CASE RESPONSEORIGINAL EXAMPLE
Harbour & Co.
Original practice example
Revenue recognition
Issue
Harbour & Co. received a $24,000 customer deposit in December for equipment to be delivered in January. The controller recorded the full amount as revenue when the cash was received.
Analysis
The timing of the cash receipt alone does not establish that revenue has been earned. We need to assess the contract terms, the delivery arrangements, and the applicable revenue recognition criteria. In this case, the equipment remained at Harbour's warehouse at year-end.
Recommendation
Investigate when the customer obtains control of the equipment and whether any special delivery terms apply. If the recognition criteria are not met at year-end, reverse the revenue and record a liability for the customer deposit.
Inventory valuation
Issue
Management identified a batch of damaged inventory during the year-end count. The items have a recorded cost of $18,000, but the team expects to sell them at a reduced price.
Analysis
Obtain evidence supporting the estimated selling price and any costs needed to complete and sell these items. Compare the resulting estimate with the carrying amount and assess whether a write-down is required under the applicable reporting framework.
Recommendation
Document the estimate, discuss the proposed adjustment with management, and investigate the cause of the damage. An improved storage process could help prevent similar losses in future periods.
Internal controls
Weakness
The same employee creates new suppliers, enters invoices, and prepares payments. There is no independent review of changes to supplier banking information.
Implication
An employee could create a fictitious supplier or redirect a legitimate payment without the error being detected promptly. This increases the risk of financial loss and inaccurate accounting records.
Recommendation
Require an independent approver to review new suppliers and banking changes. Confirm banking details using a previously verified contact number, and separate supplier maintenance from payment approval wherever possible.
Original practice example