Explain the technique the company is using that may constitute a financial shenanigan. Indicate both the technique used and how the auditor should react.
A. Highlinetime Inc., was about to report lower earnings than expected for 2010. The shortfall would be about $10,000,000. Before year end, the company contracts with Bogus Insurance, Inc., which insures corporate earnings. Under the contract, Highlinetime will receive an insurance payment of $10,000,000 at year end 2010, in exchange for a premium due at the end of 2011 in the amount of $10,000,000. The insurance payment in 2010 will enable Highlinetime, Inc. to meet its earnings expectations.
B. Hamlich, Inc. sold computer equipment to three universities at year end 2010. The universities accepted the equipment and needed to use funds to be obtained from a National Institutes of Health grant. All three universities are awaiting approval of the grants, which is expected in early 2011. Hamlich books the revenues from the sales in 2010 income.
C. Martin’s Corporation has decided that a substantial portion of its plant, property, and equipment are being depreciated over too short a period of time. It revises the depreciation period from 15 years to 25 years.
D. Newco’s bad debt expenses are been cut in half, a material reduction. The company indicates it has tightened up on its credit standards. At the same time, the company’s sales revenues have increased by 10%, which is in line with the previous 5 years.
E. Oldco has had some difficulty moving its inventory in 2010. The company’s accountants have reviewed Oldco’s overhead allocation process and has increased the factory overhead it allocates to inventory (as opposed to period costs).