Directions Read the scenarios below and respond to the prompting questions in an

Question

Directions Read the scenarios below and respond to the prompting questions in an a five sentence paragraph discussion, activities and reading assignments. You must fully answer each question.

Scenario 1 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. • Identify the parties potentially affected by this audit and the fee plan proposed. • Summarize the ethical factors in this situation. • Would you recommend Thorne accept this audit fee arrangement? Describe some ethical considerations guiding your recommendation.

Scenario 2 You are an entrepreneur. You and a friend develop a new design for in-line skates that improves speed by 25% to 30%. You plan to form a business to manufacture and market the skates. You and your friend want to minimize taxes, but your prime concern is potential lawsuits from individuals who might be injured on these skates. • What form of organization do you set up? Explain your rationale. • Describe the ethical aspects you considered to select this form of organization. • Explain the ethical ramifications if you selected the other forms of organization. Not there are three forms of organization you could select from, so explain the ethical ramifications for the other two forms of organization you did not ?

Explanation / Answer

Scenario1

Parties that may be affected include shareholders, investors, directors, the accounting firm and Tana Thorne whose pay is based on the profit amount. The ethical factors in this situation are the independence of the auditor which will be compromised as his fee depends on the amount of profit earned by the company. Throne should not accept the fee arrangement as it may lead to compromise of independence and due to such bases for fee payment it may lead to discontent in the mind of people that misleading results of audit are being provided in order to get higher fees.

Scenario2

When the prime concern is protection from potential lawsuits from individuals who might be injured on these skates, the business should be setup as a corporation as it protects your personal property from lawsuits against business. But its main disadvantage is double taxation as the corporation must pay taxes on its income and any money distributed to owners from business. If the main concern is taxation then they can also try LIMITED LIABILITY CORPORATION or S Corporation as owners of such corporation report their share of corporate income with their personal income.

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