Oracle auditing for FAS 48
Oracle Auditing Tips by Donald Burleson
For related notes, see my notes on
FAS 48 and income statements for
publicly held corporations.
When auditing income statements it is easy to
verify the actual revenue dollars received, but more challenging to verify the
method used to accurately forecast returns.
Auditing Oracle Financials
requires an intimate knowledge of Oracle at several levels:
The database layer - An auditor must
understand the Oracle schema tables where the relevant financial data is
stored, and be able to track changes over time using tools such as Oracle
The applications layer - The auditor
must be familiar with the functional inputs within all modules of Oracle
Financials (e.g. AR, AP. GL), and well as external modules that feed data to
the Financials component (e.g. INV, MFG). To effectively track the
evolution of financial statements, the auditor must know the specific screen
names and their interfaces to the underlying database structure.
The functional layer - It is not
uncommon to have external systems which utilize data from Oracle Financials,
and the auditor must be able to track-backwards from the audited financial
statements, reconstituting the evolution of the document over time.
A complete audit of income and "expected
returns" would need to cover all of these areas.
Auditing for estimated returns
Pursuant to FAS 48, SAB 104 and FAS 5,
corporations must use the historical sales database to create "reasonable"
estimates of future returns using valid statistical methods.
To audit the figures for estimated returns, we
would need to identify these data factors:
- Historical sales and returns - We
must identify the specific Oracle eBusiness Suite modules that contain
historical shipment data (the INV module). Identify the database
tables that contain this data and all online screens that allow changes to
- Income received and refunds issued
- The Oracle AR module records actual sales and the AP module records
refunds for returned goods. An auditor would need to identify the
database tables and all online screens related to this data.
Once we have identified the sources of the data
used to forecast estimated returns, we need to examine these functional business
- Returns estimation method - We
identify the specific Oracle Financials module that is used for estimating
returns from sales, identifying the database tables and all online screens
and output reports.
- Financial reporting method - The
Oracle Financials output modules for producing income statements would be
examined for the actual data sources.
notes some issues with accounting for estimated returns:
"SAB 101, along with SAB 104, further precludes such
immediate recognition of revenue under the following conditions:
- Lack of ?visibility,? or the inability to determine, or observe, the
levels of inventory in a distribution channel and the current level of sales
to end users;
- Significant increases in, or excess levels of, inventory in a distribution
channel (sometimes referred to as channel stuffing);
- Expected introductions of new products that may result in the
technological obsolescence of, and larger than expected returns of, current
- The significance of a particular distributor to the firm's business,
sales, and marketing; and
- The newness of a product.
This approach is fraught with danger for a company that has a high
proportion of sell-through revenue. In 2000, Lucent Technologies restated
its earnings, decreasing revenues by $679 million primarily because of a
$452 million reversal of previously booked sales to distributors that were
Similarly, Bristol-Myers Squibb had to restate its earnings by $1.5 billion
primarily due to improper booking of sales through distributors (Glass Lewis
& Co., in its Revenue Recognition Trend Report dated May 4, 2004, available
In the opinion of FASB and the SEC, these circumstances make reasonable
estimate of returns difficult, making Option 1 the preferred choice for only
a limited set of companies. Also, this method is not available for companies
which have other clauses in the sales contracts that make the sales price
not fixed or determinable."