The SEC has stated that revenue recognition should always be considered to be high risk in planning an audit of a company's financial statements.

Required

a. Identify the major accounting and operational processes that affect revenue.

b. Identify the other financial accounts normally associated with revenue recognition.

c. Assume management has identified effective controls over the recording of revenue transactions and the auditor concurs with that assessment:

i. What risks still might exist in the account balance if the controls over the recording of shipments has been determined to be adequate?

ii. Identify the direct tests of the revenue account that the auditor might still want to apply because the SEC has determined that revenue recognition is high risk.

d. The auditor is concerned that the client may have been involved in special contracts for goods that were shipped at year end that may have "non-standard" rights of return by the customer:

i. What controls should be in place to mitigate this risk?

ii. How would the auditor find out about the special contracts, i.e., what audit procedures should the auditor perform to identify the possibility that the special contracts might exist?