Information gathering and analysis: Does KCI have a potential loss

Information gathering and analysis: Does KCI have a potential loss contingency? Discuss procedures the auditors should perform to gather evidence about this situation.

King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors of KCI and CEO, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCI’s business is retail walk-in business, and the other 60% is regular customers where KCI delivers parts to their locations and bills these customers on account. During peak periods, KCI also uses part-time workers.

In mid-February 2023, while the December 31, 2022, audit was nearing the final wrap-up stage, KCI was contacted by the manufacturer of its most popular line of brake pads and rotors. The manufacturer notified KCI of a major defect recently discovered with its brake pads and rotors produced during August 2022 through November 2022. Several deadly car accidents have been attributed to the faulty brake parts, and the manufacturer is moving as quickly as possible to recall the affected parts. The manufacturer stated that KCI should pull the affected products off its shelves immediately and notify as many customers as possible who may have purchased the defective product. KCI management acts quickly and starts looking through its sales records to see which customers purchased the affected parts. KCI also contacts its attorney about the situation to begin discussions on how this might adversely affect KCI.

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