Getting better at auditing revenue

Why firms should also be looking for opportunities to improve their audit of revenue.

Revenue is a key area that is focused on by ICAEW’s quality assurance team, and one of the focus areas in its yearly report, Inspect the results – Audit Monitoring 2019. In this article, we explain why firms should always be looking for opportunities to improve their audit of revenue.

Revenue is a key area in many of the audits reviewed by ICAEW’s quality assurance team (QAD). It is also one of the focus areas in QAD’s most recent yearly report Inspect the results – Audit Monitoring 2019, which shares examples of best practice and highlights aspects for improvement.

Many of the points that QAD reviewers raise on adequacy of audit evidence relate to revenue – and inadequacy of audit evidence is a perennial cause for concern.

The International Standard on Auditing (ISA) 500 Audit evidence is fundamental in any audit engagement. So, it is understandable that it is cited in the audit monitoring report as the area where significant weaknesses are most commonly found and has topped QAD’s list of concerns for a number of years.

Aspects of revenue-related audit evidence where QAD reviewers commonly see room for improvement include:

• Not always testing the completeness assertion when appropriate. This may be because firms did not carry out a planned test in the way it was designed or because the test design was flawed, for example because it tested back from the accounting records rather than forwards from outside the accounting system. Sometimes completeness is not assessed as a risk. This may be justified, but QAD reviewers may consider this assessment as inappropriate, given the nature of the business.
• Not always testing all material income streams. There are various possible reasons for this. The audit team may not have identified a new income stream at the planning stage and so planned to carry out the same tests as the previous year. Or, they may have tested the most significant income streams, leaving a smaller, but nevertheless material income stream untested.
• Shortcomings when using substantive analytical procedures. They can provide very persuasive evidence if done well, but firms do not always apply sufficient rigour or work through all the required steps. Sometimes expectations are set which are not precise enough in light of the materiality level and sometimes QAD reviewers find flaws in the logic applied in setting expectations. Firms may also use data provided by the client to set expectations without testing its reliability. Firms do not always properly explore differences that exceed thresholds and explanations from management are accepted without corroboration. QAD reviewers note that it can sometimes appear that there is too much focus on making the test work rather than carrying out a robust independent check.
• Auditing of revenue from construction contracts is often challenging because of the judgements involved. If audit teams are not experienced in auditing such businesses they may fail to tailor their approach sufficiently to reflect the way that revenue is recognised and end up with a fragmented approach. With International Financial Reporting Standard (IFRS) 15 Revenue from Contracts with Customers now in place (for periods beginning on/after 1 January 2018) and bringing more prescriptive rules for revenue recognition, firms need to pay extra attention to ensure their clients’ accounting policies are appropriate.

Implementing this feedback from QAD, and tackling related shortcomings in your audit planning, testing and execution, could improve the quality of your audit evidence and help your firm to shine during its next monitoring visit.