1. Brown does not appear eager to write off many of the customer

accounts; instead, he prefers to establish an ample allowance to

provide for the possible bad debts. Is this a proper approach? Explain.

• The completely write off the customer accounts would mean

expensing the account away which would significantly increase

expenses. This might draw unwanted attention to the expenses

for someone trying to do earnings management.

• The better approach is to keep a large AFDA so the A/R would seems

smaller in the Financial Statement.

• Auditor mentioned A/R increased by 40% this year, given there is

slow growth this year in the industry (hence increased A/R is not

due to increase in overall sales), increased A/R could indicate

company not as efficient in collecting payments from customers.

Large AFDA would offset the increase and mislead any user to

the F/S

•

2. Auditor indicates he may want to revisit the 10% allowance after he

receives more information from his staff. As an auditor, how would you

view Brown's move to set up a large allowance? Would you be more

likely to view this as an example of safe, conservative accounting, or do

you see any problems? Explain

• Large allowance decreases the revenue

• Given Brown is new to the company, he would want to prove himself

• There is motive for him to go into earnings management by

decreasing revenue for this year so next year, the company can

appear stronger than before since Brown has joined

• Not an example of safe, conservative accounting as Brown's motive is

not to accurately reflect company's financial health but to distort

financial health of company

• I wonder what would Brown do next year? 10% AFDA is much more

than the usual 3% the company has used. Keeping 10% would

mean the revenue would always be 10% less so would not be

good for future. Unless if Brown wants to change it back to 3%

next year. Changing AFDA back to 3% would increase net

income. Using very different percentage allowance for doubtful

accounts distorts the picture of the company that Financial

Statements draw.

3. Regarding the presentation of realized investment gains and losses,

does GAAP address this issue, and is there any indication that more

firms are starting to reflect investment gain/losses in operations?

• The auditor mentions that a few firms do this but this does not indicate

more firms are starting to reflect gain/losses in operations

• need help with this one,

4. The auditor seems concermned about the reclassification of the

investment losses. Would Brown's reclassification 'distort the picture'?

Yes, the reclassification would 'distort the picture'

• Since Zar had losses on investment this year and since the loss on

investment is not combined with the operating earnings, the

reclassifiation would change the picture.

• The reclassification decreases the operating earnings this year makes

firm appear worse this year

• Brown admits "[i]t will hurt us this year, but in most years we will have

investment gains, so it will normally help us." (p. 11) The sharp

decrease in one year then a great increase the next year are

qualities of a big bath which is earnings management. Earnings

management without a doubt distorts the picture of the financial

health of a company

Moving the losses into operating income would also mislead users of

the financial statement. The loss in operations could be attributed to

conditions outside of the company but companies choose their

investment so showing losses decrease confidence in shareholders of

the company.

Module 3

1. Penghapusan akun pelanggan dapat meningkatkan beban dan mugkin Ini

menarik perhatian yang tidak diinginkan dengan bagi seseorang mencoba untuk

melakukan manajemen laba.

Pendekatan yang lebih baik adalah untuk tetap menetapkan AFDA yang besar

sehingga A / R akan tampak lebih kecil dalam Laporan Keuangan.

Auditor menyebutkan A / R meningkat sebesar 40% tahun ini, mengingat ada

pertumbuhan yang lambat tahun ini di industri (dimana meningkatnya A / R

bukan karena peningkatan penjualan keseluruhan), meningkatnya A / R bisa

mengindikasikan perusahaan tidak efisien dalam mengumpulkan pembayaran

dari pelanggan. AFDA yang besar akan mengimbangi peningkatan A/R

peningkatan dan juga dapa menyesatkan pengguna atau pembaca F / S

2. Penjelasan :

• AFDA yg besar menurunkan pendapatan

• Ada motif baginya untuk masuk ke manajemen laba dengan mengurangi

pendapatan untuk tahun ini sehingga tahun depan, perusahaan dapat muncul

lebih kuat daripada sebelumnya karena Brown telah bergabung

• menurut kami bukan contoh yang aman karena motif brown menggunakan

akuntansi konservatif tidak secara akurat mencerminkan kesehatan keuangan

perusahaan, tetapi untuk mendistorsi kesehatan keuangan perusahaan

• AFDA sebesar 10% jauh lebih besar dari biasa perusahaan tertapkan yaitu 3%.

Kalau ditetapkan 10% berarti pendapatan akan menjadi berkurang 10% hal ini

tidak akan baik untuk masa depan. Bila AFDA ditetapkan 3% maka akan

meningkatkan laba bersih. Penetapan presentase AFDA yang perbedaannya

sangat signikan untuk piutang tak tertagih, dapat mendistorsi Laporan Keuangan

perusahaan.