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Staff Alert Warns Auditors About Problems with Revenue Reporting

The PCAOB warned audit firms to pay more attention to their clients’ reporting of revenue. The audit regulatory board said it continues to find problems with how accounting firms treat the reporting of revenue, including the way auditors test a client’s revenue from contracts.

The PCAOB warned audit firms on September 9, 2014, to pay more attention to their clients’ reporting of revenue in Staff Audit Practice Alert (APA) No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements .

“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 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.”

The audit regulatory board said it continues to find problems with how accounting firms treat the reporting of revenue, including the way auditors test a client’s revenue from contracts. Audit firms also often fail to confirm whether the client reported the revenue in the correct period or satisfied the disclosure requirements for revenue.

PCAOB inspectors also have faulted audit firms for failing to check if a client properly accounted for its role in customer sales. The alert said that under U.S. GAAP companies should report the gross amount of the sale when they’re the principal supplier of the product or service but only report a commission or fee if they’re acting as a sales agent.

The PCAOB said the guidance in APA No. 12 should remain applicable when the recently published revenue recognition standards from the FASB and IASB become effective. The FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the IASB’s IFRS 15, Revenue from Contracts with Customers, establish a uniform means for reporting revenue in U.S. GAAP and IFRS.

At a June meeting of the PCAOB’s Standing Advisory Group (SAG), Chief Auditor Martin Baumann said the board was planning to issue interpretive guidance for the revenue standards but hadn’t determined if it should publish a formal standard.

In an email response to a question, Baumann said the staff is still considering its options.

The alert said the PCAOB expected that company audit committees would probably want to discuss the company’s reporting of revenue with the outside auditor, given the significance revenue has in a company’s financial performance.

In addition, studies of accounting fraud often find that revenue is the most common source of reporting fraud, and a frequent reason for PCAOB disciplinary actions against auditors.

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