Auditing and Accounting Cases Investigating Issues of Fraud and Professional Ethics 4th Edition Case 1.3 Page 15 3. Consult Paragraph 67 of PCAOB Auditing Standard No. 12. Do you believe that Qwest had established an effective system of internal control over finan-cial reporting related to the presentation and disclosure of its nonrecurring revenue? Why or why not? Solution The revenue recognition principle states that revenues are recognized when realized or realizable and when earned; also, revenue from a transaction must meet both criteria to be recognized for recording in the financial statements.  Revenues are realized when products are exchanged for cash or claims to cash, and are realizable when related assets received are readily convertible to cash.  Revenues are earned when products are delivered or services are performed.  These principles are important in defining revenue recognition, which helps auditors identify fraud and misstatements.  Users of financial statements will have a better understanding of an entity .