You have been assigned to the audit of Utopia Industries, Inc., for the year ended December 31, 20X1. The company makes components for communications and defense applications. To obtain an understanding of the methods of revenue recognition used by such businesses and the risks involved, you decide to review the SEC filings of other companies in the same industry.
a. Use the Internet to search the SEC’s EDGAR (Electronic Data Gathering and Retrieval System) for the 10-Ks of two companies that are in Utopia’s industry (Standard Industrial Classification Code—3812—Search, Detection, Navigational, Guidance, Aeronautical Systems). The URL for EDGAR is www.sec.gov/edgarhp.htm. You can obtain a list of these companies by searching for the number 3812.
b. Review the notes to the financial statements of the two companies and summarize their methods of revenue recognition.
c. Describe the audit risks that are inherent in the methods of revenue recognition used by the companies.