You have been assigned to the audit of Oshkosh Truck Corporation. The company is the leading manufacturer of fire trucks and heavy duty army trucks. All of the basic components are warranted for 100,000 miles or 4 years, whatever comes first. There is a different warranty if the trucks are used in desert lands and that warranty is for 40,000 or 18 months, whatever comes first.

Required

a. Identify the components of an information system that Oshkosh Truck should establish to develop an estimate of the warranty liability and warranty expense.

b. Assume the company established an information system to your specifications described in part (a).Write an audit program to audit the accuracy of the process that would provide audit evidence on the reasonableness of the warranty expense and warranty liability account.

c. Assume that last year, 60% of the trucks sold to the army were designated for use in the Middle East and thus only carried the 40,000 miles or 18-month warranty. Explain how this change would affect the recognition of the warranty expense and liability account.

d. Assume that the warranty liability has been growing over the past few years because actual warranty expenditures have been significantly less than estimated. Assume there has been no significant decline in the quality of the vehicles produced. (i) What information would the auditor gather to determine whether or not the liability might be materially overstated? (ii) If the auditor concludes the liability is materially overstated, what is the proper accounting? The company proposes to reduce the warranty expense this year and in coming years until the warranty liability is not overstated.'