Revenue Recognition Essay Example

Revenue Recognition Essay Example Revenue Recognition Essay Revenue Recognition Essay The gross acknowledgment rule is a foundation of accrual accounting and one of the chief rules of GAAP. The gross acknowledgment rule is a set of guidelines that helps comptrollers to place when a gross event has taken topographic point and how to suitably enter hard currency exchanges before. during. and after the gross event. Harmonizing to the gross acknowledgment principal. gross must ( 1 ) be realized or realizable and ( 2 ) earned. in order to be recognized. Harmonizing to the SEC gross is realized when ( 1 ) Persuasive grounds of an agreement exists. ( 2 ) Delivery has occurred or services have been rendered. ( 3 ) The seller’s monetary value to the purchaser is fixed or determinable. and ( 4 ) Collectability is moderately assured. It is indispensable for the users of fiscal statements to cognize that the existent grosss are recorded and disclosed and non deceitful grosss. A restraint of GAAP that is relevant to the gross acknowledgment rule is the materiality rule. Fraudulent grosss will make misstatements that could hold a material consequence on the determinations of fiscal statement users. In 2002. WorldCom a telecommunication company. filed for bankruptcy. It was subsequently revealed that the company was involved with improper accounting in two major signifiers. First WorldCom inflated grosss to increase net incomes. thereby increasing stock monetary values. and increasing the satisfaction of stakeholders. Second. the company unostentatious line costs. Gross is of import to users of fiscal statements because it helps them measure a company’s public presentation and chances. WorldCom violated the gross acknowledgment rule by making an history that did non come from the operating activities of the company’s gross revenues channel. WorldCom named this fabricated agenda corporate unallocated history. This action was unethical and illegal. and gave the company a really bad repute. Harmonizing to paragraph 25 of PCAOB Auditing Standard No. 5. because of its importance to effectual internal control over fiscal coverage. the hearer must measure the control environment at the company. As portion of measuring the control environment. the hearer should measure the followers. Does management’s doctrine and operating manner promote effectual internal control over fiscal coverage? Has the company developed sound unity and ethical values. and more significantly. make all employees understand these values. peculiarly top direction? Does the Board or scrutinize commission understands and exercisings oversight duty over fiscal coverage and internal control? The control environment is what sets the tone for an organisation and is the foundation for all other constituents of internal control. It provides subject and construction and reflects the ethical values. unity and competences of the organisation. The control environment is really of import to effectual internal control over fiscal coverage to an audit client like WorldCom. because good designs can forestall and observe frauds and mistakes. But because WorldCom had such a hapless control environment. the company would necessitate more testing for an audit. This shows that the board did non exert inadvertence duties over fiscal coverage or internal controls. Harmonizing to PCAOB Auditing Standard No. 5 paragraphs 26 A ; 27. the top-side adjusting diary entries are when the executives record the entries. or when the comptrollers are asked by the executives to enter the entries. A valid usage of top-side journal entries is to apportion income or disbursals from a parent company to its subordinates. However. top-side accommodations can besides be used to improperly cut down liability histories and increase gross or lessening disbursals. Companies undergoing amalgamations. acquisitions or reconstituting are peculiarly susceptible to the deceitful abuse of top-side journal entries. Necessary grounds to obtain include gross revenues bills. recognition memos. client maestro file list. analytical processs. and accounting systems. In the auditing of WorldCom. we would necessitate seting journal entries. the MonRev spreadsheets detailing gross. the corporate unallocated agenda. the machine-controlled procedure for shutting and consolidating operational gross Numberss. and properness of a top-side diary entry made to their gross history. We would besides necessitate the mandate of the CFO or any officers. Good moralss is really important for an organisation. When ethical quandary are non recognized there could be serious effects that could take to imprisonment. In add-on. a company will lose its repute immediately. Assuming that Lorenzo and Taranto knew that the entries being proposed by Scott Sullivan were deceitful they should non hold recorded the diary entries as they were directed. If WorldCom had a control environment where it took more than three employees to cabal to perpetrate such a big fraud. and where the board checked on the corporate adjusting entries. this could hold been prevented. Employees should be trained and guided by a codification of moralss and observed with appropriate influences for misdemeanor