Audit Case

In: Business and Management

Submitted By rdoty92
Words 1028
Pages 5
Accounting 440
Case 1

When auditors are determining when or how much revenue should be recognized, they call on a list of criteria in SABs 101 and 104 created by the SEC. The four main points that should be considered in making this decision are: 1. Persuasive evidence that an arrangement exists 2. Price must be fixed or determinable 3. Collectability must be reasonably assured 4. Delivery has occurred.
The first of this criterion is in place because the business must be able to show that a buyer has promised them revenue. The second means that the buyer and seller have agreed on the price. The third means that the seller can expect to get revenue. It is also important to know that unless a reasonable estimate of the amount of allowance for doubtful accounts can be made, revenue should not be recognized until it is possible to make an estimation or the entire payment has been received. And finally, ownership of the goods has transferred to the buyer and they have accepted them. These criteria are important in making sure that revenue is not recognized too early because financial statements need to be as accurate as possible. 1. AOL Software
The main issue to address for if AOL Software can recognize revenue is figuring out if AOL can use a 30%/70% split for recognizing revenue. Auditors should first find out why AOL decided to use the 30%/70% split. It should also be known if prices could be separated by software and Internet services, and what happens if customers go over 500 hours. From the information given, there is nothing that supports the 30%/70% revenue split. The delivery of the product and services is not a combined act because the service is provided for at least a year. Due to this, revenue should not be recognized immediately. Because the service portion happens monthly, AOL could recognize revenue at a monthly rate of…...

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