Essay About Revenue Account Of Longeta Corporation And Sale Transactions

Revenue Recognition and the Need for Professional Skepticism
IWA 7: Revenue Recognition and the need for professional skepticism
This case study is mainly about GAAP revenue recognition. I, as a staff auditor, concern
about two sale transactions while auditing the revenue account of Longeta Corporation. The first
one is $7 million transaction between Longeta and Magicon. Longeta recorded $5.8 million as
current revenue and $1.2 million as deferred revenue for its transaction with Magicon, an
intermediary that could resell Longeta products to the government purchasers such as U.S Air
Force. The second one is $25 million transaction between Longeta and Newstone Software, a
company that was incorporated by two former Longeta senior sales personnel.
First of all, the fact that these two major transactions happened right before the fiscal
year-end raises a concern of whether these transactions are valid, or they were part of the
management’s earning manipulation scheme. Per AU 316.54, revenue recognition is considered
as one of the most sensitive area according to GAAP, and the auditor should treat it as high fraud
risk in all audit.
Per ASC 606-10-25, an entity shall account for a contract with a customer when all five
of the following categories are met: 1.Both parties to the contract have approved the contract and
committed to perform their respective obligations 2. The entity can identify each party’s rights in
regard to the goods and services being to be transferred 3. The entity can identify the payment
term 4. The contract has commercial substance 5. The amount of payment for goods and services
are reasonably collectible.
In the first case, Longeta’s recording of the sale transaction violated GAAP revenue
recognition, and revenue from this transaction should not be recognized. The letter from
Longeta’s vice president of sales clearly listed all the terms and conditions for the transaction
between Longeta and Magicon. It also stated that both party would