Examine the sketches and label which of the firms corresponds with the sketch.

Firm $1.$ This is a U$.$S$.$ steel manufacturer that had several years of troubling financial performance but is now under new

management. The new management says two factors are creating positive momentum so that the first earnings announcement that will reflect the new management's performance$-$which will be next year's earnings$-$will be much stronger than the current year. The two factors cited by management are new big tractor$/$steamroller construction booms due to infrastructure repair, as well as the new tariffs on foreign$-$produced steel. Together these two will enable their future performance to really shine positively. The audit partner thinks this story is pretty reasonable, but also worries that management is taking a "big bath" on purpose

this reporting period, and that true performance this year is much better. By taking a big bath this year, management can "save" those earnings for next year.

Firm $2.$ This firm's management has high integrity, but it also a manufacturer of equipment using technology that is still

unproven. Further to provide customers with enough confidence to purchase this equipment despite the unproven

technology, the firm offers a best$-$in$-$industry warranty. The audit partner worries true warranty liabilities could be quite a bit higher than reported. One the other hand, this partner believes management has over$-$reserved a litigation$-$related liability. Legal counsel tells her the firms litigation expense and liability are quite possible too high. Overall, then she thinks the firm's reported earnings are not biased one way or the other, but that true earnings could be higher or lower.

Firm $3.$ This firm has aggressive management, and the audit partner is concerned it has used a revenue recognition method that allows premature recognition of revenue. So while it's not likely true earnings are higher, it easily could be the case that true earnings are lower.

Firm $4.$ This firm previously was audited by a large CPA firm and the engagement partner who handled this client was known in the profession as a stand$-$up$,$ courageous auditor. He also was known for being persuasive in getting management to adjust its books, up or down as needed, to correct for errors. Management has high integrity and high competence at this firm, the audit partner believes.