AICPA Publishes Revenue Recognition Guidance

By Julie Anne Dilley

In January 1999, the AICPA published Audit Issues in Revenue Recognition on its Web site (www.aicpa.org). The publication brings together in one source the audit and accounting guidance on revenue recognition for sales of goods and services in the ordinary course of business. Its primary objective is to help auditors fulfill their professional responsibilities with regard to auditing assertions about revenue. A related objective is to help other members of the financial community, including preparers of financial statements and audit committees, appreciate the importance of accurate revenue recognition. The publication—

• Discusses the responsibilities of management, boards of directors, and audit committees for reliable reporting of revenue. It summarizes deterrents to improper financial reporting that have been recommended by the National Commission on Fraudulent Financial Reporting (the Treadway Commission) and others including the Public Oversight Board and the Securities and Exchange Commission (SEC). Among the recommendations are an ethical "tone at the top," vigilant audit committee oversight of financial reporting, the internal audit function, and internal control.
• Summarizes key accounting guidance regarding whether and when revenue should be recognized in accordance with generally accepted accounting principles. The following pronouncements are among those discussed:

  - Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards   No. 48, Revenue Recognition When Right of Return Exists

  - SEC Accounting and Auditing Enforcement Release No. 108 on bill and hold transactions

  - Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and   Certain Production-Type Contracts

  - SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP   97-2, Software Revenue Recognition, With Respect to Certain Transactions

  - FASB Statement No. 57, Related Party Disclosures

  - Accounting Principles Board Opinion No. 22, Disclosure of Accounting Policies

• Identifies circumstances and transactions that may signal improper revenue recognition, including fraud risk factors that are particularly relevant to revenue recognition. Issues that may require special attention are discussed, such as related party transactions, side agreements (hidden arrangements with customers that may alter the terms and conditions of sales transactions in ways that preclude revenue recognition, such as granting a customer the right to return goods on more liberal terms than expressed in the original contract), and channel stuffing (a marketing practice to augment sales by inducing distributors to buy substantially more inventory than they can promptly resell, possibly resulting in greater than normal sales returns). The publication also lists specific examples of sales transactions that may be recorded improperly as a result of the absence of an agreement, lack of delivery, or an incomplete earnings process.
• Summarizes key aspects of the auditor's responsibility to plan and perform an audit under generally accepted auditing standards (GAAS). The auditor's responsibility to obtain knowledge of the entity's business and an understanding of the entity's internal control are discussed with an emphasis on matters relevant to management's assertions about revenue. Similarly, responsibilities under other auditing standards, including the following, are discussed with a focus on revenue recognition issues.

  - Statement on Auditing Standards (SAS) No. 82, Consideration of Fraud in a Financial   Statement Audit

  - SAS No. 45, Related Parties

  - SAS No. 67, The Confirmation Process

  - SAS No. 57, Auditing Accounting Estimates

• Describes procedures that the auditor may find effective in limiting audit risk arising from improper revenue recognition. For example, the publication discusses numerous analytical procedures relevant to assertions about revenue and describes substantive tests of details including revenue cutoff tests and vouching.

SEC staff applauded the release of the publication. Its development is one of several AICPA activities that mirror recent SEC initiatives to address "earnings management" practices that threaten the integrity of the financial reporting process. Audit Issues in Revenue Recognition will be available in a paperbound edition late in February 1999. To obtain a copy, call the AICPA Order Department at (888) 777-7077 and request product number 022506TL.