Audit firms may want to review their approaches to the audit of revenue as they prepare for the 2025/2026 reporting season. Andrew Paul outlines topical considerations and reminds firms of some recurring audit quality themes.
During 2026, approaches to the audit of revenue will need to reflect ongoing economic and political uncertainties and consider recent and coming changes to financial reporting standards (FRSs) and International Standards on Auditing (ISAs). They will also need to address some of the recurring audit quality issues that Audit & Beyond explored in an earlier article: Auditing revenue - dealing with the risks.
In case you missed it, the article highlighted opportunities for firms to enhance their risk assessments and responses for revenue. Key themes included audit work on revenue recognition, revenue streams, fraud risk, selecting audit procedures, using automated tools and techniques and producing efficient and effective documentation.
To further assist teams planning their next audits, this follow-up article takes a closer look at four specific issues related to revenue audits.
Revenue recognition under revised FRS 102
The revisions to the FRS 102 revenue recognition model do not apply until accounting periods beginning on or after 1 January 2026, but if you are not talking to management and those charged with governance in this audit cycle, you are missing a trick.
Users of International Financial Reporting Standards (IFRS) will be familiar with the new five-step model, as this has been part of IFRS 15 for a while now. However, for UK GAAP users, there could be some significant changes in the amount and timing of revenue recognition.
If you are not talking to management and those charged with governance in this audit cycle, you are missing a trick.
As auditors, we should be preparing the audited entities and ourselves for these changes (and there’s an ICAEW helpsheet on implementing FRS 102 revenue recognition amendments). For each of the five steps in the revenue recognition model, there are some key things for auditors to look at and discuss in this audit cycle.
Step 1: Identifying contract(s) with the customer
How does the audited entity contract with its customers? Do those contracts fall withing the scope of Section 23 of FRS 102 or IFRS 15? Is there a history of multiple contracts but with interdependencies or a single performance obligation? How are contract modifications handled?
An essential element to consider now is, how does the audited entity assess the probability of the customer’s ability to pay for the contract? As the auditor, you will be looking for evidence of this, to have assurance that the use of the model is applicable. However, the audited entity may need to adapt its processes to ensure that such considerations are documented and available for your review.
Step 2: Identifying performance obligations
How many elements are there to the performance obligation? Is it one deliverable, a series of deliverables bundled together, or a series of deliverables that are distinct from each other? Are warranties included? What is the policy on refunds or additional sales?
All or any of these elements could affect when, or whether, the performance obligation has been met and, therefore, when revenue is recognised. Having the conversation in this audit cycle will give the audited entity time to consider any changes in its contracting policies before the revised FRS 102 becomes effective.
Step 3: Determining the transaction price
Is there a variable element to the transaction price? If so, what is it based on?
The recognition of the variable element will be an accounting estimate that will need to be audited. So why not start to look at reasonableness and probability of these elements now, to have a better understanding for future audit cycles? How good are management at preparing accounting estimates? What has their track record been with other estimates?
Step 4: Allocating the transaction price to the performance obligations in the contract
How does the audited entity link the transaction price to the performance obligations?
Where there is uncertainty about standalone selling prices, estimates will likely be used. Again, this is an area to discuss with audited entities now so that they can retain the appropriate evidence for your next audit cycle.
Step 5: Recognising revenue when (or as) the entity satisfies a performance obligation
Is the performance obligation satisfied at a single point in time or over time? Does the entity’s historical practice align with the criteria in revised FRS 102/ IFRS 15? If not, the timing of revenue recognition may need to change from how it has been applied in the past. As this could result in significant changes in revenue patterns, it is worth discussing now to avoid issues in the future.
Transitioning
Remember that the FRC has provided two choices for transitioning to the new FRS 102 model, one of which is to apply the requirements retrospectively and restate comparatives ie, the numbers you will be auditing in this cycle.
Remember that the FRC has provided two choices for transitioning to the new FRS 102 model.
If this approach is taken, discussing it with the audited entity during the 2025/2026 audit will save difficult conversations next time, and you can gather lots of useful information and evidence as part of the current assignment.
Alternatively, entities may choose to apply the new FRS 102 requirements prospectively from the date of transition, without restating comparatives. In this case, the impact of the change would be recognised in opening reserves and only current-period figures would reflect the new revenue recognition model. If the entity decides to take this approach, it is still important to start talking to them early about the changes. Do not use that decision as an excuse to ignore this important change for another year.
Revenue and accounting estimates
All auditors should by now be familiar with the requirements of ISA 540 to use one of three approaches when auditing an estimate:
- using evidence obtained from after the end of the accounting period;
- testing how management made the estimate; or
- developing an auditor’s point estimate or range.
When applying these techniques to revenue, each technique can provide different challenges.
Is sufficient post year-end information available to provide evidence? Is the nature of the calculation model used by management so complex that it is beyond our understanding and we need expert assistance? Do we understand enough about the revenue model to be able to construct our own estimate or range?
None of these are valid reasons for not obtaining sufficient, appropriate audit evidence and can all be overcome with timely planning, appropriate knowledge of the business and the selection of the appropriate technique for the circumstance.
Revenue recognition in times of uncertainty
With the global economy sluggish and the export tariff landscape in flux, getting certainty over revenue recognition is perhaps less simple than it has been previously.
Where audited entities are involved in exporting, understanding where they are exporting to, which tariffs apply and when are all very important for auditors. Sales a few days apart could be priced differently to ease the effect of tariffs being imposed. Some customers may be invoking contract break clauses or refund provisions due to increased prices; some customers may simply be rejecting deliveries or refusing payment.
These could all have an impact on what and how revenue is being recognised in the financial statements.
Auditors should be making appropriate enquires of management and those charged with governance about the impact tariffs are having and what they are hearing from customers. But auditors should also be benchmarking this against the wider industry and economic backdrop to ensure that management are not simply being overly optimistic with revenue recognition.
Revenue recognition and going concern
All the matters discussed above focus on auditing the historical financial statements, but revenue recognition will also be a factor in an audited entity’s budgets and forecasts for the future.
When reviewing the audit entity’s going concern position, the auditor must consider the timing of the revenue and cash flows when looking at the ongoing profitability and solvency of the business.
The revisions to FRS 102 may result in businesses changing terms of contracts, which could then affect profiling of revenue and cash flows.
Understanding the impact of tariffs on revenue in future periods will be essential to ensure that the business is not spending money on products and services that are either going to have lower margins, to absorb some of the tariff impact, or may not even be sold and result in cash tied up in inventory or work in progress.
Planning for success
As audit firms plan for engagements in the 2025/2026 audit season and beyond, there are many matters for auditors to consider. As you review your approach to the audit of revenue recognition amid recent and ongoing changes and uncertainties, keep the key revenue considerations above in mind and explore other ICAEW resources that may help you on your journey.
Andrew Paul, Director of Audit Technical, Baker Tilly International
ICAEW resources
- Auditing revenue: dealing with the risks – key themes and other considerations to enhance risk assessments and responses.
- Performing a robust audit of revenue – a smaller firm shares its approach.
- A practical guide to auditing revenue – tips on problem areas and ways to address them (a faculty webinar).
- ICAEW Audit Monitoring Report 2022/23 – a source of information on areas of weakness and aspects of auditing revenue where more work may be needed.
- Auditing Accounting Estimates – a hub of support tools and other resources.
- Evaluating going concern – a hub providing guidance and resources, including on auditing going concern.
- FRS 102 amendments: revenue recognition – a technical helpsheet with practical tips on implementation.
- Five-step revenue recognition model – this article from the Corporate Reporting Faculty takes a closer look at the five steps.
