1. Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). Define the revenue recognition principle and explain why it is important to users of financial statements.
Case Questions
1. Consider the principles, assumptions, and constraints of Generally Accepted
Accounting Principles (GAAP). Define the revenue recognition principle and
explain why it is important to users of financial statements.
2. Consider the Sithe Energies contract described in the case. Does the account-
ing for this contract provide an example of how Enron violated the revenue
recognition principle? Why or why not? Please be specific.
3. Consult Paragraphs .06–.07 of AU Section 319. Based on the case informa-
tion, do you believe that Enron had established an effective system of inter-
nal control over financial reporting related to the contract revenue recorded
in its financial statements? Why or why not?
4. As an auditor, what type of evidence would you want to examine to deter-
mine whether Enron was inappropriately recording revenue from the Sithe
Energies contract?
5. Consider the role of the Enron employee who was responsible for applying
MTM accounting rules to electric power contracts, like the Eli Lilly contract.
Assuming the employee knew that the use of MTM accounting was beyond
the scope of the SEC approval parameters, do you believe that the employee
had a responsibility to report the behavior to the audit committee? Why or
why not?
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