Revenue from the operation is one of the most essential measures of performance of a company’s financial activities and if the financial activities and in the financial are to be presented correctly the stakeholder can rely on the business. As a 9 clarifies whether and when there should be a recognition with respect of revenue from operation.
Auditing revenues from operations under AS9 is defined as an exercise of careful checks on the financial records of a company to ensure compliance with these standards. It outlines various main matters related to the auditing process as in recognition of revenue ,disclosures required and common audit problems.
The awareness of these points ensures accurate, transparent and reliable statements of investors, regulators or third parties.
Understanding Revenue Recognition
Revenue refers to all cash, amount receivable and other consideration received from scale of products, providing services or earning on accounts and other property of the entity which occurs during the normal oration course of each entity.
Revenue is forecasted and evaluated on the basis of cost imposed on consumers for the provision of sold goods as on the basis of standing ceded economic benefits and payments earned in utilizing such resources. In an agency relationship revenue is earned as commission; it is the gross inflow of cash ,receivable and even other considerations which are not considered as revenue.
As 9 concentrates on the principles that govern the recognition of revenue in the financial statements of a company. It allows recognition of revenue generation from sales, services offering and application of the company resource in earning sound interest, dividend and royalties within the course of ordinary business operations. Assets that are likely to affect revenue recognition on the income statement includes.
- The correct time of recognition of revenue.
- The amount of valuable revenue depends on agreement between the two parties involved in the transaction.
- The not fixed amount of associated costs may influence the timing of revenue.
How Do You Recognize Revenue from the Sale of Goods?
Revenue from selling goods is recognized when:
- The Buyer has taken on the main risk and benefits of owning the goods.
- The seller has transferred ownership of the goods of the buyer in exchange for payment.
- The seller no longer has significant control over the goods.
- There is no uncertainty about the amount of payment that will be received.
When ownership of the goods is passed to the buyer the man risk and reward of owning them are also transferred. However sometimes the goods may be delivered later and in those cases the revenue is recognized when the buyer takes on the main risks and benefits of ownership.
If there is a delay in delivery caused by either the buyer or seller the part of the fault is responsible for any loss that happens during the delay.
How Do You Recognize Revenue From The Sales of Services?
Revenue generation services transactions are normally recognized:
- Proportionate Completion Method and Completed Services contract method are two methods for performance of services.
- There is no major doubt regarding the amount of consideration derived from services rendering.
Proportionate Completion Method
The proportionate completion method is the way to identify revenue for the work and the services that are completely different from this method, revenue is track based with the amount of the services or work has been completed. This can be calculated by seeing the contract value cost or other appropriate ways. In practice if there is a service performing different times throughout the year then the revenue is displayed out the same manner over that time until there is a better way to show how the work is done.
For example : If a company has a yearly contract to maintain a machine and their assets, they perform maintenance every three months. The revenue from the contract would be recognized every three months so 25% of the total maintenance fee would be recorded as revenue after every 3 months.
Completed Service Contract Method
The complete service contract method identifies revenue only after when all required services in the contract are fully completed. This means that even if the services are done in many steps or levels, the contract is not considered as complete unless the final part of service is done.
For example, imagine a contract to install wooden benches in parks across the city. The contract says payment will only be made once all the benches are installed. Even if some benches are already in place, the city will only count the service as complete and recognize the payment when every bench has been installed. Revenue is acknowledged at the end of the project, once everything is finished.
Revenue Arising from the use by others
This includes interest, royalties, and dividends. The revenue should only be recognized when no substantial doubt about the measurability or collectability exists. There are considerations of profit recognition as follows in the case of interest:
Interest: Calculated on the outstanding balance and the interest proportionate to the elapsed time.
Royalties: These shall be computed in accordance with the terms of the agreement then prevailing.
Dividends: These accrue to shareholders once their right to cash is established.
Uncertainties in Revenue Recognition
As per accounting standard 9, revenue can be recognized only after these two conditions are met.
