Apex is a private company that manufactures pharmaceutical drugs. It is now December 15, 2020, and you are planning to attend the December 31 inventory count. Apex’s year-end is December 31, 2020. During 2020, one of Apex’s largest customers, Ontario Hospital Network (OHN), did not renew its contract with Apex to supply naloxone, a drug that reverses narcotic overdoses. Because OHN was a longstanding customer, Apex had already manufactured a significant quantity of naloxone based upon OHN’s usual purchasing pattern. Given the current opioid epidemic, the drug is in short supply. However, most of Apex’s supply of naloxone has an expiration date of January 31, 2021. As a result, management is attempting to sell the naloxone to hospital pharmacies at a discounted rate. However, because the sales are on condition of no right of return, many are hesitant to purchase the drug because it is difficult to predict if it will all be used prior to January 31. Drug regulations require pharmacies to throw away all their expired drugs. Apex management has also approached the Ministry of National Defense, which maintains a large stockpile of drugs for its armed forces. Although government regulations require pharmacies to throw away expired drugs, the Ministry is not required to follow these regulations. Instead, it maintains a program to test the quality of the drugs to determine if the end dates can be safely extended. Naloxone is a drug in the government’s stockpile that has an extended expiration date. Management is in negotiations with the Ministry regarding purchasing the naloxone with the January 2021 expiration date. It is likely that negotiations will not be completed until January 2021. Based on facts depicted in the case, identify the relevant management assertion that is at most risk of being misstated:
1) Valuation
2) Cutoff
3) Existence
4) Rights and Obligations
5) Completeness
6) Classification
a. Explain why the assertion is at risk.
b. Propose an audit procedure to test the assertion you chose in Part a.