Basics of Revenue Recognition Audits

Revenue Recognition accounting is a process that depicts how sales transactions are recorded by a company in financial statements. While recording revenue, companies are mandated to comply with Generally Accepted Accounting Principles (GAAP). As per GAAP, in order to book a sale as revenue, the revenue should be recognized initially. Consequently, for a revenue to get recognized, it should be Earned and Realizable Revenue.

It reviews the accounting techniques of revenue recognition that are adopted by a company. This audit thus assures that the recorded information is compliant with National Accounting Standards which stand mandatory for a firm.

Revenue Recognition Audit procedures:

For a successful Revenue Recognition Auditing process, Planning is a key element. This process thus initiates with analyses of revenue recognition policies and techniques of a company. Thus ensuring the company’s compliance with the desired audit procedures. After satisfying their doubts, the auditing comes to the second level that involves the analyses of contracts of that year. Material Contracts are then separated from the lot. Auditors invest their time to test whether those contracts are recognized aptly. Along with this, they ensure that the financial statement contains receivable and deferred accounts. Besides reviewing the Material Contracts, auditors also pay heed to the one which is not material to ensure that even they recognize the revenue aptly.

Important Aspects of Revenue Recognition Audit:

Reviewing General Ledger:

When an Auditor/Accountant analyzes a General Ledger it provides them with a lot of substantive evidence and thus initiates lesser procedural tests. General Ledger is reviewed to have knowledge as to how the sales are recorded in that particular firm. The information that concerns Revenue Recognition Audit includes the sold goods, the date when it was delivered and the mode of payment used to do so. It ensures that General Ledger is in accordance with the actual sale transactions of the firm. While auditing, even the Revenue Recognition Policies of a company can also be considered.

Analysing the Financial Statements:

For a detailed overview of the company’s finances, auditors look out for financial statement of an organization. Then a comparison follows between General Ledger and the statement deduced, to look out for dissimilarity that exists. Auditors are well acknowledged about the importance of financial statement; as the stakeholders evaluate a firm by the information provided by that.

Combating Risks in Receivable Accounts:

Accounts of high-profit sales of a firm can be studied by an auditor in Receivable Accounts. The information mentioned by them is cross-checked by the auditors with the original sale invoices. Primary risk that exists is that the net receivables might be overstated, because either receivable have been overstated, or the allowance for uncollectible accounts has been understated. Revenue Recognition Audit ensures that the company’s account balance mentioned is legitimate.

Accrued/Deferred Revenue:

While recording revenue, firms may incorporate accrual or deferrals. Auditors stay skeptical regarding accruals and deferrals to ensure that the real transactions are mentioned and do not contain wrong invoices.

What are the Prerequisites for a Revenue Recognition auditor?

An Auditor is required to have complete knowledge of complications prevailing in revenue recognition’s auditing and accounting. Active participation of employees should be fostered by the auditors for smooth auditing.

Internal control in an organization is a continuous process to collect, analyze and update information during an audit. Thus mandating internal control; as the responsibility of an auditor. An Auditor then evaluates the appropriateness of finances.

An Overview of Initial Coin Offering (ICO)

ICO is a means of raising funds in unregulated means for different cryptocurrency ventures. It is something that startups use so as to bypass the regulated and rigorous capital raising process that banks and venture capitalists require. In such a campaign, a given percentage of the cryptocurrency is sold to the project backers very early for other cryptocurrencies or legal tender.

How it is done

When a firm wants to raise money using the initial coin offering, there needs to be a plan on white paper stating the details of the project. It should outline what the project is about, what the project needs, what it aims at fulfilling completion. It should also state the money that will be needed so as to undertake the whole venture and how much pioneers will get to keep.

