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Audit Memo

Essay by   •  August 1, 2011  •  Essay  •  793 Words (4 Pages)  •  2,037 Views

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Revenue Recognition

There is a substantial problem with Growth Electronics revenue recognition method regarding to its shipments to its Australian customers. Growth Electronics and Suntech Systems (Austrian company) agreed on billing as of the date the goods are shipped from Sidney to the customers' facilities. According to SAB 101, it emphasizes the two revenue recognition criteria: realized (or realizable) and earned. The SEC staff has also issued guidelines that the two criteria are met when all of the following criteria are established:

 Persuasive evidence of an arrangement exists.

 Delivery has occurred or services have been rendered.

 The seller's price to the buyer is fixed or determinable.

 Collectability is reasonably assured.

Growth Electronics has shipped the order to its Sidney facility, not to Suntech Systems facility. Therefore, Growth Electronics cannot recognize $4,677,000 of sales and receivables in its 2006 financial report. Growth Electronics' account receivables and sales are overstated for 2006.

Receivables

Regarding to Growth Electronics' estimate of Uncollectible Accounts Receivable for 2006, they use an aging schedule, applying different percentages based on past experiences to the various age categories which is consistent with U.S. GAAP regulations.

Inventory

Growth Electronics inventory valuation departs from GAAP regulations. Growth Electronics discloses that: "Inventory is carried at lower of average cost or market". According to GAAP, "Amendment of ARB No.43, Chapter 4, Inventory pricing:

Statement 6

 A. Market should not exceed the net realizable value(i.e., estimated selling price- cost of completion and disposal)"

Growth Electronics cannot use the "Inventory is carried at lower of average cost or market" to value its inventory. Average selling price is not net realizable value, since it does not deduct the cost of completion and disposal of inventory. Therefore, in this specific case, inventory may be overstated for 2006. Even if Growth Electronics were to use net realizable value, the company could only use such a measure if the current replacement cost of inventory is greater than its net realizable value.

Capital assets and leases

Capital asset is a type of asset that is not easily sold in the regular course of a business's operations for cash and is generally owned for its role in contributing to the business's ability to generate profit. Furthermore, it is expected that the benefits gained from

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