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Unformatted text preview: Case 04-1 Total Computer Inc. Audit Manager Tim Jacobs was reviewing the working papers for Total Computer Inc., a large, privately owned retailer of computer hardware in the United States. Tim was on-site at the clients headquarters and had only two sections to review: inventory reserves and accounts receivable. Inventory Reserves While reviewing the inventory working papers of Total Computer Inc., Tim focused on the lower-of-cost-or-market (LOCOM) inventory reserve, which had been identified as an area of audit risk. The working papers included a schedule prepared by the client showing beginning and ending balances, write-offs, and the current-year provision. Sarah Byrd (Audit Staff) summed the schedule and traced the ending LOCOM reserve balance into the general ledger without exception. Further, Sarah documented in a memo that she had held discussions with Betty Bingham, Controller at Total Computer Inc., to gain an understanding of the clients assumptions and judgments regarding the calculation of LOCOM inventory reserves. Betty prepared the LOCOM reserve on the basis of her extensive knowledge of the company and the computer hardware business as well as her discussions with Jerry Lee, Director of Marketing at Total Computer Inc. Sarah documented the following in her memo: Inventory is a diverse portfolio of computer hardware produced by several manufacturers. Total Computer Inc. consistently has experienced an average inventory turnover of 10 times per year. Using his knowledge of the marketplace, Jerry identified for Betty the products that are currently selling below cost....
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- Spring '11