Suppose an auditor has been paid $1,000,000 each year for the past several years by a company to perform the audit of its annual financial statements. This company is the auditors largest client. In the current year, the auditor notices that the preliminary income statement excludes certain expenses that typically are shown. When asked, management tells the auditor that these expenses do not reflect the companys true performance, so they will not be shown in this years income statement. Plus, management informs the auditor that it will be paying $1,200,000 for this years audit, and management commits to using the auditor for at least five more years.

1.Required: Understand the reporting effect: Does the audit arrangement described above have the potential to jeopardize the auditors opinion of managements decision not to report certain expenses?

2.Specify the options: Are auditors employees of the company who must accept requests of management?

3.Identify the impact: Do investors, creditors, and others rely on the fair presentation of financial statements?

4.Make a decision: Should the auditor accept managements decision not to report the expenses this year?