Revenue Recognition accounting is a process that depicts how sales transactions are recorded by a company in financial statements. While recording revenue, companies are mandated to comply with Generally Accepted Accounting Principles (GAAP). As per GAAP, in order to book a sale as revenue, the revenue should be recognized initially. Consequently, for a revenue to get recognized, it should be Earned and Realizable Revenue.
It reviews the accounting techniques of revenue recognition that are adopted by a company. This audit thus assures that the recorded information is compliant with National Accounting Standards which stand mandatory for a firm.
Revenue Recognition Audit procedures:
For a successful Revenue Recognition Auditing process, Planning is a key element. This process thus initiates with analyses of revenue recognition policies and techniques of a company. Thus ensuring the company’s compliance with the desired audit procedures. After satisfying their doubts, the auditing comes to the second level that involves the analyses of contracts of that year. Material Contracts are then separated from the lot. Auditors invest their time to test whether those contracts are recognized aptly. Along with this, they ensure that the financial statement contains receivable and deferred accounts. Besides reviewing the Material Contracts, auditors also pay heed to the one which is not material to ensure that even they recognize the revenue aptly.
Important Aspects of Revenue Recognition Audit:
Reviewing General Ledger:
When an Auditor/Accountant analyzes a General Ledger it provides them with a lot of substantive evidence and thus initiates lesser procedural tests. General Ledger is reviewed to have knowledge as to how the sales are recorded in that particular firm. The information that concerns Revenue Recognition Audit includes the sold goods, the date when it was delivered and the mode of payment used to do so. It ensures that General Ledger is in accordance with the actual sale transactions of the firm. While auditing, even the Revenue Recognition Policies of a company can also be considered.
Analysing the Financial Statements:
For a detailed overview of the company’s finances, auditors look out for financial statement of an organization. Then a comparison follows between General Ledger and the statement deduced, to look out for dissimilarity that exists. Auditors are well acknowledged about the importance of financial statement; as the stakeholders evaluate a firm by the information provided by that.
Combating Risks in Receivable Accounts:
Accounts of high-profit sales of a firm can be studied by an auditor in Receivable Accounts. The information mentioned by them is cross-checked by the auditors with the original sale invoices. Primary risk that exists is that the net receivables might be overstated, because either receivable have been overstated, or the allowance for uncollectible accounts has been understated. Revenue Recognition Audit ensures that the company’s account balance mentioned is legitimate.
While recording revenue, firms may incorporate accrual or deferrals. Auditors stay skeptical regarding accruals and deferrals to ensure that the real transactions are mentioned and do not contain wrong invoices.
What are the Prerequisites for a Revenue Recognition auditor?
An Auditor is required to have complete knowledge of complications prevailing in revenue recognition’s auditing and accounting. Active participation of employees should be fostered by the auditors for smooth auditing.
Internal control in an organization is a continuous process to collect, analyze and update information during an audit. Thus mandating internal control; as the responsibility of an auditor. An Auditor then evaluates the appropriateness of finances.
Before initiating Auditing, Auditors should meet with management and the accounting staff to have an idea of the timing of the auditing process.