Lecture 2 *Which case required should I assess first? < it is important to rank the case issues on importance* Required 1 - help in preparing a preliminary audit plan Risk 5min Copy and paste case facts + explain the risk . How the risk leads to errors in F/S and what type of errors. " labs have limited grant funds to spend and are always looking for the fastest software, and therefore will switch providers if the pricing is more attractive or the software is more powerful." Therefore there is a risk that module inventory may not bevalued correctly because labs may not want to buy it and the price become obsolete. (Valuation + inventory) AEI is a new client therefore we are not familiar with the processes and there is a higher risk that errors in the overall F/S may be undetected. That industry is highly competitive and has many players therefore there is a risk that AEI revenue may be declining, and management may want to overstate revenue (occurrence) to meet results or their bonus clauses. Materiality 3min Approach 1min Required 2 - prepare a memo analyzing any new accounting issues that resulted from 2019 events that we should be keeping an eye for during our audit Issue- Should AEI have recognized the full $1,430,000 as revenuefrom the sale of modules and telephone service(important because itis depth > add case fact) when the money was received? AnalysisAccording to IFRS there are five steps to recognizing revenue. Identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue. Identifying the contract is met, both parties are agreeing to the transaction of providing the goods/service and the customer receiving the goods/service. Identifying the performance obligations, AEI provides two distinct goods met, one is the module and separately is the telephone support service. The transaction price is met as AEI states the cost of te module is from $500-5000. Allocate the transaction price, NOT MET, the module comes in two distinct goods, one is the module and the other is the 3 year telephone service. Revenue should be recognized distinctively based on their standalone prices of both goods being sold. Recognize revenue NOT MET, revenue is recognized as the bundle is sold however, revenue should be recognized as the performance obligation is met.
Recommendation (How much revenue and when does it need to be recognized > For all revenue recognition recommendations) Revenue should be recognized at a point in time in terms of the sale of the module aspect but at the time the performance obligation is performed in terms of the telephone support. The standalone selling price of the module is $1,300,000 and 130,000 for the telephone support service. The full $130,000 should be recognized at the end of the 3 year contract only then should the revenue based on telephone service obligation should be recognized. The adjusting J/E is as follows: Dr Revenue 130,000 Cr unearned revenue 130,000 Issue- Should AEI have capitalized all expenses incurred on themodule nuclear project?
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