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1. UOP ACC 546 Case 9.3 Longeta Corporation NEW
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Case 9.3 Longeta Corporation
overs auditing revenue contracts.
You want to be thoroughly prepared for the meeting with the
audit manager. Perform the following procedures to be certain
you have all necessary information about the transaction’s
treatment.
[1] The Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) recently
completed a joint project to develop a common revenue
standard for U.S. GAAP and IFRS to improve revenue
recognition practices and to remove inconsistencies and
weaknesses in revenue requirements. The updated guidance is
contained in the Accounting Standards Codification as Topic
606, “Revenue from Contracts with Customers.” Review that
guidance to summarize the core principle for recognizing
revenue and briefly describe the five steps needed to achieve
the core principle. Also, describe how the core principle was
not achieved in this situation.
[2] In your own words, explain the company’s reasoning for
recording $5.8 million as current revenue while recording the
remaining $1.2 million as deferred revenue. Also, document
where on the financial statements the deferred revenue

2. account would be presented.
[3] Assess the content of the separate letter issued by Longeta’s
vice president of sales to Magicon. Document your conclusion
about how the content of the letter affects or does not affect
revenue recognition for Longeta for the year ended September
30, 2015.
[4] Given that the letter from the vice president of sales was not
attached to or documented in the order letter submitted by
Magicon to Longeta, document your conclusion as to the
impact, if any, the vice president’s letter has on the accounting
treatment for the transaction since it was not part of the order
letter.
[5] Research PCAOB Auditing Standards on the PCAOB’s
website (www.pcaob.org) to summarize the guidance for
auditors in regards to their assessment of the risk of material
misstatement related to revenue recognition. What do those
standards require of auditors in regards to their assessment of
risk related to revenue recognition?
[6] Auditing standards describe three conditions that are
usually found to be present. What are those three conditions
and what red flags, if any, might be present at Longeta?
[7] The separate letter from the vice president of sales was
emailed and faxed to Magicon representatives. What would be
the impact if Longeta’s vice president had only provided that
information orally to Magicon representatives and not
forwarded the information in written form?
[8] As of September 30, 2015, Magicon had only submitted the
order letter. Document your conclusion about the impact on the
accounting for the transaction if Longeta and Magicon (a) sign
the reseller agreement within 30 days or (b) do not sign the
reseller agreement within 30 days.
[9] Document your final conclusion about the accounting
treatment of this transaction between Longeta and Magicon. Be
sure to provide a basis for your conclusion.

3. PROFESSIONAL JUDGMENT QUESTION
It is recommended that you read the Professional Judgment
Introduction found at the beginning of the book prior to
responding to the following question.
[10] One of the environmental factors affecting judgment is the
“rush to solve” judgment trap. Briefly describe the trap and
how it applies to the situation affecting the recording of the
sales transaction.