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The SEC charged Midisoft Corporation with overstating revenue in the amount of $$458,000.$ The overstatement occurred because the company recorded sales for products that had been shipped, but at the time of shipment, the company had no reasonable expectation that they would be paid for the products. In the end, they accepted most of the shipped product as sales returns.

Apparently, Midisoft$$s distribution agreements allowed the distributor the opportunity to return product to the company for credit whenever the distributor believed the product was unable to be sold. In FY $1994,$ the accounting personnel submitted a proposed allowance for future returns that was too low given the returns Midisoft received in early $1995.$ Furthermore, management knew the exact amount of returns affecting FY $1994$ prior to the time when the independent auditors finished their $1994$ audit. If Midisoft had accurately revised the allowance for sales returns, the amount of net revenue reported for FY $1994$ would have been significantly reduced. Instead, management devised schemes to conceal the true amount of the returns, including preventing the auditors from examining the location where the returned goods were stored. Additionally, accounting personnel altered computer records to support a reduced level of returns.

Questions

Imagine that you are the independent auditor of Midisoft. The audit plan outlines specific testing procedures to assess the fair representation of the Sales Returns and Allowances and Accounts Receivable accounts. In terms of strategic reasoning and the details provided in the case, what would be your actions if you only employ zero$-$order reasoning?

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