Several years ago, a medical device company was charged with improperly recognizing approximately $1.5 million in revenue from bill-and-hold transactions. One distributor placed orders with the medical device company for a total of approximately 15,000 units of a particular product in April and July. As part of the agreement with the distributor, the medical device company invoiced the distributor for the total 15,000 units for more than $500,000 in September, but held the product at its own refrigerated facility until the distributor requested the product, which did not occur until March the following year. Yet, the company still recorded the revenue in the previous year.
1. What accounts would this fraudulent transaction affect?
2. What could an auditor do to discover the nature of the relationship between the company and its distributor regarding these products?