What the Revenue Recognition Means for the Audit Profession
As 2019 continues, the auditing profession has been working alongside of other professionals to ensure that the IRS’s Revenue from Contracts with Customers is implemented correctly. Savvy auditors know already the considerations needed for revenue recognition, and the Professional Company Accounting Oversight Board (PCAOB) has helped to provide information along the way.
Auditing and Revenue Recognition from Contracts with Customers
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued an accounting standard for recognizing revenue from contracts with customers in 2014. From that point on, clarifications have been released, and five steps have been set out in detail to assist accountants and auditors with helping business entities understand what this Accounting Standard Codification (ASC) 606 means for recognizing revenue. Revenue recognition is one of two important major processes within businesses, purchasing being the other. Within recognizing revenue, it tends to be the area where financial mistakes are most often seen, but finding common areas where revenue is misstated can be easily spotted and corrected, luckily.
Helping Businesses Understand the ASC 606 in Audits
Working with auditing revenue is a process involving two-steps and most financial statements must work within the generally accepted accounting principles (GAAP). The steps include sampling and testing the balance sheet account in accounts receivable and sample and then testing the income statement revenue accounts. Within the balance sheet account, which is the client’s accounts receivable account, auditors work to ensure the correct amount of money customers are owed from the client for goods and services. Secondly, auditors work with revenue accounts on the income statement which reflect all income earned during the period, regardless if cash has changed hands. Lastly, the auditor works to verify that balances in the revenue and accounts receivable are without issues.
Issues Arising with Revenue Recognition in the Audit
As auditors work with balance sheets and recognizing revenue, there are two potential issues that can arise. Things auditors look for when recognizing revenue are side agreements and channel stuffing. Side agreements occur when a verbal acknowledgement is made within a sale. This side agreement could be a vendor who has agreed to order X amount of a product at a set price. However, the stipulation is that when this product is set to be invoiced, the price of the product is reduced dramatically. This is one-way companies look to temporarily and artificially inflate year-end gross receipts. Channel stuffing tends to also happen at the end of the year and is a way that companies attempt to inflate revenue artificially through allowing a vendor to return unused product after the first of the year for a full refund. This can happen for several reasons such as, vendors accepting too much product to receive favorable purchasing terms in exchange for the consideration, or the vendors themselves are participating in channel stuffing.
Contact Your Auditor for Revenue Recognition in Augusta, Georgia
he Baird Audit Group tailors each client engagement to meet the specific needs of your organization in the most efficient manner. Long established in audit, tax, consulting, and bookkeeping services, we have developed a suite of audit specialties. These include risk-based audit approach, financial audits, agreed-upon procedures, and additional services for those needing audits performed on accounting information systems and internal control procedures, including upholding the Revenue from Contracts with Customers recognition. Reach out today online, via email, or by phone at 706-855-9500. Our team is trained in government management, auditing, accounting intricacies, and more to better serve you and your business.