Anton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December, he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts.

As the financial auditor for this company, you have been asked for clarification concerning this practice by the company's owner. In your discussion of this scenario, answer the following questions posed by the owner:

What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?

What type of internal control or controls might be useful for this company in overseeing the manager's recommendations for accounting changes?