- When the revenue amount can be measured
- When it is reasonably certain that payment will be collected
However in some cases, like with insurance claims or when the price increases it might not be clear. Clear when the payment will be received. In these circumstances. As 9 advises delaying revenue recognition until the uncertainty is resolved. Once it becomes reasonably certain that payment will be collected, and revenue can be recognized
If there is no doubt about the payment, revenue is recognized when the sale or service is provided even if payments are made in installments. But if it is not clear how much will be paid, revenue recognition should be delayed. Once the uncertainties are cleared up, and collection is certain, the revenue can be recorded.
What is the Objective of the Audit of Revenue
The main Aim of auditing revenue is to make sure a company’s sales records are correct and complete.
1. Existence: The revenue that is recorded actually comes from products sold or services provided during the time period, without maximizing the numbers
2. Completeness: All sales that happened during the time period are properly recorded.. so no sales are left out..
3. Accuracy: Every sale is recorded with the correct amount there should be no error
4. Presentation and Disclosure: The revenue is presented clearly, while following the required accounting rules and guidelines.
Potential Risks of Material Misstatements in Revenue
Revenue misstatement often stems from the desire to showcase improved financial performance. Senior management might exploit gray areas in revenue recognition regulation to hasten revenue reporting , as businesses are frequently evaluated based on their reported revenue figures.
The Institute of Chartered Accountants of India (ICAI), in its Standard on Auditing (SA 240), assumes there are risks of fraud in revenue recognition and requires auditors to assess the types of revenue and assertions that could pose such risks. Common methods of revenue misstatement include:
- Fictitious sales, where goods or services are not actually delivered.
- Manipulating sales figures to meet revenue targets or secure commissions.
- Recognizing revenue prematurely before fulfilling sales conditions.
- Overstating sales through side agreements or consignment sales without actual delivery.
Auditors should also be vigilant about risks such as recognizing sales too early after the end of a reporting period, neglecting to account for sales returns, or engaging in channel-stuffing to artificially inflate sales numbers.
Protect your business from revenue misstatements by utilizing audit services. Navigate the complexities of revenue recognition to ensure compliance and maintain your financial integrity.
What is the procedure Of Audit?
- Understand the nature of products or services, including the entity’s sales processes and pricing policies.
- Ensure that the entity’s revenue recognition policies align with AS 9.
- Verify that recorded sales are consistent with supporting documents, such as sales orders, invoices, and delivery notes.
- Check whether the deferred portion is properly accounted for in cases of deferred revenue.
- Test “bill and hold” and consignment sales to confirm they meet AS 9’s recognition criteria.
- Review discount and pricing policies to ensure that proper authorizations are in place.
Auditors must also ensure that cash sales are reconciled with bank deposits, that export sales are recorded according to AS 11, and that related-party transactions are conducted at arm’s length.
The policy regarding sales returns should be reviewed, and corresponding credits must be verified with return notes and inspection reports. Additionally, revenue cut-off procedures should be in place to ensure that the correct accounting periods are adhered to.
Auditors can utilize external data for additional assurance, such as reconciling revenue with e-way bills or bank realization certificates (e -BRC) to verify export sales.
Disclosure Requirements As per Schedule III And AS 9
As per Schedule III of the Companies Act 2013 companies should show their revenue in the profit and loss statement broken down into specific categories like sales of products and services. They also need to present revenue after deducting Goods and Services Tax (GST), following the guidelines provided by ICAI (Institute of Chartered Accountants of India). For financial companies, they must separately show their revenue from interest and financial services in the notes to the accounts.
Conclusion
In conclusion, auditing the revenue as per as 9 is important for ensuring right Financial reporting. As per 9 provides guidelines on how to identify revenue from selling goods and providing services and earning income from resources..
Auditors play a key role in checking if companies follow these rules making sure that revenue is recognized only when it is earned, countable and can be collected.
By following these guidelines businesses can give a true picture of their financial health which helps build trust with investors, regulators, and others. Auditing also helps to identify and reduce the risk of incorrect revenue reporting which can happen when companies feel pressure to show better financial results.
Auditors help maintain compliance with AS9 by understanding the company’s operations, reviewing its revenue policies and checking documents thoroughly. Correct revenue recognition is essential not only for following the rules but also protecting the company’s reputation and market position.