Case 1:

Products in a manufacturing environment are often sold with a warrantya promise to repair or replace a product that malfunctions during a designated period. In recent years, based on a competitive economy, many companies are extending this warranty for longer periods. GAAP requires that the expense for these warranties be recorded to match with the product sale. Therefore, a product sold in 20XX with a five-year warranty needs to have an estimate of its future warranty claims expensed in 20XX, although many of those claims may not result for five years. This is an area of great scrutiny and judgment for both auditors and clients alike.

Tanner, CPA, is conducting a second-year audit on its client, Lucas Manufacturing, Inc. Lucas Manufacturing offers a standard five-year warranty on all products sold. The client calculates its accrued product warranty based on historical trends in warranty claims and claims incurred to-date. Traditionally, its estimates have proven reliable. Tanner, CPA, is ready to audit the accrued product warranty for the period 20XX.

1). How should Tanner, CPA, approach the audit of Lucas Manufacturing's accrued warranty if the products sold are consistent with prior years?

2). Would Tanner's audit approach be different if a brand new product was sold in the current year (20XX)?

3). What else (in addition to sales and claims history and product mix) should Tanner consider?

Case 2:

The control environment reflects the company's attitude, awareness, and actions of management and the board concerning the importance of control and how it is used. This is very relevant to an auditor%u2019s consideration of inventories and should include: a) commitment to competence and HR policies and procedure; b) integrity and ethical values; c) organizational structure and assignment of authority and responsibly.

Central Park Associates CPA is conducting an audit of a U.S. manufacturing company. When reviewing the company's inventory policy and physical inventory policy, they noted the following facts: 1) Physical inventory will be conducted this year by temporary workers, at a wage cheaper for management than the "regular" workers; 2) Approvals for purchase orders with discounts are not required any longer; 3) The shop manager is no longer responsible for the physical inventory, it is now responsibility of the CFO; 4) The physical inventory will be held four days after year end.

1. What aspects of the control environment is affected by the companies decision to hire temporary workers?

2. What aspect of the control environment is affected by the company%u2019s decision to no longer require approvals for purchase order discounts?

3. What aspects of the control environment are affected by the company%u2019s decision to no longer have the shop manager in charge of inventory?

4. What aspects of the control environment is affected by the companies decision to hold the physical inventory four days after year end?