand that the relationship between an owner and manager often results in information
asymmetry between the two parties. Information asymmetry means that the manager
generally has more information about the "true" financial position and results of operations
of the entity than does the absentee owner.
The owner likely will be willing to invest more in the business and to pay the manager more
if the manager can be held accountable for how he or she uses the owner's invested
resources. As the amount of capital involved and the number of potential owners increase,
the potential impact of accountability also increases. The auditor's role is to determine
whether the reports prepared by the manager conform to the contract's provisions. Thus, the
auditor's verification of the financial information adds credibility to the report and reduces
information risk, or the risk that information circulated by a company's management will be
eview.pdfACCT
Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$@
9/25/2026,
4301
3:32:07
ExamPMACCT
1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$$$$$$$$$$$$$$$$$
4301 Exam 1 Review.pdf@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!$
