You have been assigned to the audit of Processing Solutions, Inc., a privately held corporation that develops and sells computer systems. The systems are sold under one- to five-year contracts that provide for a fixed price for licensing, delivery, and setup of the systems and maintenance and technical support for the life of the contract. Your review of the working papers reveals that premature revenue recognition is a risk that must be addressed in the audit.

Required:

a.Summarize the guidance of the FASB regarding recognition of revenue on contracts.

b.Describe two techniques that management of Processing Solutions might use to overstate revenue.

c.For the two techniques identified in requirement (b), describe an auditing procedure that might be employed by the auditors to detect the overstatement of revenue.