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.

Required.

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 recommendations.

Answer 1

1. this agreement will definately going to impact a large renge of stakeholders & Accounting firm too. if the profit of the company gose up then it would be a profit makeing deal to the accounting firm. parties potentially impacted with this deal are listed below:

• Shareholders of Allnet company
• Management might be in the position to deal with Auditors during audit to hide there frauds.
• financials might not present the true picture.

2. As per the professional ethics, an Auditor is not allowed to charge fee from it's clients on fixed percentage of profit margine. if he do so, it will be a professional misconduct.

3. As per the professional ethics, an auditor must be indipendent, hence it is recommanded not to enter in such contract.

4. i don't knows to which country you belongs, references to the professional bodies veries from nation to nation. but i still want to give you an reference.'

as per The Institute of Chartered accountants of india, professional ethics:

Clause (2) of Part-I of the First Schedule to "The Chartered Accountants Act 1949" prohibits a Chartered Accountant from paying or allowing any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of the deceased partner or a member of any other professional body or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India;

As per NASBA:

One role of ethics codes is to help practitioners identify pitfalls and thereby avoid unethical behavior. When making a decision about engagement acceptance and continuance, the level of fees or anticipated profits may pose a threat to compliance with ethical behavior. Threats may result when, for example: