Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN: 9781337619455

Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher: Cengage Learning

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Textbook Question

Chapter 5, Problem 7RQSC

Professional guidance indicates that the auditor should consider revenue recognition to be high risk in planning an audit of a company’s financial statements.

a. Identify the activities that affect the revenue cycle.
b. Identify the financial statement accounts typically associated with the revenue cycle.

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Chapter 5, Problem 6RQSC

Chapter 5, Problem 8RQSC

Chapter 5 Solutions

Auditing: A Risk Based-Approach (MindTap Course List)

Ch. 5 - Prob. 1CYBK Ch. 5 - Prob. 2CYBK Ch. 5 - Prob. 3CYBK Ch. 5 - Prob. 4CYBK Ch. 5 - Prob. 5CYBK Ch. 5 - Prob. 6CYBK Ch. 5 - Prob. 7CYBK Ch. 5 - Prob. 8CYBK Ch. 5 - Prob. 9CYBK Ch. 5 - Prob. 10CYBK

Ch. 5 - Prob. 11CYBK Ch. 5 - Prob. 12CYBK Ch. 5 - Prob. 13CYBK Ch. 5 - Prob. 14CYBK Ch. 5 - Prob. 15CYBK Ch. 5 - Which of the following accounts would not be...Ch. 5 - Prob. 17CYBK Ch. 5 - Prob. 18CYBK Ch. 5 - Prob. 19CYBK Ch. 5 - Which management assertion is usually most...Ch. 5 - Prob. 21CYBK Ch. 5 - Prob. 22CYBK Ch. 5 - Prob. 23CYBK Ch. 5 - Prob. 24CYBK Ch. 5 - Prob. 25CYBK Ch. 5 - Prob. 26CYBK Ch. 5 - Prob. 27CYBK Ch. 5 - Prob. 28CYBK Ch. 5 - Prob. 29CYBK Ch. 5 - Prob. 30CYBK Ch. 5 - Prob. 31CYBK Ch. 5 - Prob. 32CYBK Ch. 5 - Prob. 33CYBK Ch. 5 - Prob. 34CYBK Ch. 5 - Prob. 35CYBK Ch. 5 - Prob. 36CYBK Ch. 5 - Prob. 37CYBK Ch. 5 - Prob. 38CYBK Ch. 5 - Prob. 39CYBK Ch. 5 - Prob. 40CYBK Ch. 5 - Prob. 41CYBK Ch. 5 - Prob. 42CYBK Ch. 5 - Prob. 43CYBK Ch. 5 - Prob. 44CYBK Ch. 5 - Prob. 45CYBK Ch. 5 - Prob. 46CYBK Ch. 5 - Prob. 47CYBK Ch. 5 - Prob. 48CYBK Ch. 5 - Prob. 1RQSC Ch. 5 - Prob. 2RQSC Ch. 5 - Prob. 3RQSC Ch. 5 - Prob. 4RQSC Ch. 5 - Prob. 5RQSC Ch. 5 - Prob. 6RQSC Ch. 5 - Professional guidance indicates that the auditor...Ch. 5 - Identify the accounts associated with the...Ch. 5 - Assume that an organization asserts that it has...Ch. 5 - Prob. 10RQSC Ch. 5 - Prob. 11RQSC Ch. 5 - Prob. 12RQSC Ch. 5 - Prob. 13RQSC Ch. 5 - List factors that might affect an audit firm’s...Ch. 5 - Prob. 15RQSC Ch. 5 - Prob. 16RQSC Ch. 5 - Prob. 17RQSC Ch. 5 - Prob. 18RQSC Ch. 5 - Prob. 19RQSC Ch. 5 - Prob. 20RQSC Ch. 5 - Prob. 21RQSC Ch. 5 - Prob. 22RQSC Ch. 5 - Prob. 23RQSC Ch. 5 - Prob. 24RQSC Ch. 5 - Prob. 25RQSC Ch. 5 - Prob. 26RQSC Ch. 5 - Prob. 27RQSC Ch. 5 - Prob. 28RQSC Ch. 5 - Prob. 29RQSC Ch. 5 - Prob. 30RQSC Ch. 5 - Prob. 32RQSC Ch. 5 - Prob. 33RQSC Ch. 5 - Prob. 34RQSC Ch. 5 - Prob. 35RQSC Ch. 5 - Prob. 36RQSC Ch. 5 - Prob. 37RQSC Ch. 5 - Prob. 38RQSC Ch. 5 - Prob. 39RQSC Ch. 5 - Prob. 40RQSC Ch. 5 - Prob. 42RQSC Ch. 5 - Prob. 43RQSC Ch. 5 - Prob. 44FF

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An important task ¡n the audit of the revenue cycle is determining whether a client has appropriately recognized revenue. a. What is the five-step process that companies should use in recognizing revenue? Why might the auditor need to do additional research and consider additional criteria on revenue recognition? b. The following are situations in which the auditor will make decisions about the amount of revenue to be recognized. For each of the following scenarios, labeled (1) through (6): . Identify the key issues to address in determining whether or not revenue should he recognized. . Identify additional information the auditor may want to gather in making a decision on revenue recognition. . Based only on the information presented, develop a rationale for either the recognition or nonrecognition of revenue. 1. AOL sells software that is unique as a provider of Internet services. The software contract includes a service fee of $19.95 for up to 500 hours of Internet service each month. The minimum requirement is a one-year contract. The company proposes to immediately recognize 30% of the first-year’s contract as revenue from the sale of software and 70% as Internet services on a monthly basis as fees are collected from the customer. 2. Modis Manufacturing builds specialty packaging machinery for other manufacturers. All of the products are high end and range in sales price from $5 million to $25 million. A major customer is rebuilding one of its factories and has ordered three machines with total revenue for Modis of $45 million. The contracted date to complete the production was November, and the company met the contract dare. The customer acknowledges the contract and confirms the amount. However, because the factory is not yet complete, it has asked Modis to hold the products in the ware house as a courtesy until its building is complete. 3. Standish Stoneware has developed a new low-end line of baking products that will be sold directly to consumers and to low-end discount retailers. The company had previously sold high-end silverware products to specialty stores and has a track record of returned items for the high-end stores. The new products tend to have more defects, but the defects are not necessarily recognizable ¡n production. For example, they are more likely to crack when first used in baking. The company does not have a history of returns from these products, but because the products are new, it grants each customer the right to return the merchandise for a full refund or replacement within one year of purchase. 4. Omer Technologies is a high-growth company that sells electronic products to the custom copying business. It is an industry with high innovation, but Omer’s technology is basic. In order to achieve growth, management has empowered the sales staff to make special deals to increase sales in the fourth quarter of the year. The sales deals include a price break and an increased salesperson commission but not an extension of either the product warranty or the customer’s right to return the product. 5. Electric City is a new company that has the exclusive right to a new technology that saves municipalities a substantial amount of energy for large-scale lighting purposes (e.g., for ball fields, parking lots, and shop ping centers). The technology has been shown to be very cost effective in Europe. In order to get new customers to try the product, the sales force allows customers to try the product for up to six months to prove the amount of energy savings they will realize. The company is so confident that customers will buy the product that it allows this pilot-testing period. Revenue is recognized at the time the product is installed at the customer location, with a small provision made for potential returns. 6. Jackson Products decided to quit manufacturing a line of its products and outsourced the production. However, much of its manufacturing equipment could be used by other companies. In addition, it had over $5 million of new manufacturing equipment on order in a noncancelable deal. The company decided to become a sales representative to sell the new equipment ordered and its existing equipment. All of the sales were recorded as revenue.

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