Question

(1) What do we mean by revenue recognition? What does GAAP say about proper revenue recognition?

(2) Why is the audit of revenue recognition riskier for a new company?

(3) What are some justifications for not using confirmations of accounts receivable on a particular audit?

Answer 1

1) Revenue Recognition is a process of realizing income for the product or services provided by the companies. Revenue is very important aspect for the company and hence it is important to recognize the revenue as when its recognition criteria is fulfilled as per GAAP.

2) Audit of Revenue recognition involves the following procedure:

i) reviewing revenue in the income statement

ii) verifying account receivables in the balance sheet

iii) going through the contractual agreement of the sales transactions

iv) checking the sales files for invoice evaluation and ensuring the correction of amount and other details like date of events.

v) gathering external balance confirmation from the customer for the account receivable balance

well all above procedure fails if the management is inexperience and makes accounting errors and to conduct necessary adjustments and accounting estimates.

3) Following are the justification for not using the confirmation of accounts receivable on a particular audit

i) In an audit of company which majorly deal in cash and Accounts receivable are immaterial for the audit

ii) Where the relationship between buyer and seller is such that the use of confirmations would be ineffective.

iii) When the auditors inherent and control risk is low and he had gathered sufficient audit evidence by following alternate audit procedure.