Consider a company like General Motors that must make estimates on pension liabilities, health care liabilities, guarantees on the contracts with Delphi, warranty liabilities for its cars, uncollectible loans from its subsidiary (GMAC), and costs associated with restructuring.

Required

a. With the consent of your instructor, select one of the areas identified where General Motors makes accounting estimates and completes the following:

• Identify the economic factors outside of the company that affect the computation of the liability.

• Identify the internal data that affect the computation of the liability.

• Identify the preciseness of the estimate that is expected; for example, if last year's estimate for uncollectible loans was $1.4 billion and net income last year was $1.8 billion, what is the allowable range of estimates your group would find acceptable for the estimate to be considered correct for the financial statements? If you cannot come up with a range, indicate the additional information you will need.

• Identify the control activities that you would expect to be present in the process of making the estimate.

• Identify the approaches the auditor would utilize to determine whether the design of controls is appropriate and the controls are working properly.

• Discuss whether the approach you have taken to test the controls also tests the proper recording of the accounting estimate.

b. Assume that all of the controls your group has identified and tested are working as designed:

• To what extent do you believe the auditor still has to perform direct tests of the account balances?

• If you conclude that the auditor still has to perform direct tests of the account balances, identify one or two procedures to gather additional audit evidence that the auditor should use.

c. Report your analysis to the class.