You have been hired to audit a nationally recognized financial guru. She sells subscriptions to her online coaching. Customers pay for a four-year service contract in advance. She has been recording the full payment as sales when the payment is received. During the year under review, she recorded $550,000 in sales under these contracts.
In addition, she sells books on her website, but at the end of the year, she made a large shipment to a distributor and recorded it as a sale for the full retail amount of the shipment of $265,000. The distributor has the right to return any unsold merchandise. Also, she ran a promotion at the end of the year, a 90-day money-back guarantee, and she sold $180,000 of books under that promotion.
Total revenues for the year included cash for books and services in the amount of $310,000 in addition to the above, for a total of $1.305 million in sales against about half a million of expenses (things like administrative costs, personnel, travel, promotion, and printing costs). So, she’s showing a profit of over $800,000 before taxes.
She is applying to borrow money to buy her own office complex, and several investors are eager to put money into her growing empire, but they want the financials reviewed first.
- What are the legal, ethical, and accounting issues in this scenario?
- What suggestions would you make, just based on this information? What other information would you want to have?
- How would you present those suggestions to the owner?
- If the owner declined to implement any of your suggestions, would you sign off on the financials (approve)? Why or why not?