In the year 2002, the US reached a land mark decision when the Sarbanes Oxley act was finally affected into law which principally changed the way auditing and financial reporting was being conducted. This act was prompted by high level frauds that public companies engaged in with regard to financial reporting and auditing practices. The act therefore recommended the setting up of a Public accounting Oversight board which was mainly to conduct regulatory and supervisory roles in auditing public audit firms and individual auditors. This was done through establishment of proper quality control measures on the work of auditors to minimize the audit risks that firms could face while conducting their work. The Ligand Pharmaceuticals case presents a perfect situation where the Sarbanes Oxley act was violated and required the enforcement of the law by the PCOAB. The questions that follow will therefore try to address the auditing provisions that were brought by the SOX, the role of the individual auditors and the audit firms under the new act, and the responsibility of PCAOB in enforcing the law.
1. Discuss the accounting standards and concepts that dictate the proper accounting of sales returns. Revenue recognition is one of the major problems that businesses normally face as there are many ways of recognizing revenues. They may include during production, when production is finished, at the point of sale, when cash is collected, and finally after the sale has been made. Most companies recognize revenues at the point of sale where there is transfer of ownership of the product from the seller to the buyer. But at certain points, the sales are normally done with a right of return due to several reasons. This leads to the creation of sales returns which basically reduces the benefits of the sales process as the seller will be forced to refund the equivalent amount returned. According to SFAS 48, a specific process is used in recognizing revenues with the right of return....
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