Revenue Recognition & Ethics

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Case 7.69/ Revenue recognition

A. Bait and switch is an old advertising practice that is used by sellers to attract buyers. It consists of persuading buyers through appealing “bait”, and when buyers are effectively lured in, the seller switches the product to another product that is more profitable to him. Bait and switch comes under many forms, and may not be discerned ostensibly. The practice conveys a misrepresentation of facts, and (or) an omission of facts therefore likely to mislead consumers. It’s an unfair and deceptive practice, and section 5 of the FTC Act declares such practice unlawful. Ticketmaster attracted customers by affixing a reasonable price to the concert ticket of the famous singer Bruce Springsteen, and when customer were enticed and asking for the best tickets, Ticketmaster found a way to materially distort the price to its benefit, thus inflating its profit. Totally, we can simply say that Ticketmaster used illegal practice (fraud) to generate material revenue. This case is a clear example why auditors should look into the way revenues are generated by companies. Similar practices like bill and hold, channel staffing, side agreements, and much more have been used in the past by companies to inflate revenue causing financial statements to mislead shareholders and other financial statement users. Thus the importance for auditors to comprehend the way revenue is generated by companies. The planning of an audit engagement requires the auditors to gain an understanding of the company that is audited therefore the auditors should have looked at the business practice of Ticketmaster as part of a regular necessary procedure of an audit engagement.

B. If Ticketmaster was found to use Bait and switch, then it obviously implicates that revenue could have been obtained from illegal practice, and no matter how properly Ticketmaster had accounted for that revenue, auditors bear certain responsibilities in such situation. Now should auditors...
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