Case 1.10 Gemstar-Tv Guide International, Inc.
1. We are all familiar with the basic revenue recognition rule: revenue should generally be recognized when it is realized or realizable and when it is earned. Although seemingly simple, that rule can be difficult to apply, particularly in rapidly evolving high-tech industries. Revenue recognition within the software industry has been a complex and controversial issue since the inception of that industry during the latter part of the twentieth century. The FASB addressed that issue at length in Statement of Position 97-2 (pre-codification GAAP), which was released in October 1997. A more general discussion of revenue recognition can be found in the SEC’s Staff Accounting Bulletin No. 101 that was issued in December 1999. SOP 97-2
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No doubt, when such factors are present, the likelihood of an audit failure or breakdown increases significantly. The final three items relate to auditors themselves. Audit failures are much more likely when members of the audit engagement team lack a proper degree of professional skepticism, competence (or adequate familiarity with the client’s business and industry), or independence. When the two sets of “audit failure” factors intersect, then the risk of a defective audit soars. Hopefully students recognize that the “quality control mechanisms” that are the most effective in preventing audit failures are the profession’s auditing standards and ethical mandates. In fact, the “ten commandments” of auditing, that is, the ten GAAS, are the principal guidelines established by the profession to prevent or, at least, minimize the likelihood of audit failures. Consider asking your students to identify specific measures that audit firms and auditors can use to avoid audit failures. After listing these items on the blackboard or overhead, relate that list to GAAS. You will almost certainly find that each of the items listed in some way correlates with one or more of the individual GAAS. For example, one of your students will almost certainly identify the workpaper review process as an example of an important audit quality control mechanism. Audit workpaper review relates directly to multiple GAAS, particularly the three field work standards.