Case 9.3 Longeta Corporation 

overs auditing revenue contracts.

You want to be thoroughly prepared for the meeting with the audit manager. Perform the following procedures to be certain you have all necessary information about the transaction’s treatment.

[1] The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently completed a joint project to develop a common revenue standard for U.S. GAAP and IFRS to improve revenue recognition practices and to remove inconsistencies and weaknesses in revenue requirements. The updated guidance is contained in the Accounting Standards Codification as Topic 606, “Revenue from Contracts with Customers.” Review that guidance to summarize the core principle for recognizing revenue and briefly describe the five steps needed to achieve the core principle. Also, describe how the core principle was not achieved in this situation.

[2] In your own words, explain the company’s reasoning for recording $5.8 million as current revenue while recording the remaining $1.2 million as deferred revenue. Also, document where on the financial statements the deferred revenue account would be presented.

[3] Assess the content of the separate letter issued by Longeta’s vice president of sales to Magicon. Document your conclusion about how the content of the letter affects or does not affect revenue recognition for Longeta for the year ended September 30, 2015.

[4] Given that the letter from the vice president of sales was not attached to or documented in the order letter submitted by Magicon to Longeta, document your conclusion as to the impact, if any, the vice president’s letter has on the accounting treatment for the transaction since it was not part of the order letter.

[5] Research PCAOB Auditing Standards on the PCAOB’s website (www.pcaob.org) to summarize the guidance for auditors in regards to their assessment of the risk of material misstatement related to revenue recognition. What do those standards require of auditors in regards to their assessment of risk related to revenue recognition?

[6] Auditing standards describe three conditions that are usually found to be present. What are those three conditions and what red flags, if any, might be present at Longeta?

[7] The separate letter from the vice president of sales was emailed and faxed to Magicon representatives. What would be the impact if Longeta’s vice president had only provided that information orally to Magicon representatives and not forwarded the information in written form?

[8] As of September 30, 2015, Magicon had only submitted the order letter. Document your conclusion about the impact on the accounting for the transaction if Longeta and Magicon (a) sign the reseller agreement within 30 days or (b) do not sign the reseller agreement within 30 days.

 

 

[9] Document your final conclusion about the accounting treatment of this transaction between Longeta and Magicon. Be sure to provide a basis for your conclusion.

PROFESSIONAL JUDGMENT QUESTION

It is recommended that you read the Professional Judgment Introduction found at the beginning of the book prior to responding to the following question.

[10] One of the environmental factors affecting judgment is the “rush to solve” judgment trap. Briefly describe the trap and how it applies to the situation affecting the recording of the sales transaction.

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