Financial Management Function — ACCA Practice Question 09

How to approach this question

Recall the definition of agency costs: costs incurred by shareholders to monitor management, bonding costs incurred by management, and residual loss.

Full Answer

A.The cost of implementing a rigorous external audit to monitor management's financial reporting.✓ Correct

Agency costs arise from the separation of ownership and control. They include monitoring costs (e.g., external audits, independent directors), bonding costs (e.g., managers providing guarantees), and residual loss (suboptimal decisions made by managers). The cost of an external audit is a direct monitoring cost.

Common mistakes

Classifying standard business expenses or operational losses as agency costs.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

More questions from this exam