The Public Company Accounting Oversight Board has released a new alert from the PCAOB staff warning auditors about deficiencies that have been seen in audits of revenue figures.
The Staff Audit Practice Alert highlights the requirements for auditing revenue under PCAOB standards, in light of what the staff says are significant audit deficiencies in this area that have been frequently observed during PCAOB inspections.
The PCAOB pointed out that its inspection reports have consistently identified revenue as one of the most common areas for audit deficiencies.
"Revenue is one of the largest accounts in the financial statements and an important driver of a company's operating results," said PCAOB chairman James R. Doty in a statement. "Given the significant risks involved when auditing revenue, auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue."
Staff Audit Practice Alert No. 12: Matters Related to Auditing Revenue in an Audit of Financial Statements discusses the application of certain requirements in PCAOB standards when auditing revenue that are relevant to the significant audit deficiencies frequently found during inspections.
The alert discusses areas such as testing the recognition of revenue from contractual arrangements, evaluating the presentation of revenue, such as gross versus net revenue, testing whether revenue was recognized in the correct period, and evaluating whether the financial statements include the required disclosures regarding revenue.
The document also covers other problem areas such as responding to the risks of material misstatement due to fraud associated with revenue, 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.
“It is important for the engagement partner and senior engagement team members to focus on these areas throughout the audit and for engagement quality reviewers to keep these matters in mind when conducting their engagement quality reviews,” said Martin F. Baumann, chief auditor and director of professional standards at the PCAOB. “Audit firms should also revisit their audit methodologies and their implementation of those methodologies to assure that auditing standards are appropriately followed in the area of auditing revenue. In addition, they also should consider whether additional training of their auditing personnel or other steps are needed to assure that PCAOB standards are followed.”
Due to the significance of revenues to many companies' financial and operating results, auditing revenue also raises matters of potential interest to audit committees. Audit committees might wish to discuss with their auditors their approach to auditing revenue, including the matters addressed in this alert.
In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board jointly adopted a converged accounting standard on revenue recognition, the PCAOB noted. The matters discussed in the new practice alert likely will continue to be relevant to auditing revenue under the new accounting standard.
Auditors should determine whether and how to respond to the circumstances discussed in this alert based on the specific facts presented. The PCAOB cautioned that the statements contained in the staff practice alerts do not establish rules of the board and do not reflect any board determination or judgment about the conduct of any particular firm, auditor or any other person.
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