Summary: Lecture 6 Auditing (Demand)

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• Watts and Zimmerman 1983

  The higher the manager's level of ownership, the lower the demand for audit. The lower the manager's level of ownership, the higher the demand for audit. 
  
  The existence of the independent auditor is not the direct result of government fiat. The appearance of the professional independent auditor was encouraged by changes in U.K. bankruptcy laws, but the United States' evidence suggests that even without those bankruptcy laws, economies of scale in auditing would have led to the development of the professional independent auditor.

• Fama and Jensen 1983

  Managerial shareholding can be used as a control mechanism to align interests of managers and shareholders.

• Jensen and Meckling 1976

  Due to separation of ownership of a firm and control over the firm, agency costs arise.

• Sirois and Simunic 2010

  Audits are assumed to generate firm value primarily from three components:
  1. Assurance
  2. Insurance
  3. Service value

• Why do we demand auditing?

  1. Regulation
  2. Market driven

• Name 3 early audit quality safeguards (Watts and Zimmerman 1983)

  1. fine for not completing audits in due time
  2. reputation concerns
  3. Audit committee rather than a single auditor

• When and where was the first real regulation?

  1844 in the UK

• Name the interest of the Manager/agent and the Principal/owner.

  Manager/agent: wants to increase his wealth
  Principle/owner: wants to increase their results

• When does an agency relationship arise?

  When oalfne or more principals/owner engage another person as their agent to perform a service on their behalf.

• What was the first accounting firm in the Netherlands?

  Confidentia 1883
  
  Note:
  aftereffect of the Pincoffs scandal in 1879, a lot of fraud