Question

Tana Thorne works in a public accounting firm and hopes to eventually be a partner. The management of Allnet Company invites Thorne to prepare a bid to audit Allnet’s financial statements. In discussing the audit fee, Allnet’s management suggests a fee range in which the amount depends on the reported profit of Allnet. The higher its profit, the higher will be the audit fee paid to Thorne’s firm.

1. Identify the parties potentially affected by this audit and the fee plan proposed.

2.What are the ethical factors in this situation? Explain.

3. Would you recommend that Thorne accept this audit fee arrangement? Why or why not?

4.Describe some ethical considerations guiding your recommendation.

Answer 1

1. Partiers affected due to proposed fee plans and audit engagement are:

• creditors are affected as they will not get the accurate information about the companies ability to pay the creditors in time.
• Investors do not get the exact economic position information about the organisation and they could suffer losses in their investment made.
• Banks often provides loans to the organisation based on their audited financial statements ,thus the organisation could become N.P.A for the banks.
• Unsecured loan Providers are to be paid at last after all the liablities are repaid when the organisation becomes insolvent ,therefore wrong audited financial statement could affect unsecured loans.
• Shareholders may not be able to get the desired dividends for thier capital in the organisation for thier shares , as it was expected on the basis of information provided through wrong audited financial statement.

2. Ethical factors in such a situation are : The auditor

Preconditions for an audit

Once a firm has decided to go ahead with an audit engagement, it must comply with the requirements of ISA 210, Agreeing the Terms of Audit Engagements. ‘The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted’.

This means that the auditor must do two things.

1. First, the auditor must determine the acceptability of the financial reporting framework to be applied in the preparation of the financial statements. This includes evaluating whether law or regulation prescribes the applicable financial reporting framework, considering the purpose of the financial statements, and the nature of the reporting entity (for example, whether a listed company or a public sector entity). In most cases this will simply be a matter of confirming with the client that the financial statements will be prepared under International Financial Reporting Standards, or other national reporting framework.
2. Second, the auditor must obtain the agreement of management that it acknowledges and understands its responsibility:

• For the preparation of the financial statements in accordance with the applicable financial reporting framework.
• For internal controls to enable the preparation of financial statements which are free from material misstatement, whether due to fraud or error.
• To provide the auditor with access to all information necessary for the purpose of the audit.

3. And also , the auditor should perform the audit are per standards on auditing and as per complaince , irrespective of fees being paid to him.

3. No, the auditor should not accept the audit engagement because When making a decision about engagement acceptance and continuance, the level of fees or anticipated profits may pose a threat to compliance with Ethical behaviour.

• Fees are too low to reasonably perform an engagement and comply with standards.
• Inadequate fees pose a threat to subordination of judgment and independence, integrity
  and objectivity.
• A firm, office, or partner is financially dependent on an individual client etc.

4. Some of the ethical considerations are Whether fees or profits associated with an attest engagement are unusually large or small is not, by itself, an ethics violation.

• Identifying and evaluating threats to independence—Identify and evaluate threats, both individually and in the aggregate, because threats can have a cumulative effect on a member’s independence.
• Determining whether safeguards already eliminate or sufficiently mitigate identified threats and whether threats
  that have not yet been mitigated can be eliminated or sufficiently mitigated by safeguards—Different safeguards can
  mitigate or eliminate different types of threats, and one safeguard can mitigate or eliminate several types of threats simultaneously.