Question

Which of the following statements about the Medicis fraud is false?

	a.	The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts.
	b.	EY did not properly evaluate Medicis' practice of reserving for most of its estimated product returns at replacement cost, instead of at gross sales price. It appears that EY accepted the company's basis for reserving at replacement cost when the auditors should have known that this approach would not be supported by the audit evidence.
	c.	In 2012, the PCAOB settled a disciplinary order censuring Ernst & Young (EY), imposing a $2 million penalty against the firm and sanctioning four of its current and former partners.
	d.	The PCAOB investigation revealed that by using replacement cost for the reserve, rather than gross sales price, Medicis' reported sales returns reserve were materially understated and its reported revenue was materially overstated.

Answer 1

Medicis fraud involved recording the product return estimates at replacement costs rather than sales price, thereby understating its liability to repay the customers to whom they have supplied the products. This reduced their liabilities and helped them report more than actual profits in the books,

Because of this fraud, EY was fined $2 million and three current and one former partner of the firm were sanctioned.

Based on the information given above, statements b, c and d are correct. The fraud is not related to doubtful accounts, so statement a.) is FALSE.