Reference no: EM132796820

Problem 1: A brand new client takes salary advances from his professional corporation, showing them as loans throughout the year. In December of every year, he shows the amount as salary and pays the taxes. As the new CPA you are aware that this is fairly common, but, if audited, the IRS would probably assess penalties.

What ethical issues does this present? Does the precedent of the prior CPA factor into your decision as to how you would handle this situation?

Problem 2: As the outside CPA of a medical practice, you cannot help but notice cash receipts drop off to virtually nothing every December and then the first week of January cash collections are huge. You ask the office manager, who says that the doctor insists that any checks received after Thanksgiving be held until the first week of January, thus deferring the income to the following year. They justify the action by saying the cash gets into the bank, and the only real issue is the year it is shown as income.

What do you think about the ethical values of this organization? If you were a patient and knew this information, how might that change your feelings about the doctor? As the accountant, how should you approach this?

Problem 3: Is income smoothing an ethical practice? Are there times when it might be considered ethical and others when it might not be?

Problem 4: Income smoothing is just shifting income from one year to another. What is wrong with that?