Question 4: Read the following case and answer the question which follow the case. In 1993 and early 1994, Arthur Andersen audited Waste Managements 1993 financial statements. By February 1, 1994, the engagement team quantified current and prior period misstatements totaling $128 million, which, if recorded, would have reduced net income before special items by 12 percent. The engagement team prepared Proposed Adjusting Journal Entries (PAJEs) in that amount for Waste Management to record in 1993. A PAJE is an adjustment proposed by the auditor to the company during the audit that, if accepted by the company, would correct a misstatement in the books. The engagement team also identified accounting practices that gave rise to other known and likely misstatements involving understatements of operating expenses for which no PAJEs were prepared. These misstatements included, among other things: 1 amounts for deferred costs of impaired projects that should have been written off; 2 land carrying values in excess of net realizable value; 3 improper purchase acquisition accruals in connection with the establishment of environmental remediation reserves (liabilities); 4 reversals of the environmental remediation reserves (liabilities) to income; and 5 unsupported changes to the salvage values of waste vehicles and containers. The engagement team also knew of the companys capitalized interest methodology, which Andersen knew did not conform to GAAP but which it had determined was not materially inaccurate. Waste Management refused to record the PAJEs or to correct the accounting practices giving rise to the PAJEs and other misstatements and likely misstatements. The engagement team informed Andersens risk management partner of the PAJEs and questionable accounting practices. Andersens Audit Objectives and Procedures Manual required that risk management partners consult with senior partners when cumulative PAJEs exceeded 8 percent of net income from continuing operations. These partners reviewed and discussed the unrecorded PAJEs as well as continuing audit issues. They determined that Andersen would nonetheless issue an unqualified audit report on Waste Managements 1993 financial statements. Applying an analytical procedure for evaluating the materiality of audit findings referred to as the roll-forward method, these partners determined that, because the majority of PAJEs concerned prior period misstatements, the impact of the PAJEs relating to current period misstatements on Waste Managements 1993 income statement was not material. They would issue an unqualified audit report. But they also warned Waste Management that Andersen expected the company to change its accounting practices and to reduce the cumulative amount of the PAJEs in the future. a) What analysis do you think the engagement team did to determine the amount of the PAJEs? b) By what reasoning did the audit team determine the accounting practices that gave rise to other known and likely misstatements mentioned that did not need adjustment? c) What items do you think the senior partners discussed when determining that Andersen would issue an unqualified opinion?