What Is a Revenue Audit?

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A revenue audit is a two-part process that examines the figures and information on a company's tax returns against those found in its business records. In general, auditors check the returns of income over a one-year period. However, they may review your records for prior years too in case they notice any discrepancies.

This process has the role to monitor and ensure tax compliance. It also helps identify signs of tax evasion as well as additional liabilities. The auditors will also collect interest, tax or penalties where applicable.

The two main stages of a revenue audit include testing the revenue accounts on your income statements followed by an examination of your accounts receivable on the balance sheet. The auditors may also check for revenue recognition issues, such as side agreements and channel stuffing. Companies often engage in practices to artificially inflate their revenue.

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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.

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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.

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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 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.

 

DISCLAIMER- These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information.

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