The plan also has to mention the kind of currency accepted and how long it intends to run the campaign. During such a campaign, the supporters and enthusiasts of the initiative will buy the cryptocoins using virtual currency or fiat. The coins are called tokens and are very similar to company shares that are sold to investors during IPOs. If the minimum funds required are not reached, then the money is refunded and the whole ICO is then considered not successful. When requirements are met within a set timeframe, the cash can be used to initiate the scheme or even complete it if it was still progressing.

The investors who take part in the project early are mainly motivated to buy crypto coins hoping that the plan will be successful and after launching they will get more value from it. There have been very successful projects of this kind in different economies and that is one main thing that motivates investors.

Similarities

ICOs can be compared to crowdfunding and IPOs. Just like the IPOs, a stake has to be sold by a startup company so as to come up with funds that will aid the operations of such a company. The only difference is the fact that IPOs deal with investors while ICOs work closely with supporters who are very keen about new projects just like the crowdfunding event.

However, ICOs are different from the crowdfund in the sense that the backers of ICOs are usually motivated by the fact that they may get a great return on the investment. The funds raised through crowdfunding are basically donations. It is for this reason that ICOS are referred to as crowd sales.

There have been many successful transactions so far. The ICOs are an innovative tool within our digital era. However, it is important for investors to take precaution since there are some campaigns that can turn fraudulent. This is due to the fact that they are highly unregulated. Financial authorities do not take part in this and if you lose funds through such initiatives, it is hard to follow up so as to get compensation.

Central Banks, Financial System and the Creation of Money (and Deficit)

In the market economy, the financial system gives money from the positive savers (i.e. depositors) to the negative savers (i.e. people with shortage of funds which need loans to buy property etc.). Furthermore, the financial systems facilitate non-cash payments. from individuals or legal entities.

The financial system has by law a monopoly of services. Only banks can accept deposits, only insurance companies can provide insurance services and mutual funds management can be done better by a large bank rather than by an individual investor.

How money is created

In the past, one of the reasons the ancient Greek states were strong was the ability to create their own currency. In the times of Pericles, the silver Drachma was the reserve currency of that era. The same applied for the golden currency of Philippe from Macedonia. Each of these currencies could have been exchanged with a certain amount of gold.

Nowadays, Fed creates USD and ECB Euro which both is fiat money I.e money with no intrinsic value that has been established as real money by government regulation and we, therefore, have to accept it as real money. Central banks circulate coins and paper money in most countries that they are just 5%-15% of the money supply, the rest is virtual money, an accounting data entry.

Depending on the amount of money central banks create, we live in a crisis or we have economic development. It should be noted that central banks are not state banks but private companies. The countries have given the right of issuing money to private bankers. In turn, these private central banks lend the states with interest and therefore, have economic and of course, political power. The paper money circulated in a country is actually public debt i.e. countries owe money to the private central bankers and the payment of this debt is ensured by issuing bonds. The warranty given by the government to private central bankers for debt repayment is the taxes imposed on people. The bigger public debt is the bigger the taxes, the more common people suffer.

The presidents of these central banks cannot be fired by the governments and do not report to the governments. In Europe, they report to ECB which sets the monetary policy of EU. ECB is not controlled by the European Parliament or the European Commission.

The state or borrower issues bonds, in other words, it accepts that it has an equal amount of debt to the central bank which based on this acceptance creates money from zero and lends it with interest. This money is lent through an accounting entry however, interest rate does not exist as money in any form, it is just on the loan contract obligations. This is the reason why global debt is bigger than real or accounting debt. Therefore, people become slaves since they have to work to get real money to pay off debts either public or individual debts. Very few ones manage to pay off the loan but the rest get bankrupted and lose everything.

When a country has its own currency as it is the case of the USA and other countries, it can “oblige” central bank to accept its state bonds and lend the state with interest. Therefore, a country bankruptcy is avoided since the central bank acts as a lender of last resort. ECB is another case since it does not lend Eurozone member-states. The non-existence of a Europe safe bond leaves the Eurozone countries at the mercy of the “markets” which by being afraid of not getting their money back they impose high interest rates. However, quite recently the European safe bonds have gained ground despite the differences in Europe policymakers whereas the Germans are the main cause for not having this bond since they do not want national obligations to be single European ones. There is also another reason (probably the most serious one) which is that by having this bond, Euro as a currency would be devaluated and Germany’s borrowing interest rates would rise.

