Essay about Revenue Recognition

763 Words Jun 26th, 2012 4 Pages
The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential for …show more content…
• Has the company developed sound integrity and ethical values, and more importantly, do all employees understand these values, particularly top management?
• Does the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control?

The control environment is what sets the tone for an organization and is the foundation for all other components of internal control. It provides discipline and structure and reflects the ethical values, integrity and competencies of the organization. The control environment is very important to effective internal control over financial reporting to an audit client like WorldCom, because good designs can prevent and detect frauds and errors. But because WorldCom had such a poor control environment, the company would require more testing for an audit. This shows that the board did not exercise oversight responsibilities over financial reporting or internal controls.
According to PCAOB Auditing Standard No. 5 paragraphs 26 & 27, the top-side adjusting journal entries are when the executives record the entries, or when the accountants are asked by the executives to record the entries. A valid use of top-side journal entries is to allocate income or expenses from a parent company to its…