The Waste Management fraud primarily centered around inappropriate estimates of salvage values and useful lives for property and equipment. Describe techniques Andersen auditors could have used to assess the reasonableness of those estimates used to create Waste Management’s financial statements.

Question

What will be an ideal response?

Answer 1

First, the auditors could have requested information about the sources of data and factors that
management used to form the assumptions about salvage values and useful lives to evaluate the
reasonableness of those assumptions. Second, the auditors could have compared information about
the useful lives for depreciating classes of assets to similar estimates of useful lives used by competitors
in the waste management industry. Third, the auditors could have performed an analysis of recent
property and equipment disposals to determine whether asset disposals were consistently occurring
within time periods shorter than the estimated useful lives and at disposal amounts less than salvage
value assumptions. Such a retrospective analysis of management’s estimates of salvage values and useful
lives may have identified a consistent bias in management’s assumptions of those items. Fourth, given
the specialized nature of many of the property and equipment items used in the waste management
industry, the auditors may have benefited from the judgments of independent specialists knowledgeable
of those kinds of assets.