Question

Your client Corp A is a company engaged in the production of heavy equipment and markets its products on a business to business (B2B) basis. Goods produced by Corp A are heavy equipment such as: Excavators, Bulldozers, Mobile Cranes, Motor Scrapers, etc. There are also a number of finished products in the form of heavy equipment which are self-used by Corp A. After several years of self-use, that heavy equipment is sold, which is in the fiscal year that you are currently auditing. Corp A recorded it as sales revenue which is increased their operating profit.

Question:

a. Do you think that recognize it as sales revenue is correct? Explain your answer!

b. What audit objectives relate to the above case! Explain your answer!

Answer 1

a. The heavy equipment self used by Corp A are considered as fixed assets for Corp A. Sale of a fixed assets should not be recognized as a sales revenue in the books of accounts as the sale is of a Fixed asset and not the inventory of Corp A. Sales revenue for an organization is recorded when the sale is done from the inventory of the company. Hence, recognizing sales revenue from sale of Fixed asset is not the accurate accounting treatment.

b. The objective of any audit is to ensure that the financial statements of the company show a true and fair view of the company's transactions.  It also includes recognizing the sales revenue completely and accurately. With the above accounting treatment of recognising the sales revenue from sale of a Fixed asset, the financial statement of the company do not demonstrate true and fair view of the business transactions. Hence, the auditor should get the transaction corrected as part of his audit observation.