Question

Assume you are on the audit team for a medical care product manufacturer whose product is suspected of creating additional health problems for its users and the company is experiencing public relations issues, product returns, and lawsuits as a result. All of the following are accounts and notes disclosures that your team should review carefully, EXCEPT?

1) inventory valuation
2) contingent liability accruals
3) sales returns
4) purchase discounts

Answer 1

During an audit for a company with a suspected defective product, the team should review inventory valuation, contingent liability accruals, and sales returns carefully. However, purchase discounts are not directly relevant to the issues of product defects and litigation costs.

Step-by-step explanation:

When an audit team reviews a medical care product manufacturer facing public relations issues due to a suspected defective product, they should focus on several financial statements and disclosures. However, one area that may not be particularly relevant in this situation is purchase discounts. This is because purchase discounts typically relate to the cost savings a company achieves when buying inventory and are not directly associated with product defects, returns, or litigation costs.

Instead, the audit team should pay close attention to the inventory valuation to confirm whether the value of returned or unsellable inventory has been properly adjusted. Similarly, contingent liability accruals are crucial as they reflect potential future expenses related to lawsuits and settlements. Lastly, sales returns should be reviewed to determine the extent to which the defective products are being returned and the financial impact of these returns on the company's revenue and profit.