You are an auditor at a public accounting firm. The client you are dealing with is a transportation service company. This client in the last few years has reported a loss on his income statement and this year is the first year the accounting firm you work for audits this client, previously for several years it was audited by other accounting firms. Surprisingly, this client in the financial year you audited reported a double increase in performance from the previous year. If in the previous year the company reported a loss of USD 200,000,000, this year it reported a profit of USD 150,000,000. After further inspection, it was found that the reported profit came from B2B, Business to Business contract revenue between the client and a telecommunications service company related to the installation of communication facilities in the client's transportation fleet. This transaction reverses the client's income statement from the previous loss to profit. The employment contract agreement is made at the end of the t-1 period or one period before being audited by you and your public accounting firm. The employment contract has a term of up to 15 years with a contract value of USD 200,000,000. A member of the board of commissioners questioned the revenue recognition, saying that the company's management could not simply recognize revenue. Management insists that they have the right to recognize the contract as revenue because according to him the project has been running even since the end of the previous year period there has been a sample installation of the communication device in one company's fleet. Although they have not received the payment from their B2B partners, management argues that the accrual basis system used can recognize income before the cash is received. Question: a. Are you going to agree with management or with the commissioner? Explain your answer! b. Explain what kind of audit procedure and evidence that you are going to conduct in order to investigate this finding!
You are an auditor at a public accounting firm. The client you are dealing with is a transportation service company. This client in the last few years has reported a loss on his income statement and this year is the first year the accounting firm you work for audits this client, previously for several years it was audited by other accounting firms. Surprisingly, this client in the financial year you audited reported a double increase in performance from the previous year. If in the previous year the company reported a loss of USD 200,000,000, this year it reported a profit of USD 150,000,000. After further inspection, it was found that the reported profit came from B2B, Business to Business contract revenue between the client and a telecommunications service company related to the installation of communication facilities in the client's transportation fleet. This transaction reverses the client's income statement from the previous loss to profit. The employment contract agreement is made at the end of the t-1 period or one period before being audited by you and your public accounting firm. The employment contract has a term of up to 15 years with a contract value of USD 200,000,000. A member of the board of commissioners questioned the revenue recognition, saying that the company's management could not simply recognize revenue. Management insists that they have the right to recognize the contract as revenue because according to him the project has been running even since the end of the previous year period there has been a sample installation of the communication device in one company's fleet. Although they have not received the payment from their B2B partners, management argues that the accrual basis system used can recognize income before the cash is received.
Question:
a. Are you going to agree with management or with the commissioner? Explain your answer!
b. Explain what kind of
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