Wednesday, September 10, 2014

PCAOB Alerts Auditors to Standards on Testing Revenue

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

Its inspections staff having observed significant audit deficiencies with respect to revenue, the PCAOB has issued a Staff Audit Practice Alert highlighting requirements for testing revenue recognition, presentation, disclosure, and controls. The alert notes that the auditing matters are likely to remain relevant under the converged FASB/IASB accounting standard on revenue recognition set to take effect at the end of next year.

Importance. The alert points to the importance of revenue as a driver of a company’s operating results. PCAOB standards require auditors to presume that improper revenue recognition is a fraud risk, and many fraudulent financial reporting cases have involved intentional misstatement of revenue. Because of revenue’s importance, it is a significant area of focus in PCAOB inspections. Inspections staff continue to observe frequently significant audit deficiencies with respect to revenue, according to the alert.

Issues discussed. The practice alert addresses issues surrounding testing revenue recognition, presentation, and disclosure, including testing the recognition of revenue from contractual arrangements; evaluating the presentation of revenue as gross versus net; testing whether revenue was recognized in the correct period; and evaluating whether the financial statements include the required disclosures regarding revenue. Other aspects of testing revenue include responding to fraud risks; testing and evaluating controls over revenue; applying audit sampling procedures to test revenue; performing substantive analytical procedures to test revenue; and testing revenue in companies with multiple locations.

Particular personnel. The paper urges auditors to take note of the matters discussed in planning and performing audit procedures, and audit firms to revisit their audit methodologies and implementation of those methodologies to assure compliance with PCAOB auditing standards. It is particularly important for the engagement partner and senior engagement team members to ensure that engagement teams appropriately implement the auditing standards and for engagement quality reviewers to focus on these matters in their reviews, the staff noted. Finally, audit committees may wish to discuss with their auditors their approach to auditing revenue.

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