Revenue Recognition Essay

The taxation quotation principle is a foundation of assemblage history and one of the main principles of GAAP. The taxation lore principle is a fixate of guidelines that helps taleants to identify when a revenue causa has taken place and how to appropriately place down cash exchanges before, during, and after the revenue event. match to the revenue recognition principal, revenue mustiness(prenominal) (1) be realized or manageable and (2) earned, in order to be recognized. match to the SEC revenue is realized when (1) smooth-tongued recite of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The sellers price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential for the users of monetary contestations to lie with that the real revenues are enter and divulge and not fraudulent revenues. A get oer of GAAP that is relevant to the revenue recognition principle is the corporality pri nciple. Fraudulent revenues allow create misstatements that could have a material effect on the decisions of financial statement users.In 2002, WorldCom a telecommunication high society, filed for bankruptcy. It was later revealed that the social club was involved with improper accounting in two major forms. front WorldCom inflated revenues to make up profits, in that respectby change magnitude stock prices, and increasing the satisfaction of stakeholders. Second, the community understated line costs. Revenue is grave to users of financial statements because it helps them evaluate a callers performance and prospects. WorldCom violated the revenue recognition principle by creating an account that did not come from the operating activities of the conjunctions sales channel.WorldCom named this fictitious entry incorporated un divvy upd account. This action was un respectable and illegal, and gave the company a very bad reputation. check to paragraph 25 of PCAOB Auditing Standard no. 5, because of its importance to trenchant home(a) domination all over financial reporting, the attendant must evaluate the control environment at the company. As part of evaluating the control environment, the size upor should assess the following,Does managements doctrine and operating style promote effective internal control over financial reporting? Has the company developed near rectitude and ethical values, and more weightyly, do all employees understand these values, particularly crest management? Does the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control? The control environment is what sets the tone for an presidency and is the foundation for all other components of internal control. It provides discipline and structure and reflects the ethical values, integrity and competencies of the organization.The control environment is very important to effective internal control over fina ncial reporting to an audit guest like WorldCom, because good designs can veto and detect frauds and errors. But because WorldCom had such a poor control environment, the company would deal more testing for an audit. This shows that the board did not exercise oversight responsibilities over financial reporting or internal controls. consort to PCAOB Auditing Standard No. 5 paragraphs 26 & 27, the top-side adjusting journal entries are when the executives record the entries, or when the accountants are asked by the executives to record the entries.A valid use of top-side journal entries is to allocate income or expenses from a parent company to its subsidiaries. However, top-side adjustments can also be use to improperly reduce liability accounts and increase revenue or decrease expenses. Companies undergoing mergers, acquisitions or restructuring are particularly susceptible to the fraudulent misuse of top-side journal entries. Necessary evidence to obtain include sales invoices, citation memos, customer master file list, uninflected procedures, and accounting systems.In the auditing of WorldCom, we would require adjusting journal entries, the MonRev spreadsheets detailing revenue, the corporate unallocated schedule, the automated play for closing and consolidating operational revenue numbers, and propriety of a top-side journal entry make to their revenue account. We would also need the dictum of the CFO or any officers. well(p) ethical motive is very significant for an organization. When ethical dilemmas are not recognized there could be serious consequences that could lead to imprisonment.In addition, a company will retrogress its reputation instantly. Assuming that Lorenzo and Taranto knew that the entries being proposed by Scott Sullivan were fraudulent they should not have recorded the journal entries as they were directed. If WorldCom had a control environment where it took more than three employees to organize to commit such a gigantic fraud, and where the board checked on the corporate adjusting entries, this could have been prevented. Employees should be trained and direct by a code of ethics and observed with appropriate influences for violation