Case 1.10 Gemstar-Tv Guide International, Inc. Essay examples
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1. We are all familiar with the basic revenue recognition rule: revenue should generally be recognized when it is realized or realizable and when it is earned. Although seemingly simple, that rule can be difficult to apply, particularly in rapidly evolving high-tech industries. Revenue recognition within the software industry has been a complex and controversial issue since the inception of that industry during the latter part of the twentieth century. The FASB addressed that issue at length in Statement of Position 97-2 (pre-codification GAAP), which was released in October 1997. A more general discussion of revenue recognition can be found in the SEC’s Staff Accounting Bulletin No. 101 that was issued in December 1999. SOP 97-2…show more content… If your students have not studied several problem audits, consider focusing this question on the Gemstar case alone. That is, instruct your students to identify the key factors that contributed to the deficient audits of GTGI.]
--An aggressive client management team that is committed to fulfilling their company’s revenue and profit forecasts.
--A client that is experiencing declining profitability or recurring losses.
--A client that needs to raise additional debt or equity capital.
--Highly competitive conditions in a client’s market.
--A client that has engaged in a series of large and unusual transactions, particularly near the end of a financial reporting period.
--Weak internal controls that can be easily overridden by client personnel.
--An audit engagement team that lacks the proper degree of professional skepticism.
--One or more members of the audit engagement team lack the proper training to carry out their assigned responsibilities and/or are not supervised properly by their superiors.
--Lack of a proper degree of auditor independence. This condition is likely a product of other factors, such as the existence of a high profile client that the audit firm is intent on retaining. In the past, before the passage of the Sarbanes-Oxley Act, a common precursor to audit failures for large public companies was the provision of a large amount of non-audit services by such a company’s audit firm.
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