ACCT 6355 SEMINAR IN AUDITING STANDARDS AND APPLICATION

Case Belot Enterprises (2.8)

Belot Enterprises is a consumer products company which accounts for approximately one-third of Helterbrands annual revenue and consolidated assets. Because of the intensely competitive industry the companys profitability eroded despite the slow but persistent growth in annual revenues. Allan was hired to reinvigorate the Belot. He focused on Belots marketing efforts on products with high profits margin, incentive-based compensation program for sales staff and a variety corporate-wide cost-cutting initiatives. David Robinson, the auditor engagement at the Belot Company had few disputes with Zachariah Crabtree, the accounting general manager and his best friend. The accounting matters that they centeren on are dollar-value LIFO, foreign currency translation and impairment of long-lived assets. While Crabtree is concern with losing his job in case the Helterbrands top management sale the company, he wants to improve the operating results soon. Crabtree decided to tighten the companys major discretionary accruals as of June 30. Those accruals included the allowance for bad debts, coupon redemptions, employee vacations, inventory obsolescence and product warranties. His motivation was to err on the side of conservatism in establishing the accruals because he believes all of them have been overstated by a modest amount, and he wants to reduce those to the appropriate amount. The COO, Allen, agreed to this decision, and diced that all the fat should be cut of the accruals. Robinson determined that the reduction in the five discretionary accruals at the end of second quarter account for approximately 70 percent of the improvement in Belos year-over-year operating results. Robinson reviewed Belots major discretionary accruals while performing analytical procedures, and found that each of the accruals was smaller than normal percentage of the period-ending balance of accounts receivable. Belots changed the method of estimation to a new precise point estimate method to establish these accounts. After Robinson discussion with Crabtree, Robison was motivated to adopt a more professional demeanor.