The Role Of The Audit And Agency Theory

The audit function exists to monitor the activities of management and to attest to managements performance. The cost of the audit function is an example of an agency cost. This article discusses the role of the audit function within the context of agency relationships. Such relationships exist when one party is retained to act on behalf of and in the interest of another party. Given the natural preference to maximize ones own utility, conflicts are bound to arise. Knowledge of such potential conflicts can serve to reduce the cost of the resolution of these conflicts.