An organization should have control activities in place and operating to prevent, detect, and correct accounting errors. Auditors can perform tests of controls to determine whether company personnel are properly performing controls that are said to be in place.
Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff? A) Shipments lacking sales invoices and shipping documents. B) Excessive write-offs of accounts receivable. D) Lapping of year-end accounts receivable. Vouching debits from a sample selection normal balance of customers’ accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the control assertion of A) Existence or occurrence. Which of the following is an example of the valuation or allocation control assertion for sales invoices?
The existence of a subsequently executed side agreement may be an indicator that the original agreement was not final and revenue recognition was not appropriate. For example, a manufacturer of electronic security devices shipped products after the end of a quarter but manipulated the computer dating of internal shipping documents in order to include the sales in the quarter. Because this premature revenue recognition had an offsetting effect on the next quarter in which the sales should have been recorded, management contended that the practice wasn’t objectionable due to overall immateriality. The “immateriality” cover story is, in fact, a relatively common feature of fraudulent quarterly revenue overstatements.
A positive confirmation asks the customers to respond whether the balance is correct or incorrect. A variation of a positive to be recognized, revenues must also be realized or realizable and confirmation is a blank form. A blank confirmation doesn’t contain the balance; customers fill it in themselves.
C) Inquire of the sales manager regarding the accounts receivable terms. D) Send out positive confirmations on a large sample of these customers. In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
Revenue includes services performed under time and material, fixed price, and cost-reimbursement contracts. Revenues and costs associated with fixed price contracts are recognized using the percentage of completion method. The Services Segment estimates its percentage of completion based on attainment of project milestones.
Recognition Of Revenue Prior To Delivery
Vouch a sample of recorded sales from the sales journal to shipping documents. Negative form is used mostly when the risk of material misstatement is considered low. Alternative Procedures Often client’s customers are not willing or able to return the confirmation. They may not be able if, they are on a voucher system that lists payables by invoice instead of by vendor account. If this happens auditors have to perform alternative procedures to ensure existence. Sales orders, invoices, shipping documents 3. Correspondence files for past due accounts Review for Collectability Primary evidence gained from the confirmations relates to existence.
B) no reply to a negative confirmation request is received. C) collectibility of the receivables is in doubt. D) pledging of the receivables is probable. The SEC requires all of the following for revenue to be recognized except A) Cash is collected B) Persuasive evidence of an arrangement exists. C) Delivery has occurred or services have been rendered. D) The seller’s price to the buyer is fixed or determinable.
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C) Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected. D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers. A) One of the cashiers has been covering a personal embezzlement by lapping.
Revenues And Matching Expenses
The accounting method a company uses will determine whether it relies more heavily on realized income or recognized income. Pat’s Retail, Inc. sells clothing from its retail outlets. A customer purchases a shirt on June 15th and pays for it on a credit card. Pat’s processes the credit card but does not actually adjusting entries receive the cash until July. The credit card purchase is treated the same as cash because it is a claim to cash, so the revenue should be recorded in June when it was realized and earned. The EITF also indicated that the relative strength of each factor should be assessed against individual circumstances.
In this case, revenue is not recognized even if cash is received before the transaction is complete. The percentage of completion method is used when there is a long-term legally enforceable contract and it is possible to estimate the percentage of project completion, revenues and costs. The accounting principle regarding revenue recognition states that revenues are recognized when they are earned and realized or realizable .
- The terms of the arrangement require the customer to pay a monthly usage fee that is adequate to recover the registrant’s operating costs.
- Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
- Also, there must be a reasonable level of certainty that earned revenue payment will be received.
- For companies that don’t follow accrual accounting and use the cash -basis instead, revenue is only recognized when cash is received.
- A transfer of value takes place between a buyer and seller when the buyer receives goods in accordance to a sales order approved by the buyer and seller and the seller receives payment or a promise to pay from the buyer for the goods purchased.
Revenue is recognized when earned and payment is assured; expenses are recognized when incurred and the revenue associated with the expense is recognized. A customer reply on a positive confirmation says “We dispute the $250 charge. We believe it is excessive.” This confirmation A) provides evidence of existence. B) does not provide evidence of existence because the customer may refuse to pay the $250 charge. C) provides evidence that the account was inaccurately recorded.
