This is due to the fact that the goods could be returned and this can substantially reduce the company’s earnings. In this case, the wholesalers had not sold all the goods. At the same time, the company did not know with certainty the amount of goods that could be returned. In this case, the conservatism principle could have been applied hence avoiding the recognition of revenues without providing appropriate allowances for the sales returns.
3. During the review of Ligand’s first-quarter financial statements for 2004, the Deloitte auditors learned that the company had significantly underestimated its future sales returns at the end of 2003. Discuss what responsibility, if any, this discovery imposed on Deloitte auditors. The auditors normally have a duty to scrutinize the quality of earnings of the company as indicated by the financial statements to evaluate their sustainability. This should also include assessment of the financial reports and their conformity to the economic reality. According to the international standards on auditing 240, auditors have a responsibility to consider errors and frauds in financial statements. They also have a responsibility to critically look at the quality of the company revenues and gains with a view to identifying risk factors within the process. (Pcaobs.org). Early recognition of revenues without following the due process set up by the accounting standards should raise alarm to the auditing