The introductory material to the chapter painted a scenario that was based on the financial crisis that first came to light in the fall of 2008. In that scenario, it was stated that:

• For many manufacturing companies, goodwill is now one of the largest assets on their books.

• Many companies are downsizing, and not only will they be laying people off, they will be reducing inventories and closing plants.

• Sales are expected to be down.

• Customers will be paying more slowly, and some may not be able to pay at all.

• Return on the company's pension assets may be significantly lower.

Required

Assume you are auditing a manufacturing firm headquartered in the United States, 80% of its sales are made in the United States, and 60% of its manufacturing is also located in the United States. The two largest assets are property, plant, and equipment (31% of assets) and goodwill (24% of assets). It is likely that the firm will be scaling back operations. The other large assets are receivables and inventory.

a. Identify the accounting decisions that must be made by the company regarding the five significant trends identified above.

b. For four asset accounts identified above (PPE, goodwill, receivables, and inventory), indicate how the audit will change this year because of the economic downturn. Be specific as to how the auditor should gather the information regarding each of these accounts to assess their proper valuation.

c. How important are both economic trends and industry trends regarding the valuation of the above assets? Management asserts that the trends are only temporary and that there is no need to write down any of the assets. However, assume that current economic data does not justify that optimism; i.e., the industry is down, the clients are slow in paying, and inventory is building up. How does the auditor deal with the optimism of management-who might be right-and the accounting requirements?