6 Part 1 Introduction to Assurance and Financial Statement Auditing
mes32502_ch01_001-034.indd 6 09/30/15 02:33 PM
of thousands of small loans (i.e., bonds) so that vast amounts of capital can be raised from a wide variety of investors and creditors. A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company’s resources. Thus, the growth of the modern corporation led to diverse groups of owners who are not directly involved in running the business (stockholders) and the use of professional managers hired by the owners to run the corporation on a day-to-day basis. 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 gener- ally has more information about the “true” financial position and results of operations of the entity than does the absentee owner.