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PC$-$Clone Inc.

Julie Madison, CPA, is the manager in charge of the audit of PCClone Inc., a closely$-$held manufacturer of personal computers. The company has experienced explosive growth in sales and profits since it was established three years ago.

Sam Lee, the senior on the audit, has extensively analyzed the company's finished goods inventory. Julie's review of his work has identified what may be a serious problem. Total finished goods at PC$-$Clone increased to ten million dollars from seven million dollars last year, an increase not unexpected given the sales increase during the year. Moreover, during the fourth quarter, PCClone began shipping personal computers using the latest microprocessor $($fifth generation$)$ available on the market.

Julie is concerned because the finished goods inventory includes a significant nutmber of computers based on the fourth$-$generation microprocessor chip. These machines are nearly obsolete by industry standards, and their market

generation machines, is in line with manufacturing costs and current market prices. The $$1\mathrm{.}5$ million valuation of parts, supplies and goods in process also appears reasonable.

If Julie's inventory analysis of the fourth$-$generation machines is correct, PC$-$Clone faces an inventory writedown and a pre$-$tax profit adjustment of one million dollars, a material amount in relation to net income. Julie realizes a million$-$dollar inventory write$-$down may create some tension between herself and PC$-$Clone's managers. She declines to join staff for lunch, opting instead to prepare a more detailed analysis of the fourth$-$generation machines, tracing the data back to original documents and manufacturing records.

Julie Madison brings important knowledge to her position as audit manager at the accounting firm Kramer and Hernandez, LLP$.$ Since joining the firm five years ago, Julie has established herself as the in$-$house expert in microcomputers. Her undergraduate

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