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Why Is Improper Revenue Recognition Important

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Revenue recognition consists of two factors which are being realised when products are exchanged for cash and being earned when an organisation has met the requirements to get its benefits. The accrual basis requires that revenue to be recorded in the income statement in period earned and not when cash when cash is collected (Perry, n.d).
Revenue is considered the most important factor in an organisation. Auditing revenue therefore requires significant considerations. PCAOB requires auditors to assume improper revenue recognition as a purpose of fraud. Professional skepticism therefore needs to be a vital characteristic for an auditor so as to catch any errors made in recognition of revenue. Improper revenue recognition has been identified as a frequent factor in financial reporting fraud. According to accountingweb (2010) fraud generally increase during times of economic downturn and 40% of frauds arise due to improper revenue recognition practices.
Revenue recognition can be approached with regards to materiality, whether the difference is material or not. There are particular conditions that increase the risk of misstatements which includes, complex revenue transactions, sale recorded before being delivered, major sales recorded at year end.
Material misstatements due to falsified financial reporting are generally as a result of overstatement …show more content…

The U.S generally accepted accounting principles and international financial reporting standards have different standards and therefore a need arises to have a common standard for all firms. The weaknesses with the current standard often lead to different accounting for similar transactions. The current IFRS does not have sufficient guidance in revenue recognition which made it complex while the current US GAAP is more industry specific and transaction specific which lead to conflicting revenue recognition outcomes (McConnell,

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