hesapeake.instructure.com/courses/2229626/assignments/16537321 #submit Please re

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hesapeake.instructure.com/courses/2229626/assignments/16537321 #submit Please review the attached grading rubric prior to completing the assignment. Financial statements are prepared and issued as a means to provide useful info outside of an external decision maker would be a bank that is trying to decide whether to make a loan to a company. Another example would be an investor who is trying to decide whether to purchase the stock of a particular company. These decision makers must be able to "trust" the information provided in the financial statements in order to make informed lending and investment decisions The role of an independent auditor is to provide credibility to the financial statements. They are hired by the company being audited, however, they are actually working for the public. An auditor examines the financial stat determine whether they have been prepared in accordance with GAAP and then issues a report stating their findings Without the "independence" of the auditor, do you think that the financial statements could be trusted? Without "trust would banks lend or investors invest? rmation to decision makers who are a company. These statements are used to report the financial status of a particular company. An example of ies Jane Thomas works in a public accounting firm and hopes to one day become a partner in the firm. The management of HSM, Inc. has asked Thomas to prepare a bid to audit HSM's financial statements. As part of the audit fee discussion HSM suggests a fee range in which the amount depends on the reported net income of HSM, Inc. In other words, the higher the profit, the higher the fee paid to Thomas 1. Identify the parties that are potentially affected by this audit and fee proposal. (Consider both internal and external parties) What is the ethical factor(s) in regards to the suggested fee arrangement? (Review the role of an auditor as stated above 3. Should Thomas accepted the proposed fee arrangement? (Support your answer.) If not, how would you suggest the fee be determined? Text Entry

Explanation / Answer

Q1) The parties that are potentially affected by the audit and fee proposal include -

1. HSM Inc.

2. Auditor and his public accounting firm

3. Investors

4. Lending firms (banks and financial institutions)

5. Public

Q2) The suggested audit fee arrangement, though legal, is highly unethical due to the below reasons -

1. Audit should be neutral and free of any kind of influences which might impact the output favouring a party. In this case, the firm has set an audit fee range depending on the net profit shown by the auditor. In reality, net profit should be solely based on accounts and this should not influence the auditor's pay. By linking the fee to profits, the firm is expecting auditor to show good profits if he wants good pay.

2. Though the effort that auditor puts in auditing all the documents of the firm, it might be wasted if the profit is less. This negatively influences his work.

Q3) Thomas should not accept the proposed fee arrangement as it is unethical in multiple ways and puts his organization in an ethical dilemma. Rather, the fee should be based on the effort which includes number of documents audited and results reported, correctness of the audit and suggestions that the auditor provides to manage accounting better in future.

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