On September 9, 2014, the PCAOB released Staff Audit Practice Alert No. 12 – Matters Related to Auditing Revenue in an Audit of Financial Statements. The audit practice alert addresses the more frequent significant audit deficiencies in which the PCAOB feels auditors did not perform sufficient auditing procedures related to revenue, and gives an overview of the PCAOB standards and requirements for auditing revenue of which the significant audit deficiencies were noted as a result of PCAOB inspections.
One of the most important line items on a company’s financial statements is revenue. Not only is it an important driver of a company’s operating results that affects potential and current investors, creditors and management, but it also involves significant risks that require additional audit consideration. Furthermore, many fraudulent reporting cases and scandals have been a result of a company intentionally misstating revenue. Because of these factors, revenue is a major focus for the PCAOB when performing inspections of registered public accounting firms.
The PCAOB has noted significant deficiencies in areas ranging from testing revenue recognition on contractual arrangements, to testing whether revenue was recognized within the proper period, to ensuring that all required disclosures regarding revenue were included within the financial statements. For instance, regarding testing revenue recognition on contractual arrangements, the PCAOB inspections staff noted that auditors did not perform sufficient procedures to understand contractual terms and conditions within specific arrangements, which could have been remitted by performing a detail review of the contracts and assessing the elements within the contract as a part of the auditor’s procedures. In another example, the inspections staff noted auditors failed to perform cutoff procedures to address the risk of material misstatement. This could have been remitted by the auditor planning procedures to test sales transactions both before and after year-end by comparing sales data to invoices, shipping documentation, or other evidence (depending on the nature of the transaction), to ensure that the criteria for recognizing revenue for that particular transaction were met.
This audit practice alert impacts the amount of testing that auditors are now conducting to ensure that revenue is being properly recognized, and that adequate support and documentation are readily available to support the amount recognized. Companies should review their revenue recognition policies to ensure they are aligned with the appropriate guidance to ensure amounts are recognized in the proper period and can be properly substantiated.
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