Revenue Recognition

The review of the revenue recognition process in an organization is only one part of evaluating
income accounts. This work program will focus on the major revenue areas associated with the sales
cycle particularly major customers and channel partners.

Consider the relationship between revenue and expense accounts in determining the extent of
testing, developing recommendations about the revenue recognition process, and considering
controls.

Revenue recognition policies and procedures should be clearly defined and evaluators should bring
an appropriate level of professional skepticism to the review process. This area can have particular
rules for various industries such as software, construction, real estate, etc. Audit teams should
perform research to ensure they understand the technical guidance related to their situation.

Potential Areas of CONCERN

The following are potential areas of fraud surrounding revenue recognition:

 Revenue recognition practices are not in accordance with GAAP/IFRS
 Estimates, that may be used to recognize revenue, are not used properly (i.e.,
software/construction percentage-of-completion method).
 Revenues and expenses are misclassified.

Work Steps RESULTS

Planning
Objective: Develop an understanding of the process
1. Obtain management reports for revenue by:
 Major customers by location
 Revenue by Project
 Revenue by geographic area
2. Review revenue recognition policies and procedures.
 Obtain revenue recognition policy Review
 Understand any industry or international specifics that
may apply to the revenue recognition area.

Objective: Determine if controls for recognizing revenue are

operating effectively by testing revenue transactions.
3. Select a judgmental sample of 15 invoices from each
quarter, for a total of sixty. Use the following criteria will be
used for selecting the invoices:
A. Only sheet branded domestic and international sales.
B. Include one invoice from each of the top 20 customers
for sales.
C. Weight samples more heavily towards the two weeks
prior to quarter end.

4. Compare each invoice to the applicable PO and examine

 Work Steps RESULTS
for:
A. An acceptance clause in the PO that would prevent
automatic recognition of revenue.
B. A match for the total amount due between the
customer’s PO and Company’s invoice
5. Perform the following procedures on the invoice:
A. Compare the invoice to the PO to determine if the
invoice was for a partial delivery. Partial shipments
should be completed before quarter-end or be
approved by the revenue recognition officer before
being recognized as revenue (only if a non-standard
contract).
B. Verify the invoice date is not prior to the date of
delivery
8. Obtain each customer agreement (i.e. contract or PO) and
examine for:
A. The contract has the appropriate departmental
signatures.
B. Payment terms
C. Significant obligations for future performance, such as
installation services, that may preclude revenue from
being automatically recognized.
9. Verify the revenue from the invoice was posted to the
appropriate period and G/L account.
Notes:
 Review invoices that are adjusted from one period to
the appropriate period and review the process for
approving changes.
 Consider invoicing and appropriateness of related revenue
procedures.
10. Review the process for extending, modifying and
monitoring the credit balance of customers.