revenue recognition is a critical accounting policy to discuss with the audit committee.
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It affects the financial health and performance indicators of the organization. Show more…
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Text: Discussion: Maximizing Revenue Scenario: You have been hired to audit a nationally recognized financial guru. She sells subscriptions to her online coaching. Customers pay for a four-year service contract in advance. She has been recording the full payment as sales when the payment is received. During the year under review, she recorded $550,000 in sales under these contracts. In addition, she sells books on her website, but at the end of the year, she made a large shipment to a distributor and recorded it as a sale for the full retail amount of the shipment of $265,000. The distributor has the right to return any unsold merchandise. Also, she ran a promotion at the end of the year, a 90-day money-back guarantee, and she sold $180,000 of books under that promotion. Total revenues for the year included cash for books and services in the amount of $310,000 in addition to the above, for a total of $1.305 million in sales against about half a million of expenses (things like administrative costs, personnel, travel, promotion, and printing costs). So, she's showing a profit of over $800,000 before taxes. She is applying to borrow money to buy her own office complex, and several investors are eager to put money into her growing empire, but they want the financials reviewed first. Discussion Questions: 1. What are the legal, ethical, and accounting issues in this scenario? 2. What suggestions would you make, just based on this information? What other information would you want to have? 3. How would you present those suggestions to the owner? 4. If the owner declined to implement any of your suggestions, would you sign off on the financials (approve)? Why or why not?
Akash M.
Assume that during the audit of the public Chandler Corporation the following critical matter was identified and summarized for purposes of inclusion in the audit report. Critique presentation and details of the matter. Critical Audit Matter The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the boards of directors and that (1) relate to any accounts or disclosures related to the financial statements and (2) involve especially complex matters. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill Under generally accepted accounting principles, the company is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the balance of $12,000,000 as of December 31, 20X1 is material to the financial statements. In addition, management's assessment process is complex and highly judgmental and is based on assumptions, specifically [assume assumptions are presented], which are affected by expected future market or economic conditions, particularly those in India and Nepal. Accordingly, we disclaim an opinion on the goodwill. The company's disclosures about goodwill are included in Note 6.
When is it an appropriate accounting practice for a publicly traded corporation to use recognition in financial statements?
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