Question
Able & Baker LLP auditors are beginning their audit of Foster's 2017 financial statements. Because of changes in the market and increased competition, Foster changed
Able & Baker LLP auditors are beginning their audit of Foster's 2017 financial statements.
Because of changes in the market and increased competition, Foster changed the terms of its
sales at the beginning of 2017. Previously, Foster's customers had to pay for maintenance of the
Foster products at the time such maintenance was performed. Beginning in 2017, Foster included
3 years of maintenance as a part of the sales price. This requires Foster to defer a portion of
revenue from sales of the product and recognize it in future periods. Accordingly, Foster's
accounting staff must estimate the amount to defer based on Foster's future involvement with the
products sold. This change resulted in Foster showing the following unaudited results: a lower
gross profit margin, but significantly increased sales, which increased Foster's overall net profit
as compared to 2016.
Questions: How do each of the changes described above affect the amount of audit evidence the
Able & Baker LLP auditors will need to obtain about the occurrence and accuracy of the
recorded revenue, as compared to the previous year, and why?
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