Consider the following areas in which estimates are made in the preparation of financial statements:

a. Pension obligation

b. Warranty liability and related expenses

c. Allowance for uncollectible accounts (manufacturing company)

d. Allowance for returned goods (such as at a catalog company like Land's End or L.L. Bean, which have a guaranteed period warranty on catalog sales)

1. Identify the factors inherent in each account that might significantly affect the dollar estimate of the account balance.

2. For each factor identified, briefly discuss the importance of the item to the overall account estimate. For example, how important is the interest rate assumption to the overall estimate of the pension liability? (hint: you may want to perform a sensitivity analysis to assess the importance of each factor)

3. For each factor identified, briefly describe audit evidence that should be gathered to determine how the factor should be used in making the accounting estimate. For example, how should the auditor determine the proper interest rate assumption in estimating the account balance?

4. Assuming there are differences between the auditor's estimate and management's estimate, indicate how a professionally skeptical auditor can determine whether management is attemping to manage or smooth earnings or that there is a genuine disagreement on the correct factor to be used in making the estimate.