How to identify the factors inherent in each account

Reference no: EM13215935

Consider the following areas in which estimates are made in
the preparation of financial statements:
a. Pension obligation
b. Warranty liability and related expenses
c. Allowance for uncollectible accounts (manufacturing company)
d. Allowance for returned goods (such as at a catalog company
like Lands' End or L.L. Bean which have a guaranteed-period
warranty on catalog sales)

1. Identify the factors inherent in each account that might significantly affect the dollar estimate of the account balance.

2. For each factor identified, briefly discuss the importance of the item to the overall account estimate. For example, how important
is the interest rate assumption to the overall estimate of the pension liability? (Hint: You may want to perform a sensitivity
analysis to assess the importance of each factor.)

3. For each factor identified, briefly describe audit evidence that should be gathered to determine how the factor should be used
in making the accounting estimate. For example, how should the auditor determine the proper interest rate assumption in
estimating the account balance?

4. Assuming there are differences between the auditor's estimate and management's estimate, indicate how a professionally
skeptical auditor can determine whether management is attempting to manage or smooth earnings or that there is a genuine disagreement on the correct factor to be used in making the estimate.

Reference no: EM13215935

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