Management has the responsibility of accurately preparing financial statements when communicating with investors and creditors. Another group, auditors, serves an independent role by helping to ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Suppose an auditor is being paid $1,000,000 by the company to perform the audit. In addition, the company plans to pay the auditor $500,000 over the next year for business consulting advice and another $200,000 for preparing its tax returns. The auditor and management of the company have always shared a friendly relationship, which partly explains the company's willingness to give the auditor additional work for $700,000.

Required:

How might an auditor's ethics be challenged while performing an audit?

Each analysis will include a minimum of four sections:

1. Ethical situation and people who will be affected

2. Options for alternative courses of action

3. The impact of each option on the stakeholders

4. Decision and reasoning underlying the decision.