One Comment On Revenue Recognition Principle
Acceptance provisions based on seller-specified objective criteria. Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations? The client requests alternative procedures be performed instead. Other procedures provide sufficient competent evidence. Analysts, therefore, prefer that the revenue recognition policies for one company are also standard for the entire industry. Revenue recognition principles within a company should remain constant over time as well, so historical financials can be analyzed and reviewed for seasonal trends or inconsistencies.
Retainage receivables represent amounts that are billed or billable to our customers, but are retained by the customer until completion of the project or as otherwise specified in the contract. Our retainage receivable balances are all current. Retainage receivables of approximately $229,000 and $11,000 as of December 31, 2015 and 2014, respectively, are included in the accounts receivable balance on the Company’s Consolidated Balance Sheets in the respective periods. During the nine months ended September 30, 2017, revenues generated from Entity C represented approximately 10%, of the Company’s total revenue. During the three and nine months ended September 30, 2016, revenues generated from Entity C represented approximately 15% and 14%, respectively, of the Company’s total revenue.
B) Increase the dollar threshold of vouching customer invoices. C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. D) Use more experienced audit team members to perform year-end testing. Which of the following controls is designed to meet the completeness assertion? A) Prenumbering invoices, shipping documents, and sales orders. B) Sales orders are approved by the credit department prior to shipping goods. C) The sale is to a customer on the approved customer list.
A small business owner can best offset the lack of separation of duties by A. B. C. D. Creating an internal audit department. Installing the latest computer equipment and software. Being actively involved in the accounting process. Relying on the external auditor to detect errors. Ask tax and consulting personnel who provide services to the client about their knowledge of management’s involvement in material transactions or with transaction principals. Accrued revenue—an asset on the balance sheet—is revenue that has been earned but for which no cash has been received.
C Impact Of A Registrants Adoption Of Fasb Asc Topic 606, Revenue From Contracts With Customers
B) Intensify the study of the internal control structure concerning the revenue cycle. C) Increase the assessed level of detection risk for the existence assertion. D) Inspect the shipping records documenting the merchandise sold to the debtors. ASC , “Revenue Recognition – Principal Agent Consideration” provides guidance regarding the accounting and financial statement presentation for certain taxes assessed by a governmental authority. These taxes and surcharges include, among others, universal service fund charges, sales, use, waste, and some excise taxes. In determining whether to include such taxes in its revenue and expenses, the Company assesses, among other things, whether it is the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where the Company does business.
Persuasive Evidence Of An Arrangement
Goods sold, especially retail goods, typically earn and recognize revenue at point of sale, which can also be the date of delivery if the buyer takes immediate ownership of the merchandise purchased. Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured. The accrual journal entry to record the sale involves a debit to the accounts receivable account and a credit to the sales revenue account; if the sale is for cash, the cash account would be debited instead. The revenue earned will be reported as part of sales revenue in the income statement for the current accounting period.
D) Other procedures provide sufficient competent evidence. The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because A) many customers merely sign and return the confirmation without verifying its details. B) recipients usually respond only if they disagree with the information on the request. C) customers may not be inclined to report understatement errors in their accounts. D) auditors typically select many accounts with low recorded balances to be confirmed. Tracing shipping documents to prenumbered sales invoices provides evidence that A) no duplicate shipments or billings occurred. B) shipments to customers were properly invoiced.
Further, the staff believes that the earnings process is completed by performing under the terms of the arrangements, not simply by originating a revenue-generating arrangement. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from A. B. C. D. An aging schedule of past due accounts which the auditor has tested. Correspondence with the client’s collection agency. Financial statements of individual customers. Revenue-recognition frauds have been at the core of many suits against auditors; similarly, such frauds have been uncovered during SEC and AICPA ethics and quality control inquiry investigations.
Accumulated depreciation and amortization as of September 30, 2017 and December 31, 2016 was $5,044,518 and $4,726,861, respectively. Hence, we can conclude that Walmart should only recognize the revenue from Jada only after full payment for the television is made and its delivery is provided. The bought product will only be delivered after full payment of the purchase price. FASB’s Lucas contends that “it’s difficult to craft what are retained earnings a rule that doesn’t catch some of the wrong fish in the net.” Companies must report transactions in a manner that reflects economic reality. The SEC is still deadly serious about SAB 101, even if the recent stock market meltdown lessens some of the importance of revenue recognition as a “hot issue.” A similar fall in stock price at another company shows just how sensitive the market is to changes in revenue expectations.
D) Invoice quantities are compared to shipment and customer order quantities. The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.