MB101 Tutorial 1 Activity 2 Q3) (1) Craig Thorne, Firm that Craig Thorne works in(since Thorne represents

his company when dealing with clients), Allnet Company, Shareholders in Allnet Company (2) An audit is an investigation of a companys financial statements, designed to determine the fairness of these statements. Auditors are experts in the field of financial reporting and are independent of the company issuing the financial statements. Issue of Thornes Integrity According to the fee plan proposed, the larger the reported profits of Allnet, the larger the audit fee Thorne gets to earn. Due to the benefit in wages Thorne could get to earn in relation to Allnets reported profits, the integrity of Thornes audit may be put into question since he has benefits to gain if he overlooks overstatements of profits in Allnets financial statements. Issue of the Public Interest With Thornes financial income hinging on the reported profits of Allnet after his audit, Thornes commitment to presenting the public and shareholders an objective view of the companys financial statements could be put to question due to the motive present for him to be biased and to report untruthfully.

(3) I would not recommend that Thorne accept this audit fee arrangement. Auditors are supposed to be independent of the company issuing the financial statements, and their job is to determine the fairness of these statements. If Thorne accepts this audit fee arrangement, it could be challenging for him to truly be independent and objective in his audit, due to the temptation of overlooking misleading overstatements of Allnets profits to gain an increased audit fee and to achieve his goal of becoming a partner earlier. Even if Thorne manages to ensure that his audit is unbiased and objective, he may find his integrity and his audit questioned by external regulators and shareholders who may view the audit fee plan arrangement as a conflict of interest.

(4) The Public Interest

Auditors must acknowledge their obligation to inform the public on the fairness of their clients financial statements, honour the public trust, and demonstrate commitment to professionalism. The fee plan should not present temptations to the auditor to dishonour this commitment to the public. Integrity Auditors should have utmost integrity, and in the case of the fee plan arrangement above, it should not have any elements that could bring the auditors integrity into question. Auditors should also avoid conflicts of interest by refusing compromising gifts and favours, by refusing to subvert organizational objectives, by refusing to communicate biased information, and by avoiding activities that could discredit the profession.

Self-Practice Problems Q4) A2 B4 C3 D5 E1 Q5) 1a. Assets = Liabilities + Owners Equity Amount of Equity on December 31, 2006 = Assets Liabilities = $55,000 - $24,500 = $30,500 1b. Owners Equity = Capital Stock Dividends + Retained Earnings (or Net Income) Amount of Equity on December 31, 2007 = Stock issued Cash Dividends + Net Income + Previous years Equity = $6,000 - $3,500 + $8,500 + $30,500 = $41,500 1c. Assets = Liabilities + Owners Equity Amount of Liabilities on December 31, 2007 = Assets Equities = $58,000 - $41,500 = $16,500 2a. Assets = Liabilities + Owners Equity Amount of Equity on December 31, 2006 = Assets Liabilities

= $34,000 - $21,000 = $13,000 2b. Assets = Liabilities + Owners Equity Amount of Equity on December 31, 2006 = Assets Liabilities = $40,000 - $26,500 = $13,500 2c. Owners Equity = Capital Stock Dividends + Net Income Net Income for year 2007 = Equity Stock Issued + Cash Dividends Previous Years Equity = $13,500 $1,400 + $2,000 - $13,000 = $1,100 3. Assets = Liabilities + Owners Equity Amount of Assets for Company C = Liabilities + Stock Issued Cash Dividends + Net income + Previous Years Equity = $29,000 + $9,750 $5,875 + $8,000 + ($24,000 - $9,000) = $55,875 4. Equity = Capital Stock Dividends + Net Income Stock Issuances for Company D on December 31, 2007 = Equity on December 31, 2007 + Dividends Net Income Previous Years Equity = ($85,000 - $24,000) + $0 - $14,000 ($60,000 - $40,000) = $27,000 5. Equity in 2007 (including equity in 2006) = $113,000 - $70,000 = $43,000 Equity generated in 2007 (excluding equity in 2006) = $6,500 - $11,000 + $20,000 = $15,500 Amount of Equity in 2006 = $43,000 - $15,500 = $27,500 Amount of Liabilities for Company E on December 31, 2006 = $119,000 - $27,500 = $91,500