Question

1) If there is a completeness problem with cash receipts, are accounts receivable overstated or understated? Explain

2) How might the risk of material misstatement in the revenue process differ for a manufacturer of oil and gas field machinery equipment and a retail?

grocer?

3) Identify one or two financial ratios that you believe would be useful in identifying revenue recognition problems. Explain your reasoning.?

4)Explain a sound control over revenue recognition in the process of making credit sales for a manufacturing company.?

5) Identify a risk of fraudulent financial reporting in the revenue process. Describe a sound internal control that would detect and correct the misstatement on a timely basis.?

6) Explain an effective substantive test related to the cutoff of sales at year-end.?

Answer 1

Only first four questions are answered.

Answer to Question 1

If there is a completeness problem in cash receipts, this means cash receipt is not fully recorded. Cash receipt is a credited to accouns receivable. So, the account receivable balance shows lower credit. Hence, the account receivable is overstated.

Answer to Question 2

The oil and gas field machinery concerned entity has high risks of material misstatement due to inherent risks involved.

Whereas the retailer has lower risk of material misstatement due to lower inherent risks.

Answer to Question 3

The financial ratios that are useful in determining revenue recognition problems are-

1. Fixed Assets turnover ratio - It measures the level of sales for the fixed assets employed.
2. Profitability ratios- Gross profit ratio, net profit ratio also helps in determing the revenue recognition problems.

Answer to Question 4

Recognition of sales based on transport document such as bill of lading, etc.

The stage where this document is issued is the exact stage where sale must be recognized, since all the risks and rewards are transferred to the buyer.