What are the most important assertions for revenue?

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

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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.

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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.

1. Occurrence

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.

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