3. Consider the following two scenarios [Option A and Option B]:

Manaka Inc. has the total inventory of $6,000. Currently, Manaka has this entire inventory stored in one warehouse. There is a 20% chance that a fire could occur. If this fire occurs, then Manaka will lose their entire inventory. [Option A]

As an alternative to keeping their entire inventory in one warehouse, Manaka is considering separating their inventory evenly into two different warehouses. Once again, there is a 20% chance that a fire could occur in each warehouse. If this fire occurs, then Manaka would once again lose their entire inventory in that particular warehouse. [Option B]

Read about this concept in Chapter 5 of your text under the heading ‘Separation’ on pages 5.9 – 5.12 in order to answer this question properly.

1.          First, consider Option A.

What is the probability of having zero dollars in losses? What is the probability of having $6,000 in losses?

Derive the probability distribution for total dollar losses under Option A. Note that this question asks for total dollar losses, not number of losses. Hint: Think about the definition of a probability distribution and apply it in this case. [2 points]

2.          Now consider Option B.

Derive the probability distribution for total losses under Option B. Hint: In the case of Option B, you need to consider all the possible outcomes in terms of dollar amount of losses, recognizing that Manaka now has two warehouses. Further hint: consider the rules of probability as discussed in class when you derive your probability distribution. [4 points]

3.          Compare the amount of risk Manaka faces under Option A vs. Option B. Which option has more risk? Justify and demonstrate your answer. Recall our discussion in Topic 4 about how we measure risk. [4 points]

You asked: “”On January 15, Year 2, Lawrence and Rigoli, CPAs, are hired to audit the December 31, Year 1, financial statements of Keep Well, Inc., a health care provider. Lawrence and Rigoli have only a limited time in which to complete the audit, due to pre-existing client obligations. There are two staff people available to work on the audit, Roger, a new staff accountant and Lisa, an experienced audit senior. The firm has never audited a company in the health care field.Which auditing standard, if any, is being violated in the following situations? Select as many options as apply, but no more than three for each situation.Auditing Standards 1. Professional care 2. Planning 3. Supervision 4. Internal control, entity, and environment 5. Consistency 6. Disclosure 7. No standard violatedSituations a. The firm accepts the engagement despite the fact that it has never audited a company in the health care field. b. Due to time constraints, there is no opportunity to learn much about the health care field, so a standard audit plan from another industry is used. c. In the interest of being fair, Rigoli and Lawrence devote an equal amount of time to overseeing the work performed by Roger and the work performed by Lisa. d. Lisa is currently overseeing two other audit engagements. e. Lisa audits the more complicated areas, such as pensions and leases, while Roger audits cash and receivables. Each staff member is responsible for setting the scope of the audits in their areas. f. Roger drafts the initial report, and indicates that accounting principles have been consistently applied, but fails to state that disclosures are adequate. g. Lisa modifies the report to indicate that disclosures are adequate. h. Lisa has an excellent track record in the firm, so Rigoli and Lawrence do not review her work.”