Question

I. What are two major controls for sales returns and allowances transactions? What are the control objectives for each?

II. For each of the following situations based on ASC606, indicate the audit evidence that should be obtained to determine whether revenue should be recognized or not in the current period:

The company you are auditing, Morgan Telecom, maintains an inventory of telecommunications equipment. Peaks Telephone Company placed an order for 10 new transformers valued at $5 million, and Morgan delivered them just prior to December 31. Morgan's normal business practice for this class of customer is to enter into a written sales agreement that requires the signatures of all the authorized representatives of Morgan and its customer before the contract is binding. However, Peaks has not signed the sales agreement because it is awaiting the requisite approval by the legal department. Peaks' purchasing department has orally agreed to the contract, and the purchasing manager has assured you that the contract will be approved the first week of next year.

Good Products is a retailer of appliances that offers “layaway” sales to its customers twice a year. Good retains the merchandise, sets it aside in its inventory, and collects a cash deposit from the customer. The customer signs an installment note at the time the initial deposit is received, but no payments are due until 30 days after delivery.

Taylor's Discount Stores is a discount retailer who generates revenue from the sale of membership fees it charges customers to shop at its stores. The membership arrangement requires the customer to pay the entire membership fee (usually $48) at the beginning of the arrangement. However, the customer can unilaterally cancel the membership arrangement and receive a refund of the unused portion. Based on past experiences, Taylor's estimates that 35 percent of the customers will cancel their memberships before the end of the contract.

Answer 1