Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire. The firm specializes in aerial tours of the New England countryside during September and October, when the fall color is at its peak. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by an individual who had little formal training in accounting. As the business began to grow, however, the owner recognized the need for more formal accounting procedures. Jacqueline Frost has recently been hired as the new controller, and she will have the authority to hire an assistant.

During her first week on the job, Frost was given the following performance report. The report was prepared by Red Leif, the company's manager of aircraft operations, who was planning to present it to the owner the next morning. "Look at these favorable variances for fuel and so forth," Leif pointed out, as he showed the report to Frost. "My operations people are really doing a great job." Later that day, Frost looked at the performance report more carefully. She immediately realized that it was improperly prepared and would be misleading to the company's owner.