You have just finished the audit field work of EyeSore Optics, a publicly held optical equipment manufacturing company. EyeSore has a manufacturing subsidiary in Shenzhen, China. Your firm did not audit the subsidiary but is relying upon the audit opinion of a local CPA firm in China. Approximately 40% of Eyesore's equipment is produced by the subsidiary in China, and shipments are made world-wide from the China facility. The company provides a one year warranty on all equipment sold. This morning's newspaper had an article about a lawsuit just filed against your client. The lawsuit alleges, among other things, that the optical equipment produced by the subsidiary is defective and causes patient's eyes to deteriorate after getting corrective care with the equipment. As a result of the lawsuit, in addition to possible liability to injured patients, the company could be receiving returns of equipment or warranty claims to correct the issues. The company's CEO issued a statement indicating that the lawsuit is just another get rich quick scheme of greedy lawyers and that the lawsuits are baseless and without merit.
Instructions:
Please prepare a memorandum discussing the issues involved and how the newly discovered issues should be addressed in finalizing the audit.