PM550–4 Revenue Recognition

PM550–4
Revenue Recognition.
Audit Excellence 2008
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 2
Objectives
You will be able to:
•
Describe the objective and significance of revenue
recognition.
•
Discuss the practical issues and challenges when auditing
the risk related to revenue recognition.
•
Implement an efficient and effective process on
engagements to identify and pinpoint risks related to revenue
recognition.
•
Outline the documentation appropriate to support the
assessment of the risk of revenue recognition.
•
Direct engagement teams to develop tailored audit
procedures that respond to the risk of revenue recognition.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 3
What we already know
Revenue recognition is a presumed specific risk due to fraud
•
We should ordinarily presume that there is a specific risk of material
misstatement due to fraud related to revenue recognition and consider
which types of revenue, revenue transactions, or potential errors may

give rise to such risk.
<Audit Approach Manual G045.02>
Exception - rebutting the presumed risk
•
If we have not identified a specific risk of material misstatement due to
fraud related to revenue recognition, we should document the reasons
supporting our determination.
<Audit Approach Manual G045.05>
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 4
Why revenue recognition is still topical
Revenue
Recognition
Be mindful of deficiencies
and plan towards a better audit
Fraud cases
Economic factors
Regulators’ concerns/
Practice review findings
Evolving business
models/practices
ISA
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 5
Regulators’ concerns
Key findings from PCAOB:
•
Evaluate compliance with GAAP & address complex or
specialized revenue-recognition accounting principles.
•

Deficiencies in performing audit procedures:
–
Inadequate substantive procedures to test the existence,
completeness, and valuation of revenue.
–
Examining significant contractual arrangements.
–
Performing cutoff procedures.
–
Applying confirmation procedures.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 6
Common fraud schemes used for improper revenue
recognition
•
Side agreements
•
Channel stuffing
•
Round tripping sales
•
Bill and hold transactions
•
Fictitious sales to existing or nonexistent customers
•
Contract accounting scheme
•
Sham related party transactions
•
Contract with multiple deliverables

•
Consignment sales
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 7
Process overview of revenue recognition
WPs in Large
Man pack
Step 1: Determine the overall audit strategy
Step 2: Discuss the possibility of fraudulent financial
reporting
Step 3: Understand the entity and its environment
Step 6: Pinpoint the presumed specific identified risk
Step 4: Understand the revenue significant flow of
transactions
Step 5: Perform preliminary analytical review
1230
1410
1535
1611
1832/1811
1213
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 8
Revenue recognition criteria – IAS 18
No managerial
involvement
or control
Reliable
measurement
Economic

benefits probable
Transfer of
risks and rewards
Goods
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 9
Revenue recognition criteria – IAS 18
No managerial
involvement
or control
Reliable
measurement
Economic
benefits probable
Transfer of
risks and rewards
Goods
Percentage
completion
Reliable
measurement
Economic
benefits probable
Services
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 10
Analyze and disaggregate the revenue account
Type B: Retailing
Type A:

Distribution
Type C: Wholesale
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 11
Type B: Retailing
Type A:

Distribution
Linking the presumed risk with our audit assurance
model
Type C: Wholesale
Pinpoint the risk to
specific transactions
Pinpoint the risk to
specific transactions
Pinpoint the specific
risk at the potential
error level
Cutoff
Validity
Design the right
approach
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 12
Process overview of revenue recognition
AS/2 common
documentation
in a large pack
Step 1: Determine the overall audit strategy
Step 2: Discuss the possibility of fraudulent financial

reporting
Step 3: Understand the entity and its environment
Step 6: Pinpoint the presumed specific identified risk
Step 4: Understand the revenue significant flow of
transactions
Step 5: Perform preliminary analytical review
1230
1410
1535
1611
1832/1811
1213
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 13
Example 1
•
“Keep it in the Family” is a manufacturing entity which sells all of
its goods to a wholly-owned subsidiary of its parent entity.
•
Sales are priced on arm’s length basis and in line with the
standard pricing policy of the group.
•
Sales are recognized when title passes.
Keep it in the Family
Can we rebut the presumed revenue recognition risk?
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 14
Example 2
•
“You’re Trumped” is a property investment company.

•
It owns one leasehold property for rental purpose.
•
It has entered into rental agreements with five tenants at a fixed
monthly rental for fixed terms.
•
Rental income is recognized on a straight line basis over the lease
term.
You’re Trumped
Can we rebut the presumed revenue recognition risk?
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 15
Rebuttal of the presumed specific identified risk
It is unusual to be able to rebut the presumption of revenue
recognition risk.
•
Document the reasons of the rebuttal in the text box of “Audit Plan by
Account”.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 16
Examples of audit responses dealing with specific
risk of revenue recognition
Perform substantive analytical procedures.
Confirm with customers.
Inquiries of sales and marketing, legal counsel.
Attend year-end inventory count.
Perform cut-off procedures.
Test operating effectiveness of controls.
“Pervasive responses”, such as “applying increased
professional skepticism, is generally not appropriate or

sufficient.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 17
Other efficiency and effective considerations to
achieve a focused level of substantive assurance
Performing tests of details using a focused level of
substantive assurance for the entire revenue balance is
usually not efficient or effective.
May be effective to apply nonrepresentative selections in tests
of details.
Perform substantive analytical procedures, with a maximum
level of substantive assurance to obtain at:
•
Intermediate level (for non-SIR)
•
Moderate level (for SIR)
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