Billy Beat's Case

I. Accounting Issues:

1. The first accounting event that takes place is an incorrect valuation of acquired assets from Little Drummer Boy Inc.

Billy's mistakenly recorded the newly acquired assets at fair market value.

"This statement requires disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption."

Statement number 141 http://www.fasb.org/summary/stsum141.shtml

2. RockOut changed the useful life of its intangible assets.

Billy's accounting changed the useful life of its customer lists from 15 to 20 years during 2010.

Section 250 "Accounting Changes and Error Corrections" Paragraph 45-17 "Change in accounting estimate" states, "A change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods."

3. The accounting event is the assignment of the useful life of acquired assets.

Billy's used Little Drummers useful life of property, plant, and equipment but it is different than the company used for its own property, plant, and equipment.

Billy's needed to reevaluate the useful life of the acquired assets instead of using Little Drummer's amounts. The useful life should have been decreased based on actual remaining life left and accounted for in a similar manor of Billy's current property, plant, and equipment.

360 "Property, Plant, and Equipment" paragraph 35-4 "Depreciation"

4. Accounting for Allowance for Uncollectable Accounts.

Billy's experienced a substantial reduction in the Uncollectible account based on management's analysis.

To accrue uncollectable receivables, the loss must be reasonably estimated; this is based on "the experience of the entity, information about the ability of individual debtors to pay, and appraisal of the receivables in light of the current economic environment." (Accounting Standards Codification 35-10)

310 Receivables paragraph 35-7 to 35-11 "Losses from Uncollectable Receivables."

II. Auditing Issues

1. The engagement team tested for useful lives of the operating assets.

The team asked management why they used the useful lives that they did for their newly acquired assets. Management led them to the Little Drummer management, and the discussion was documented. The proper audit procedure for this situation would have been to perform some substantive tests along with the discussion with the client.

The team should have researched industry estimates of similar plant, property, and equipment useful lives to test the reasonableness of the estimates. The team also should have gone though Little Drummer's prior financial statements to determine the reasons of using the estimates on the books.

The relevant standard for this issue is AS 15 "Sufficient Appropriate Audit Evidence" and "Audit Procedures for Obtaining Audit Evidence." Paragraphs: 15 Inspection, 17 Inquiry, 21 Analytical procedures.

2. Testing allocation of the value of the acquired property, plant and equipment.

The team compared the percentages of valuation specialist who was hired by the client to allocate the property based on the client's spreadsheets.

The audit should have consisted of the auditors themselves recalculating the computation of the acquired assets and then used analytical procedures to compare their results with the valuation specialists.

AS 15 "Sufficient Appropriate Audit Evidence" and "Audit Procedures for Obtaining Audit Evidence." Paragraphs: 19 Recalculation, 21 Analytical procedures.

3. The engagement team questioned the management about the change in economic life for the period.

The engagement team examined a document of a discussion about the reason for changing the useful life