Hale Nelson, CPA, is engaged to audit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition. As a result, Nelson has identified revenue recognition as an audit area of significant risk that requires special audit consideration.
a. Describe the implications of Nelson’s identification of revenue recognition as an area of significant risk.
b. Describe how Nelson might decide to react to the significant risk related to revenue recognition.