QUESTION 1

(a) Based on management's analysis of sales returns and allowances and uncollectible

accounts, Time Warner established "reserves of $2,253 billion and $2,229 billion at

December 31, 2009 and 2008, respectively. These estimates represent about 30 percent

of gross accounts receivable in both years. Management explains that this is an "area

of judgment affecting reported revenues and net income" and is based on analysis of

"vendor sell-off of product, historical return trends, current economic conditions, and

changes in customer demand" (Times Warner Inc., 2010). This is perhaps an example

of conservative to neutral earnings management."

(Source: Needles Jr. B.E.,Powers M., Senyigit Y.B.2018. MED -Journal of Accounting Institute)

(i) What is conservative earnings management. How to distinguish earnings

management and fraud? (7 marks)

(ii) Explain any FOUR (4) negative consequences of earnings management AND

provide TWO (2) roles of auditor to combat earnings management.

(13 marks)

(b) System oriented theories considering unregulated corporate reporting decisions.

Provide TWO (2) roles of corporate reporting according to Ethical branch of

Stakeholder Theory.