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PM550–4
Revenue Recognition.
Audit Excellence 2008
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 2
Objectives
You will be able to:
•
Describe the objective and significance of revenue
recognition.
•
Discuss the practical issues and challenges when auditing
the risk related to revenue recognition.
•
Implement an efficient and effective process on
engagements to identify and pinpoint risks related to revenue
recognition.
•
Outline the documentation appropriate to support the
assessment of the risk of revenue recognition.
•
Direct engagement teams to develop tailored audit
procedures that respond to the risk of revenue recognition.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 3
What we already know
Revenue recognition is a presumed specific risk due to fraud
•
We should ordinarily presume that there is a specific risk of material
misstatement due to fraud related to revenue recognition and consider
which types of revenue, revenue transactions, or potential errors may
give rise to such risk.
<Audit Approach Manual G045.02>
Exception - rebutting the presumed risk
•
If we have not identified a specific risk of material misstatement due to
fraud related to revenue recognition, we should document the reasons
supporting our determination.
<Audit Approach Manual G045.05>
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 4
Why revenue recognition is still topical
Revenue
Recognition
Be mindful of deficiencies
and plan towards a better audit
Fraud cases
Economic factors
Regulators’ concerns/
Practice review findings
Evolving business
models/practices
ISA
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 5
Regulators’ concerns
Key findings from PCAOB:
•
Evaluate compliance with GAAP & address complex or
specialized revenue-recognition accounting principles.
•
Deficiencies in performing audit procedures:
–
Inadequate substantive procedures to test the existence,
completeness, and valuation of revenue.
–
Examining significant contractual arrangements.
–
Performing cutoff procedures.
–
Applying confirmation procedures.
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 6
Common fraud schemes used for improper revenue
recognition
•
Side agreements
•
Channel stuffing
•
Round tripping sales
•
Bill and hold transactions
•
Fictitious sales to existing or nonexistent customers
•
Contract accounting scheme
•
Sham related party transactions
•
Contract with multiple deliverables
•
Consignment sales
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 7
Process overview of revenue recognition
WPs in Large
Man pack
Step 1: Determine the overall audit strategy
Step 2: Discuss the possibility of fraudulent financial
reporting
Step 3: Understand the entity and its environment
Step 6: Pinpoint the presumed specific identified risk
Step 4: Understand the revenue significant flow of
transactions
Step 5: Perform preliminary analytical review
1230
1410
1535
1611
1832/1811
1213
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 8
Revenue recognition criteria – IAS 18
No managerial
involvement
or control
Reliable
measurement
Economic
benefits probable
Transfer of
risks and rewards
Goods
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 9
Revenue recognition criteria – IAS 18
No managerial
involvement
or control
Reliable
measurement
Economic
benefits probable
Transfer of
risks and rewards
Goods
Percentage
completion
Reliable
measurement
Economic
benefits probable
Services
Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu
Slide 10
Analyze and disaggregate the revenue account
Type B: Retailing
Type A:
Distribution
Type C: Wholesale
[...]... Rental income is recognized on a straight line basis over the lease term Can we rebut the presumed revenue recognition risk? Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu Slide 14 Rebuttal of the presumed specific identified risk It is unusual to be able to rebut the presumption of revenue recognition risk • Document the reasons of the rebuttal in the text box of “Audit Plan by Account”... to specific transactions Type C: Wholesale Slide 11 Process overview of revenue recognition Step 1: Determine the overall audit strategy AS/2 common documentation in a large pack 1230 Step 2: Discuss the possibility of fraudulent financial reporting 1213 Step 3: Understand the entity and its environment 1410 Step 4: Understand the revenue significant flow of transactions 1535 Step 5: Perform preliminary... subsidiary of its parent entity • Sales are priced on arm’s length basis and in line with the standard pricing policy of the group • Sales are recognized when title passes Can we rebut the presumed revenue recognition risk? Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu Slide 13 Example 2 You’re Trumped • “You’re Trumped” is a property investment company • It owns one leasehold property for... Document the reasons of the rebuttal in the text box of “Audit Plan by Account” Partners in Learning ©2000-2008 Deloitte Touche Tohmatsu Slide 15 Examples of audit responses dealing with specific risk of revenue recognition Perform substantive analytical procedures Confirm with customers Inquiries of sales and marketing, legal counsel Attend year-end inventory count Perform cut-off procedures Test operating... Tohmatsu Slide 16 Other efficiency and effective considerations to achieve a focused level of substantive assurance Performing tests of details using a focused level of substantive assurance for the entire revenue balance is usually not efficient or effective May be effective to apply nonrepresentative selections in tests of details Perform substantive analytical procedures, with a maximum level of substantive . and significance of revenue
recognition.
•
Discuss the practical issues and challenges when auditing
the risk related to revenue recognition.
•
Implement. pinpoint risks related to revenue
recognition.
•
Outline the documentation appropriate to support the
assessment of the risk of revenue recognition.
•
Direct
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