preview

Audit Activity, Audit, And Agency Theory

Better Essays

Abstract
Based on a number of researches conducted by the prior papers about audit activity, audit price and agency theory. This short paper will provide a brief review focus on whether agency theory provides a general framework for audit pricing majorly refer to the study by Nikkinen and Sahlstron (2004). Furthermore, this is short paper also try to make further discussion from personal perspective.
Literature review
The purpose of Nikkinen and Sahlstron (2004) study is to ‘investigate whether agency theory provides a general framework for audit pricing.’ Through analysing audit price in seven countries representing entirely different accounting and economics environment, they try to verify the hypothesis that audit fees are determined by agency theory (Nikkinen and Sahlstron, 2004). As suggested by the regression analysis, it confirms that there is a negative relationship between audit fees and manager ownership and a positive relationship between audit fees and free cash flow in several countries (Nikkinen and Sahlstron, 2004). As the overall R2is 0.78, which is suggested that agency theory can be used, at least to some extent, to explain audit fee (Nikkinen and Sahlstron, 2004)
Discussion
According to Jensen and Meckling (1976), agency theory derives from the financial economics literature, which postulate that firm consist of a nexus of contracts between the owners of the entities (the principles) and manager (the agents) who are charged with using and controlling

Get Access