The primary line item on a for-profit business’s income statement is revenue (or sales), making accurate reporting crucial for producing reliable financial statements. According to U.S. Generally Accepted Accounting Principles (GAAP), revenue is recognized when it is earned, typically upon delivery of goods or services to the customer, irrespective of when cash is collected.
Incorrectly stated revenue can significantly impact stakeholders’ perception of your company, including investors and lenders. It may also cast doubt on the accuracy and integrity of other income statement items, as well as figures reported for accounts receivable and inventory. Hence, auditing revenue becomes a critical component of a financial statement audit.
Audit standards dictate adherence to Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, effective since 2018 for calendar-year public companies and 2020 for calendar-year private entities. This standard mandates detailed disclosures and outlines five steps for determining the amount and timing of revenue recognition.
When auditing revenue, auditors evaluate your company’s processes, internal controls, and underlying technology to ensure compliance with regulations. Their objective is to accurately record every customer obligation and report revenue in the appropriate accounting period.
During fieldwork, auditors scrutinize internal controls, segregation of duties, and accounting processes related to customer contracts. They sample individual transactions, reviewing contracts, inventory records, labor reports, and invoices to validate revenue recorded in the general ledger. Beyond validating revenue recognition, transaction testing can reveal errors, omissions, or fraudulent activities.
Auditors analyze financial metrics to identify anomalies and may compare your company’s ratios to industry benchmarks, especially in periods of changing demand or costs.
Accurate revenue recognition is crucial as stakeholders, including investors, lenders, suppliers, customers, employees, and regulatory agencies, rely on financial statement information for various purposes. Flaws in the revenue recognition process can compromise the integrity of financial statements. Packer Thomas specializes in audit procedures for revenue and can assist in enhancing your revenue recognition process. Contact us to discuss audit procedures tailored to your needs and improve your financial reporting accuracy.
