auditing

Topics: Audit, Big Four auditors, Balance sheet Pages: 6 (1764 words) Published: March 8, 2014
Question 1

Incentives:
Financial pressures from changes in the market and industry intense competition (national, regional, local) under cut prices from municipalities that could offer lower prices by using tax revenue. Pressure to meet earnings expectations Stock ownership benefits Retirement benefits Performance based bonuses Maintain growing stock price Maintain industry leadership Maintain reputation

Opportunities:
Able to use a lot of estimates in depreciation of PPE (over 1/2 of assets) Accounting firm (Arthur Andersen) thought of Waste Management as a crown jewel and would be lenient to keep from losing their account, working together since before 1971. Lot of former Andersen employees were working at Waste Management CFO and CAOs all former Anderson auditors Arthur Anderson hadn’t forced them to change yet Arthur Andersons action steps- working together to cover up past fraud with new fraud f. g. Top executives working together in the fraud Netting and geography.

Attitudes:
If their auditor was approving the accounting treatment of certain items, it must have been correct. These entries were needed to stay competitive keep their jobs and status in community. Keep shareholders happy and willing to invest more Review Waste Managements Consolidated Balance Sheet as of December 31, 1996. Identify accounts whose balances were likely based on significant management estimation techniques. Describer the reasons why estimates were required for each of the accounts identified.

Question 2

Accounts Receivable Waste Management must determine an allowance for bad debt, which requires judgment. This may be difficult to determine based on past experience as the market place is changing. In addition, general economic conditions must be considered in customer’s ability to pay. Employee Receivables this account requires judgment based on the willingness of employees to pay. It is unclear if this payment is handled by direct deposit, or like any other receivable. Waste Management must consider their turnover rate, and the fact that disgruntled employees may refuse to pay. Costs plus estimated earnings in excess of billings, this requires an estimate for total costs to be incurred and total profit to be earned upon completing a contracted project.

Duration of the project, and changes in material and labor costs could have a significant impact on the actual costs. The customer may not be satisfied with the work and not pay invoices in full. This account is like an unbilled receivable so it is unclear if all of the cost will actually be billed and received. An example of how this is calculated follows: Estimated Price: Estimated Cost: Profit: $3,000 $2,000 $1,000 Now assume that cost incurred up to this point is $1,000 therefore the project is 50% complete (1,000/2000). Earned income is therefore .5 X profit (1000)= $500. Up to date you have billed the customer for $400. So the unbilled portion of $100 (500-400) of earned income is your cost in excess of billings.

So essentially the company is recording a receivable based on the work completed without securing the payment from the customer. This is allowed under GAAP but as can be seen is subject to estimates that may not play out once the project is complete. Accumulated Deprecation Management must estimate useful lives and salvage values of property and equipment. There is a dilemma as to whether Waste Management should consider unpermitted (at the time) expansions when determining the useful life for landfills. Because the industry was going through changes, it is unclear how technological improvements and new processes could affect the salvage value of equipment. Goodwill is based on estimated value of subsidiary assets and liabilities. The nature of the industry may require valuation of multiple assets, such as unique plant equipment, that may not have a ready market to offer guidance. Although Goodwill is no longer amortized as an expense over...
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