CA Inter P6 · Chapter 1 · Question 5 of 7
Which of the following is an example of an agency cost borne by shareholders?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Fees paid to an independent firm to audit the financial statements prepared by management
Explanation
Agency costs include monitoring costs incurred so that managers act in the interest of shareholders. An external audit is a classic monitoring mechanism. Interest, depreciation and cash discounts are normal business costs, not costs of resolving the principal-agent conflict.
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