Back dating invoices
Most of the techniques that CPAs can use to detect premature revenue recognition are textbook audit procedures.
The trick is to apply the proper degree of professional skepticism in interpreting the results.
According to GAAP, revenue is recognized when the earnings process is complete and the rights of ownership have passed from seller to buyer.
Examples of rights of ownership include: possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.
It normally involves one of two basic techniques: recording revenues early and/or recording expenses and liabilities late.
The schemes for late recording of liabilities mirror those of early revenue recognition, so we will cover only the latter topic.
Adequate internal control involves the following segregation of duties: order entry, shipping, billing, accounts receivable detail and general ledger.
In more than a few cases, companies—around the time of an audit—have shipped merchandise to private warehouses for storage and counted those shipments as sales.
(A variation of this technique is failing to record returns and allowances in the proper period.) Most frequently, accounts payable personnel are told to hold all unpaid bills until the beginning of the next accounting period.
Often, the unpaid invoices are simply secreted in a desk or filing cabinet, out of sight of the auditors.
Proper accounting cut-off tests prevent most of these problems, but not all.
A Boca Raton, Florida, company programmed its time clocks to stop at exactly am on the last day of each quarter. Alert auditors uncovered the scheme when they noticed a batch of time cards all stamped with the same date and time.