Agency theory can be described as the theory of
A) hiring an agency to review the work of the management, in this case it is the auditor.
B) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party's work.
C) the relationship between the owner and the management of the business when the owner is not the manager of the business.
D) none of the above

Question

Quizplus · Accepted Answer

Agency theory is primarily concerned with the relationship between the principal (owner) and agent (management) of a business, where the agent is tasked with making decisions on behalf of the principal, but may have different interests and goals. This can result in agency costs, such as information asymmetry, moral hazard, and adverse selection, which can affect the performance and efficiency of the business. The auditor may be involved in evaluating the effectiveness of the agency relationship and the controls in place to mitigate these risks. Choices A and B do not accurately describe agency theory.

Agency Theory Can Be Described as the Theory of