APPENDIX

Before starting the activity, I would like to share how we can observe or evaluate a given situation.

Construal instructions treatment: (Abstract construal instructions)

For everything we do, there always is a reason why we do it. Moreover, we often can trace the causes of our behavior back to broad lifegoals that we have. For example, you must annually prove a minimum number of hours of continuing education. Why are you doing this? Perhaps to satisfy a requirement necessary to continue acting in an audit. Why are you fulfilling this requirement? Perhaps to update yourself on important topics in the area. Why update yourself on important topics in the area? Perhaps because you want to perform a better-quality audit. Research suggests that engaging in thought exercises like that above, in which one thinks about how one’s actions relate to one’s ultimate life goals, can improve people’s life satisfaction. In this experiment, we are testing such a technique. This thought exercise is intended to focus your attention on why you do the things you do. For this thought exercise, please consider the following activity: "Audit the Financial Statements".


After performing this thought exercise, you are invited to audit the financial statements of 12/31/2019 from TCH.

It is important that you analyze the context, thinking broadly about all of the evidence collectively, as in the previous activity.

Construal instructions treatment: (Concrete construal instructions)

For everything we do, there always is a process of how we do it. Moreover, we often can follow our broad lifegoals down to our very specific behaviors. For example, like most people, you probably expect to receive promotions that can bring you happiness and professional fulfillment in your life. How can you do this? Perhaps performing a better-quality audit. How do you perform better quality auditing? Perhaps updating on important topics in the area. How do you update yourself on important topics in the area? Perhaps fulfilling a minimum number of continuing educations. Research suggests that engaging in thought exercises like that above, in which one thinks about how one’s ultimate life goals can be expressed through specific actions, can improve people’s life satisfaction. In this experiment, we are testing such a technique. This thought exercise is intended to focus your attention on how you do the things you do. For this thought exercise, please consider the following activity: "Audit the Financial Statements".
After performing this thought exercise, you are invited to audit the financial statements of 12/31/2019 from TCH.

It is important that you analyze the context, thinking specifically about each evidence item, as in the previous activity.

Hierarchical Level treatment: (High Hierarchical Level)

You act as an audit manager at Beta Auditors. Given your position, you are in command of certain activities, as well as control over the results of your subordinates.

Hierarchical Level treatment: (Low Hierarchical Level)

You act as an assistant auditor for Beta Auditors. Before your position, you submit and have your activities controlled by your immediate supervisor.

Audit context:

TCH is a technology distribution and support company that has facilities throughout Brazil. TCH’s stock is publicly traded. The company has been audited by the same accounting firm for the past three years, Beta Auditors. Previous audits have resulted in standard, unmodified audit reports.

During the audit, you found the following information:

SECTOR

*Brazilian technology sector is continuously expanding and attracting local and foreign players.
*There is no change in average selling price from 2018 to 2019.
*There is no significant change in the average purchasing price.

COMPANY

*The company must establish a competitive selling price due to intense competition.
*Percentage of 2019 sales increase is 17.76% compared to last year.
* TCH’s pretax earnings per share have increased by 6% in each of the last three years.
* TCH’s stock price typically reacts negatively when favorable trends in financial results are interrupted.

When you analyze the financial statements for 12/31/2019, you noticed that TCH has a value of R$ 1,000,000.00 of Accounts Receivable. Part of this amount, approximately R$ 300,000.00, refers to contracts signed with the client Global S.A, one of its main clients.

Global declared at the end of January 2020 short-term cash flow difficulties, two weeks after the end of TCH’s fiscal year. A review of Global's payment history indicated a series of late payments in 2019 and two letters received from Global (in August and October 2019), explaining that the company was having difficulty generating the cash flow needed to meet short-term obligations.

Despite the difficulties in cash flow, Global on 01/15/2020 sent TCH a proof of bank deposit of R$ 140,000.00 related to the settlement of the remaining balance, together with an email indicating that this payment represented the possible conditions until now. Consequently, R$ 160,000.00 of Global's R$ 300,000.00 balance remains open. The potential audit adjustment of R$ 160,000.00 for Allowance for Doubtful Accounts represents 3.5% of TCH’s R$ 4.56 million EBIT.

Based on the scenario of the organization and the sectorial market, you realize that the discussion of the constitution of the Allowance for Doubtful Accounts has a significant impact on TCH’s stock price because it would interrupt the trend of 6% increases in pretax earnings per share. On the other hand, you understand that the materiality thresholds of up to 10% of the EBIT are generally considered acceptable, which is approximately 5%.

However, you also understand that even with this loss, it may be relevant for TCH’s financial statements to reflect Global's financial situation, since the adjustment represents 3.5% of EBIT, even within the materiality established in the audit planning.

Analyzing this scenario, what judgment would you have in relation to the adjustment of Allowance for Doubtful Accounts?

There is no right or wrong answer in this case, but you are asked to respond with care and consideration.