A debt contract is said to be incentive compatible if
A) the borrower's net worth reduces the probability of moral hazard.
B) restrictive covenants limit the type of activities that can be undertaken by the borrower.
C) both A and B of the above occur.
D) neither A nor B of the above occur.
A
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Son applied for a car loan from First Bank. First Bank would not approve the loan unless Dad agreed that he would pay the loan if First Bank's efforts to collect from Son were unsuccessful. The kind of liability Dad assumed in his contract with First Bank is
a. Primary b. Secondary c. Prescriptive d. Constructive
Which of the following best describes the primary reason an independent auditor reports on financial statements?
A) To give stockholders some assurance that any fraudulent activities will be detected. B) To identify a poorly designed internal control structure that may produce unreliable financial statements. C) To provide expertise to management, which may not be totally knowledgeable of prevailing GAAP. D) To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.