Question

Scenario: On January 20, 2018, Sasha Smith, the accountant for Ward Enterprises, is feeling pressure to complete the annual financial statements. The CFO has said he needs an up-to-date financial statement to share with the bank on January 21st at an evening meeting that has been called to discuss Ward's obtaining financing for a building project. Sasha knows that she will not be able to gather all of the needed information in the next 24 hours to prepare the entire set of adjusting entries. Those entries must be posted before the financial statements accurately reflect the company's performance and financial position for the fiscal period ended December 31, 2017. Sasha ultimately decides to estimate several expense accruals at the last minute. When deciding on estimates for the expenses, she uses low estimates because she does not want to make the financial statements look worse than they are. Sasha finishes the financial statements before the deadline and gives them to the CFO without mentioning that several account balances are estimates that she provided. Discussion Requirements: 1. Identify at least two courses of action that Sasha could have taken instead of the one she took. 2. If you were in Sasha's situation, what would you have done? Briefly justify your response

Answer 1

1. First of all, Sasha should have clearly discuss issues in relation to preparing financial statement (with CFO) within such a short period of time. Adjustment entries usually take more time during year ending additional procedures/assumptions than month closing. Secondly, Sasha need to inform CFO about various estimate she has made while preparing financial statements, specifically due to the fact that she uses low estimates to look financial statement in a better position.

2. Only Sasha knows the fact that financial statements were prepared on low estimates for few account balances and financial statements looks better than its fair value as of period ending. This is the case of misstatement of financial records and Sasha need to discuss her estimates/ assumptions with CFO before presenting financial statement to bank. Also best course of action here would to disclose all the estimates in financial statement so that Bank can make their own decision considering its impact on financial statement.