Which of the following common risks can impact revenue recognition?

Management compensation linked to profit can significantly impact revenue recognition due to the potential for biases that may arise. When management’s financial rewards are tied to profitability, there could be a temptation to manipulate revenue figures to meet targets or expectations. This could lead to recognizing revenue prematurely or through inappropriate means, which can distort the financial statements and misrepresent the financial health of the organization.

In contrast, a focus on accurate reporting might help ensure proper revenue recognition. The existence of signed contracts for sales generally provides assurance regarding the legitimacy of revenue, as contracts often detail the terms and obligations of sales. The use of conservative accounting policies typically promotes caution in revenue recognition, which helps prevent overstatement. Each of these alternatives operates in a way that typically mitigates the risk associated with revenue recognition, whereas management compensation linked to profit inherently introduces a potential conflict of interest that can compromise the integrity of revenue reporting.