Auditing Case: Revenue Recognition
Revenue is the electricity that drives business. Revenue has been the starting point on every income statement generated, every sales meeting conducted, and is on every entrepreneur’s wish list. The basic concept for revenue recognition is that revenue should not be recognized until it is realized or realizable and earned. There are also four criteria must be met in order to recognize revenue: 1) persuasive evidence of an arrangement exists: Consider the substance of the transaction and not merely its form. Because the SEC believes that a sale has not taken place if a "sale" is only intended for demonstration purposes, or if the seller is obligated to repurchase the product at specific prices, or if the buyer can …show more content…
If the payment has been made, then the revenue should be recognized since the company meets the contract date and does not carry any obligations.
3. In this scenario, criteria 1, 3 and 4 have been met. However, the key issue here is that we have to determine is the right to return the merchandise for a full refund or replacement with one year of purchase, since Standish Stoneware grants each customer the right to return the merchandise within a year. The additional information the auditor may want to know is that how many of the merchandise that has been sold and not being returned for a full refund, because the company still has the obligation to customers within the year. Based on the information presented, the revenue of the company would be recognized only after the sale for one year.
4. According to this scenario, Omer Technologies only met criteria 1, 2 and 4. For criteria 3, they key issue is that to find out what is the price break made by the sales staff, otherwise, we will not know whether the seller’s price to the buyer is determinable or not. Additionally, the auditor may also want to know the exact price that the sales staff offered to their customers during the fourth quarter of the year. In conclusion, after the company provides the additional information, the revenue of the company would be recognized only after the warranty period of the product ended and that no product returns from the customers. 5. Base