Explain premature revenue recognition. You have been asked to advise a business-to- business manufacturing company how to detect fraudulent financial reporting. Management does not understand how early revenue recognition by backdating invoices from next year to this year would affect financial statements. Further, management wants to know which accounts could be audited for evidence of fraud in the case of early revenue recognition.
a. Using your own numbers, make up an example to show management the effect of early revenue recognition.
b. Prepare a short report to management explaining the accounts that early revenue recognition would affect. Suggest some ways management could find errors in those accounts.