Jody Burden is a senior auditor with a public accounting firm and has been assig

Question

Jody Burden is a senior auditor with a public accounting firm and has been assigned to the Stanley Corporation's audit engagement. Stanley has been an audit client of the firm for many years and is in the fast-growing commercial construction industry. In reviewing fixed assets, Jody discovers a number of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate of their useful lives. For example, the useful life of a front-end loader was changed from 10 to six years in its fifth year of service. When Jody questioned the chief financial officer, she responded that it is perfectly legal to change accounting estimates and this helps the company shows bigger earnings.

• What is the impact to the financial statements of this change in estimate?

• Do you see any ethical problems with this scenario? If so, what are they?

• Who could be harmed by these problems?

• What should Jody do in this scenario?

Explanation / Answer

The impact of financial statement would be that it would lower the earnings instead of increasing the earning as said by CFO .When the estimated life of the asset is decreased it will increase the amount of depreciation charged to income statment

2) Though change of accounting estimate is allowed but it is unethical to do so for showing higher earning as planned by CFO

3) All the users of the fianacial statments will be mislead and specially stockholder's as their earnings are reduced

4)Jody should notify the users of the fianancial statments of the changes made in the notes to the financial statements and its effect

The impact of financial statement would be that it would lower the earnings instead of increasing the earning as said by CFO .When the estimated life of the asset is decreased it will increase the amount of depreciation charged to income statment

2) Though change of accounting estimate is allowed but it is unethical to do so for showing higher earning as planned by CFO

3) All the users of the fianacial statments will be mislead and specially stockholder's as their earnings are reduced

4)Jody should notify the users of the fianancial statments of the changes made in the notes to the financial statements and its effect

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