In the USA things are different since the state borrows its own currency (USD) from Fed so local currency is devaluated and therefore state debt is devaluated. When a currency is devaluated the products of a country become cheaper without reducing wages but imported products become more expensive. A country which has a strong primary (agriculture) and secondary (industry) sector can become more competitive by having its own currency provided that it has its own energy sources i.e. it should be energy sufficient. Banks with between $16 million and $122.3 million in deposits have a reserve requirement of 3%, and banks with over $122.3 million in deposits have a reserve requirement of 10%. Therefore, if all depositors decide to take their money from the banks at the same time, banks cannot give it to them and bankrun is created. At this point, it should be mentioned that for each USD, Euro etc deposited in a bank, the banking system creates and lends ten. Banks create money each time they give loans and the money they create is money that appears on the computer screen, not real money deposited in the bank’s treasury that lends it. However, the bank lends virtual money but gets real money plus interest from the borrower.

As Professor Mark Joob stated no-one can escape from paying interest rates. When someone borrows money from the bank, s/he has to pay interest rates for the loan but all who pay taxes and buy goods and services pay the interest rate of the initial borrower since taxes have to be collected to pay the interest rates of the public debt. All companies and individuals that sell goods and services have to include the cost of loans in their prices and this way the whole society subsidizes banks although part of this subsidy is given as interest rate to depositors. Professor Mark Joob goes on and writes that the interest rate paid to the banks is a subsidy to them since the fiat/accounting money they create is considered as legal money. This is why bankers have these large salaries and this is why the banking sector is so huge, it is because the society subsidizes banks. Concerning interest rates, poor people usually have more loans than savings whereas rich people have more saving than loans. When interest rates are paid, money is transferred from poor to the rich therefore, interest rates are favourable for wealth accumulation. Commercial banks gain from investments and from the difference between interest rates for deposits and interest rates for loans. When interest rate is added regularly to the initial investment, it brings more interest since there is compound interest which increases exponentially initial capital. Real money by itself is not increased since this interest rate is not derived from production. Only human labour can create interest rate of increasing value but there is a downward pressure for salaries cost and at the same time increase of productivity. This happens because human labour needs to satisfy the demands of exponentially increased compound interest.

The borrower has to work to get the real money, in other words, banks lend virtual money and get real money in return. Since the lent money is more than the real one, the banks should create new money in the form of loans and credits. When they increase the quantity of money there is growth (however, even in this case with the specific banking and monetary system debt is also increased) but when they want to create a crisis, they stop giving loans and due to the lack of money a lot of people bankrupt and depression starts.

This is a “clever trick” created by the bankers who have noticed that they can lend more money than the one they have since depositors would not take their money, altogether and at the same time, from the banks. This is called fractional reserve banking. The definition given by Quickonomics for fractional reserve banking is the following: “Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. This gives commercial banks the power to directly affect money supply. In fact, even though central banks are in charge of controlling money supply, most of the money in modern economies is created by commercial banks through fractional reserve banking”.

Are savings protected?

In the case of Italian debt as in the case of Greek debt, we have heard from politicians (actually paid employees by the bankers) that they want to protect people’s savings. However, are these savings protected in this monetary and banking system? The answer is a simple NO. As mentioned, the banks have low reserves in cash. This is the reason that they need their customers’ trust. In case of a bankrun there would face liquidity problems and they would bankrupt. There are deposit guarantee schemes that reimburse, under EU rules, that protect depositors’ savings by guaranteeing deposits of up to €100,000 but in case of chain reactions, commercial banks need to be saved by the governments and central banks act as lenders’ of last resort.