Introduction
In this article, we will cover the audit procedures for revenues. Auditors should place great attention on revenue audit because it is considered one of the most sensitive area. Revenues are sensitive as the most common inherent risk is the possibility of misstatement due to management’s intention to receive a certain level of sales. In the revenue audit the inherent risk is high because client has to deal with many complex sales transactions. More attention is required on revenue audit because the material misstatement can easily occur due to fraud or error.
Objectives of Revenues Audit
The main objectives of revenue audit is to ensure the completeness of income, ascertain efficiency in internal control, determine the degree of compliance and ensure timely recognition of revenue. The auditor should perform sufficient control testing and substantive testing for the revenue audit.
Risks and Control Deficiencies in Relation to Revenues
In this section, we cover the risks for revenues as well as the control deficiencies (sometimes called internal control deficiencies or deficiencies of internal control) that may happen for the accounting and management of revenue.
Below list down the key risks associated with the revenue that we commonly encounter so far:
- An entity or management may intentionally account for or overstate the revenue
- Similarly, there are also possible risks on missing the accruals.
- There is risk where the revenue recognition was not recognized in accordance with International Financial Reporting Standards; IFRS 15 – Revenue from Contracts with Customers.
- There is a risk of possible fraud on the unrecorded cash collection from the revenue.
In addition, there are also control deficiencies on the revenue that auditor should assess and detect. The control deficiencies give rise to the possible fraud as well as other problems that result in the misstatement of revenues recorded and presented in the income statement.
The deficiencies of internal control exist when such control is unable to prevent, detect or correct the misstatements in the financial statements in a timely manner.
Where there is significant deficiencies in internal control, auditor shall need to perform in-debt test of detail. Significant deficiencies in internal control exist when the following indicators incurred:
- There is any evidences of ineffective aspect of control environment
- The risk assessment process is absent or there is evidence that there is ineffective risk assessment process happen for the entity
- There is any evidences of ineffective response the significant risks which have been identified
Below list down the examples of control deficiencies that we commonly encounter during the course of the audit of revenue:
- There is no proper segregation of duties between the person to issue invoices to customers and the person who receive the payment as well as the person who record transactions into system. In addition, the person who perform the reconciliation on sales listing is also not segregated.
- There is no proper review and approve the invoices; especially against the approved price list.
- No proper reconciliation between sales listing to General Ledger (GL) or to Trial Balance (TB).
The risks and control deficiencies as we have described above are the key areas that shall need to take into account and perform the relevant audit procedures for the audit of the revenue.
In the later section of this article, we will cover the key assertions as well as the audit procedures for the audit of revenue.
Key Assertions of Revenue Audit
As mentioned above, the audit on revenues is very important as it is the key and material items in the financial statements. In addition, we consider revenues as a very sensitive area that may result in the possible misstatement in the financial statements.
In order to audit the revenues, it requires to use the combination of analytical procedures and tests of detail or substantive tests. Typically, we perform the audit of revenues in conjunction with the audit of accounts receivable. Below are the key audit assertions for revenues:
Occurrence
Auditor should assess the recorded revenue has actually occurred as there is a risk that the recorded revenue may not occurred.
Completeness
Completeness is ensuring that the revenue balance reported on the income statement includes all revenue transactions occurring during the period.
Rights and Obligations
The rights and obligations assertion is linked to risks and rewards. It is important to consider the entity’s rights and obligations over the products sold or services rendered to customers.
Classification
Auditors need to check all revenue transactions are classified in accordance with applicable accounting standards.
Cut Off
Cut Off assertion is ensuring that revenues are recorded in the correct accounting period.
Presentation
Presentation assertion is the auditor should review proper disclosures related to revenue are presented in the notes to the financial statements.
Key Audit Procedures for Revenue Audit
In order to easily understand about each types of audit procedure, we will group all those audit procedures into categories as per the relevant assertions as below:
Please note that in one audit procedure can be used to obtain the audit objective of one or more audit assertions.
In addition, in the section we use the combination of both analytical procedures and detail testing procedures or substantive audit procedures.
- Occurrence
Under this assertion, the auditor performs the audit procedures to ensure and confirm occurrence of revenue. Below list down the audit procedures that auditors may carry out to ensure this assertion.
- At first the auditor should obtain the client’s policies relating to pricing, credit, payment terms and acceptance of sales return.
- The auditors should review the sales occurrence by obtaining sales transactions that are recorded in the financial statements and the sales report.
- They should perform the vouching on the selected sample transactions to the customer orders as well as the dispatch document to see if such sales transactions really occurred.
2. Completeness
Under this assertion, the auditor performs the audit procedures to ensure and confirm completeness of revenue. Below list down the audit procedures that auditors may carry out to ensure this assertion.
- For a sample of sales transactions auditors should check the quotation, sales order, invoices and goods delivery note.
- They should perform sales revenue analysis that will help to identify unusual events or transactions related to sales. They can perform different types of analysis like the seasonal analysis or monthly trend analysis to see if there is any unusual change in the trends.
- Auditor should review the sales price authorization as there are high risk of fraud in this area. They should review the control over this area and check if there is any unauthorized sales or sales commission as it is linked to the performance incentive of the sales team.
- The auditors should review the sales recognition has been done as per IFRS 15 revenue recognition criteria.
- They can check the completeness of revenue recording in the financial statements by verifying numerical sequence of invoices.
- When there is a sales increase the accounts receivables analysis should also be done and credit policy should be reviewed.
- The auditors shall perform the analytical procedures to analyze the gross profit percentage and compare to previous years or industry data.
- They should also review the prepayment or advance deposit from customers to previous years to see if there is any significant differences. They assess if they revenue from such prepayment or advance deposit were properly recognized.
3. Cut-Off
Under this assertion, the auditor performs the audit procedures to ensure and confirm cut-ff of revenue. Below list the audit procedures that auditors may carry out to ensure this assertion.
- Auditors should perform cut-off test to check the sales transactions are recorded in the proper accounting period. There is a chance of sales revenue being recognized in the wrong accounting period due to complicated sales process. The auditor should select sample of invoices, inspect the invoice date and trace the date with goods dispatch note and trace the date to the sales record to ensure the correct accounting period.
- Select subsequent credit notes or invoice cancellation after the year end to see if such credit notes and cancellations should be adjusted in current year.
- Select few invoices at the year-end as well as at the beginning of the following year and review if the revenues are properly recognized in the correct period.
4. Accuracy
Under this assertion, the auditor performs the audit procedures to ensure and confirm accuracy of revenue. Below list down the audit procedures that auditors may carry out to ensure this assertion.
- They should perform journal entry test for revenue to check if there are duplicate journal entries.
- From the selected invoices, perform the review and compare to the price list to invoice to ensure that the price charges are correctly as per the approved price list.
- In case there is any discount, perform the test or recalculation if such discount is appropriately calculated and accounted for.
- In addition, the auditor shall also perform the testing if the tax calculation is appropriately and correctly calculated.
