You are an external auditor for LLP and Associates. You are currently working on the audit of Paradise Pharmaceuticals, a national leader in diabetes medication, for the year ended December 31, 2022. This audit is particularly important as Paradise Pharmaceuticals is under discussion to be purchased by Diamond Drugs, an international pharmaceutical conglomerate. Paradises shareholders have voted almost unanimously in favor of the acquisition so it is important to Paradises board and management that the audit goes smoothly.

You are currently reviewing Paradises accounting for research and development costs. During the year, the company expensed $2,500,000 in research costs. It capitalized $4,200,000 in development costs related to its newest drug, InsulNow, a new long-acting insulin medication that the company believes will improve the lives of diabetic patients. Appendix 1 provides a breakdown of the capitalized costs related to InsulNow.

The following is your conversation with Perry Hull, Paradise's Vice-President for Product Development.

Perry Hull (PH): I hear you have some questions about the development of InsulNow. You know, this product is really going to improve the lives of lots of people. We think weve reached a real breakthrough here.

You (Y): Great. Tell me about your plans for the drug.

PH: We think this drug will hit the market in 2026. Were still working out some kinks in terms of dosing and delivery, but were fairly confident that we can complete the project. We have the best scientists in the country on our team.

Y: Do you think there is a market for this kind of drug?

PH: Absolutely. This drug will allow diabetics to inject themselves with insulin once a month, whereas some diabetics now have to inject themselves weekly or even daily. Weve talked to some of the major pharmaceutical chains, and theyre interested in carrying the drug as soon as it becomes available.

Y: Have you run into any regulatory hurdles?

PH: Of course, but thats par for the course with this type of drug. There were some serious side effects during our initial round of clinical trials. However, we changed the formulation a bit, and those issues disappeared. Weve made Health Canada aware of the issues and our changes. They seem happy with everything so far.

Y: Thinking big picture, how much do you think you have left to spend on this drug before its ready for market?

PH: Well, thats a bit of a sore point around here. Were not exactly sure. Some estimates say that it's $2M, others say that it's $10M. Either way, Ive talked to the board, and theyre fully behind this product. We have enough money to pay for the remaining development either way. Its just a matter of budgeting. But financially, supporting InsulNows development is everyones priority.

Y: Is the problem that you cant measure development costs or dont know how much work is left?

PH: Its not a measurement project. We implemented a new IT system that year that has been very helpful. The bigger question mark concerns how much additional testing we must do to satisfy Health Canada. I know this drug will eventually make it through the regulatory process; its just a matter of money and time.

Required: Write a memo describing the accounting issue at Paradise Pharmaceutical (through issue, user, handbook analysis, conclusion, and quantification) and recommending a course of action