Auditing and Assurance Services 1st Edition by Iris Stuart

Exercise 6

Merck-Medco
Between 1999 and 2001, Merck-Medco recorded $12.4 billion of revenue that it will never collect. During this time, Merck included as part of revenue the copayments collected by pharmacies from patients even though it does not receive these funds. These copayments accounted for nearly 10 percent of Merck's total revenue during this time period.
The $12.4 billion represents the copayment, typically $10-$25 per prescription, paid directly to the pharmacies by customers using a prescription drug card from an insurance company. Merck reported expenses equal to $12.4 billion to offset the copayment revenue on the income statement. The net income that Merck reported was correct.
Suggest a substantive test of balances or of transactions that could be effective in detecting the revenue misstatement