You are a junior auditor working at a CPA firm and doing a review engagement for ABC Corporation which has sales of $2,000,000. Inventory is recorded at $125,000. Prior-year unaudited statements, prepared by the company without assistance from a public accounting firm, disclose that the inventory is based on historical cost estimates by management. You obtain the following facts:

The company has been growing steadily for the past five years.

The unit cost of typical materials used by the company has increased dramatically for several years.

The inventory cost has been approximately $125,000 for five years.

Management intends to use a value of $125,000 again for the current year-end financial statements.

The response is negative when you discuss with management the need to get a physical count and an accurate inventory.

Management is concerned about the effects on income taxes of a more realistic inventory. The company has never been audited and has always estimated the historical cost of inventory. Based on the inquiry and ratio analysis, you are concerned You are concerned about, based upon inquiry and ratio analysis, that a conservative evaluation would be $500,000 at historical cost.

The problem is serious because the statements appear to be unacceptable as stated. The client is not following appropriate accounting principles that are part of an acceptable financial reporting framework and the tax returns apparently are not being prepared correctly. Materiality is a critical consideration.

Required:

You want to resolve the problem. Your manager suggested four alternatives that you can forward to the management. These alternatives are laid out in the following table. You are required to evaluate the costs and benefits of each alternative by completing the following table.

Alternatives	Costs	Benefits
1. Convince the client to prepare proper financial statements by convincing him of potential consequences. Also, convince the client of the benefits of properly prepared statements.
2. Prepare a review as the statements now exist but include appropriate report qualifications. Do not do tax returns.
3. Withdraw.
4. Change to a compilation with full disclosure.