II. For each of the following situations based on SAB No. 101, indicate the audi
ID: 2576896 • Letter: I
Question
II. For each of the following situations based on SAB No. 101, indicate the audit evidence that should be obtained to determine whether revenue should be recognized or not in the current period:
The company you are auditing, Thomson Telecom, maintains an inventory of telecommunications equipment. Bayone Telephone Company placed an order for 10 new transformers valued at $5 million, and Thomson delivered them just prior to December 31. Thomson's normal business practice for this class of customer is to enter into a written sales agreement that requires the signatures of all the authorized representatives of Thomson and its customer before the contract is binding. However, Bayone has not signed the sales agreement because it is awaiting the requisite approval by the legal department. Bayone's purchasing department has orally agreed to the contract, and the purchasing manager has assured you that the contract will be approved the first week of next year.
Explanation / Answer
The auditor should inquire about aby oral contract is made or not. Revenue can be recognized if Thomson Telecom had made an oral contract. But a copy of the contract signed by both buyer and seller should be taken on safer side before recognizing the revenue in current period.