Reference no: EM132791776

Financial statements are prepared and issued as a means to provide useful information to decision makers who are outside of a company. These statements are used to report the financial status of a particular company. An example 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 statements to 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?

• 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 get ready 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.

Problem 1. Identify the parties that are potentially affected by this audit and fee proposal. (Consider both internal and external parties)

Problem 2. What is the ethical factor(s) in regards to the suggested fee arrangement? (Review the role of an auditor as stated above)

Problem 3. Should Thomas accepted the proposed fee arrangement? If not, how would you suggest the fee be determined?