Adecco SA is the world's largest temporary employment company. It lost several major accounts because customers felt it was not adequately serving their complex staffing needs. It announced that it was not able to deliver its financial statements on schedule. Their auditors had raised questions about accounting and controls as part of an intensive audit of internal controls as mandated by the Sarbanes-Oxley Act. It appears that Adecco recorded revenue for temporary services provided during the first several weeks in January as previous year's income.

The company has a database in which it knows, at any point in time, which temporary employees are assigned to which clients, and the daily billing rates for those employees. The company bills each client at a rotating month end; for some clients, the billing is on the5th of the month, others are on the 15th of the month, etc. Each client receives only one bill per month and is expected to pay within 30 days after the billing date. The billing is computerized, and the client makes accruals for unbilled revenue at the end of each quarter and year end. Most of the bills are sent electronically, although a few are sent using paper documents.

Required

a. Explain why revenue recognition is always considered "high risk" for each audit engagement.

b. If revenue is overstated, what assertion(s) is (are) the auditor most concerned with?

c. Why might management be motivated to accelerate the recognition of revenue into the current year-even though it makes it difficult to achieve higher revenue in the following year? What factors related to the control environment might have been identified that would have led the auditor to rate the audit as "high risk."

d. One evidence-gathering option was to send out a confirmation to Adecco's clients as to the amount owed to Adecco as of year-end. Explain why (or why not) this would be a good audit procedure.

e. What other audit procedures could have been used to determine whether revenue was properly recorded?