(Risk of material misstatement) Your client, a manufacturer of computer componen
ID: 2376994 • Letter: #
Question
(Risk of material misstatement) Your client, a manufacturer of computer components, has experienced slowing demand for its product. Recently, it cut back from three shifts a day to two shifts a day, and the company has eliminated the backlog of orders that existed in prior years by providing financing to customers. Newspaper reports indicate that competition has taken significant business away from the client because a large investment in R&D has not resulted in improved products. Furthermore, a small handful of your client's customers are experiencing financial difficulties because of slowing demand for your client's products.
Required
Explanation / Answer
Revenues, if recognized on the products for which financing was provided to the customers, may be overstated if the customer is unable to pay. If you recognize revenues when providing customer financing, they are contingent on the customer being credit worthy. Accounts receivable may also be overstated.
Inventory may be overstated because it is excess or obsolete (since R&D has not resulted in improved quality) and also because there are no orders for it (due to the lack of backlog). Reserves for excess or obsolete inventory may have to be taken to write the inventory down to its net realizable value.
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