2024 – You are the senior auditor assigned to the team performing an audit for Restorative

You are the senior auditor assigned to the team performing an audit for Restorative Pharmaceutical Corporation (RPC), a 10-year-old publicly held corporation listed on the New York Stock Exchange which specializes in anti-aging products such as vitamins protein infused beverages, and dietary supplements. RPC’s corporate office is located in San Diego, CA.

The audit firm’s lead and senior audit manager and firm partner, Scott Payne, CPA, has requested that you develop two audit/internal control procedures which address the following issues which emerged during the past three reviews of RPC:

1. The company has an equal balance of equity and debt which compose its capital structure. It is subject to a number of debt covenants, including its current ratio, which should be maintained above 1.5 per the debt covenant. The year-end current ratio attained is 1.45. There is no opportunity to refinance short term debt and reclassify liabilities to ameliorate the ratio.
2. A number of sample products are provided to fitness centers, health fairs, marathons, and charitable walking events. A significant stock sample pull amounting to $200,000 for the New York marathon was not recorded as an inventory reduction for this promotional event, and was discovered during the physical inventory at year end.