(a)A company has been charged by the Securities Commission for overstating the revenue by $1,000,000. The overstatement occurred because the company recorded sales products that have been shipped but, at the time of shipment, the company had no reasonable expectations that they would be paid for the products. Later, the company would accept the shipped products as sales returns. Apparently, the company's distribution agreements allowed the distributor the opportunity to return product back to the company whenever the distributor believed the product was unable to be sold. In FY 2018, their accounting personnel submitted a proposed allowance for future returns that was too low given the returns that the company already received in early 2019. Furthermore, management knew the exact amount of returns affecting FY 2018 prior to the time when the independent auditors finished their 2018 audit. If the company had accurately revised the allowance for sales returns, the amount of net revenue reported for FY 2018 would have been significantly reduced. Instead, management devised schemes to conceal the auditors from examining the location where the returned goods were stored. Additionally, accounting personnel altered computer records to support a reduced level of returns.

Required:

Assuming you are the independent auditor of this company, critically discuss your strategic reasoning to assess the true and fair representation of the "Sales and Allowances and "Accounts Receivable" if you employ the following in the audit plan and audit program:-

i.Zero order reasoning

ii.First order reasoning

iii.Higher order reasoning

(please provide reference)