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This Audit Guide provides the latest information on auditing issues involving revenue recognition, and specifically those issues affecting the computer software and high-technology manufacturing industries. Updated with conforming changes as of March 1, 2008, it includes guidance in planning and performing audits under the risk assessment standards (SAS Nos. 104-111). This edition of the guide has also been conformed to reflect the Defining Professional Requirements standard (SAS No. 102).
The guide summarizes applicable requirements and practices, and delivers "how-to" advice for handling audit and accounting issues common to both the computer software and high-technology manufacturing industries. It describes the conceptual basis for revenue recognition, contract accounting, software revenue recognition, accounting for bill and hold sales, sales of real estate, and includes discussion of other relevant financial statement considerations. The guide covers the following new pronouncements:
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Revenue recognition continues to pose significant audit risk to auditors and has contributed to perceived erosion in the integrity of the financial reporting process. In recent years, several high-profile incidents of improper revenue recognition attracted the attention of the business media and led to unflattering coverage. A substantial portion of recent litigation against accounting firms reported to the AICPA Securities and Exchange Commission (SEC) Practice Section Quality Control Inquiry Committee cite revenue recognition issues. In March 1999, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released Fraudulent Financial Reporting: 1987–1997, An Analysis ofU.S. Public Companies. The report examines incidents of fraudulent financial reporting alleged by the SEC in Accounting and Auditing Enforcement Releases issued between January 1987 and December 1997. More than half of the frauds involved overstating revenues by recording them either fictitiously or prematurely. In August 2000, the Public Oversight Board's Panel on Audit Effectiveness, established in October 1998 in response to a request by the SEC, published its final report. The report included recommendations that the Financial Accounting Standards Board (FASB) and the AICPA's Auditing Standards Board (ASB) provide additional guidance on revenue. On May 1, 2002 the Public Oversight Board terminated its operations and the SEC Practice Section of the AICPA ceased existence on December 31, 2003, transferring is operations and oversight responsibility to The Center for Public Company Audit Firms, which commenced operations on January 1, 2004. Its membership is voluntary. On January 30, 2007, the center changed its name to "The Center for Audit Quality." More information can be found at www.thecaq.org.
The implications are wide reaching. Investor confidence has driven the unparalleled success of the U.S. capital markets, and a key component in creating that confidence is the confirming role of audited financial statements. In this guide, the AICPA's intent is to help auditors fulfill their professional responsibilities with regard to auditing assertions about revenue. This guide—The primary focus of this publication is revenue recognition for sales of goods and services (other than lending activities) by for-profit entities in the ordinary course of business. Revenue recognition for governmental and not-for-profit entities is beyond the scope of this publication. The FASB has an active comprehensive revenue recognition project on its agenda. The objective of this project is to develop a comprehensive statement on revenue recognition that is conceptually based and framed in terms of principles. This project intends to (a) convergeU.S. and international standards on revenue recognition, (b) eliminate inconsistencies in the existing conceptual guidance on revenues, (c) provide conceptual guidance that would be useful in addressing revenue recognition issues that may arise in the future, (d) eliminate the inconsistencies in the existing authoritative literature and accepted practices, (e) fill the voids that have emerged in revenue recognition guidance in recent years, and (f) establish a single, comprehensive standard on revenue recognition. Although the FASB plans for this statement to apply to business entities generally, it might later decide to exclude certain transactions or industries requiring additional study. The FASB's goal is to issue a due process document in the second quarter of 2008 covering two models, including concepts-level and standards-level revenue recognition guidance. Readers should be alert to the progress of this project because it may affect the accounting described in this guide.
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