Auditing Revenue Recognition

Question: Discuss about the Auditing for Revenue Recognition. Answer: Introduction: The word Audire from the Latin, for Audit means to say to listen. The business always started with generating profit and is related with huge transactions involving cash and bank and will involve lot of other transactions like revenue, sales, expenses like depreciation, etc. The Auditor is appointed with an objective to crosscheck various entries related to cash and bank and also expenses and income which has either relation with cash and bank only as the total world business runs on either cash or bank as all transactions are on the basis of cash and bank and there is no other ways and means to deviate from here. The Auditors main duty is to detect if any fraudulent activities are taking place or not in the business. Also to check the entire human resource of the company is fraud free or not. If any fraudulent activities are found then they are required to take appropriate measures to rectify the same1. The auditors job is related with the following: To verify all guidelines, rule and regulations, standard operating procedures, etc of the company. To detect and demonstrate all its detection of financial information to all stakeholders. To verify the procedures and methods followed by each department as formulated by the company2. To find out any manipulations, mistake or misrepresentations of any vital information is made in the business by any employees. To bring in the new guidelines on the basis of the findings and the detection done and to prepare a detailed report on such discoveries. The auditor is always to find the loopholes in the functioning of the business and any mistakes, fraudulent activities have taken place in the business and the management is aware of it then the auditors duty is to highlight this to all the stakeholders in their report and to make it rectified totally so that such acts are not performed in future in the greater interest of the business and all the investors2. About QQQ Limited The company is in the business of the Airlines and customers who travel by air. Their revenue has dropped by 6% and their advance revenue also dropped by 11% and the depreciation also dropped by 5%. Explain why the revenue from passenger accounts in the income statement is at significant risk of fraudulent financial reporting by management3. a) The management always target to show very high earnings but if the cost is not recovered from the operations and from the revenue earned then the business will tend to go for losses. The management always looks into this as a bad sign and try to find ways and means to cover such losses in different types of manipulation of accounts by making adjustments in various types in the incomes and the expenses. The most effective manipulation can be done in the process in the areas of revenue, advance revenue, and expenses like depreciation which is of very big nature in an airline industry as the planes value is very high[2]. The revenue and the advance revenue is shown reduced to show its stakeholders that the business is not going good and as also the depreciation is reduced means the reduction in depreciation means reduction in substantial expense which will result in drop in total expense but as the revenue and the advance revenue is reduced by 6% and 11% respectively that means the prof it will be reduced in the long run and the business will like a loss making thus making it bankrupt and no more workable. This is nothing but sheer fraud to reduce revenue, advance, revenue and depreciation which also means that the value of total assets will not actually reduce instead it will show the profit to jump due to less expense but it all depends on actual figures in an airline business. Describe a relevant and practical internal control to address the fraud risk described in (a) above. Explain how the internal control will minimize the risk of b) The main target of the auditor is to prepare a list for their audit job is to detect fraud and manipulation and find ways to correct and to put in place an internal control through this process as described as per ASA-240 are as follows: First to understand the nature of business. Next to understand the human resources including the management of the company. Then to make a detailed list of dos and donts for the audit team to follow during the time of audit[3]. Then to find out the detailed list of all books of accounts and other books and records maintained by the whole company. Then to start planning for checklist for each and every department according to their job profile. Then to start planning for making counter verification with other parties and stakeholders if required to verify certain transactions in which they may have doubts and needs further clarification from third parties like bank, investors, suppliers, shareholders, creditors, debtors, ex-employees, ex-management people, etc3. Next to have a list for collection of evidence of large amount transactions. Then to do a list planning for making the random checking to find if the internal audit system is placed well enough to detect any problem at all. Then to prepare for steps to be taken if any fraud, mistake, manipulations, misrepresentations, etc are located. Finally to prepare a detailed findings report for the entire stakeholders to take note of. The management is to keep strict internal control and the entire business setup needs to be kept in strict guideline as per the advice of the auditor. The internal auditors and the external auditors need to start the reconciliation of the entire process of checking and rechecking of the entire operations in detail. The control requires being very specific and guided by both the management and the auditors. Reference Auditor's Perspective: An Interview with Mike Schamberger, Assurance Partner at Grant Thornton LLP https://www.revenuerecognition.com/content/articles/9031, (October, 14 2010) Maire Loughran, WHAT TO LOOK FOR WHEN YOU AUDIT REVENUE https://www.dummies.com/business/accounting/auditing/what-to-look-for-when-you-audit-revenue/, (October, 14 2010) AICPA, Revenue Recognition https://www.aicpa.org/PUBLICATIONS/ACCOUNTINGAUDITING/KEYTOPICS/Pages/RevenueRecognition.aspx, (October, 14 2010) PCAOB, PCAOB Issues Staff Audit Practice Alert on Auditing Revenue in Light of Frequently Observed Significant Audit Deficiencies, https://pcaobus.org/News/Releases/Pages/09092014_SAPA12.aspx, (October, 14 2010) Pwc, Revenue recognition: Effectively managing accounting changehttps://www.pwc.com/us/en/audit-assurance-services/accounting-advisory/revenue-recognition.html, (October, 14 2010) [1] Auditor's Perspective: An Interview with Mike Schamberger, Assurance Partner at Grant Thornton LLP 2https://www.revenuerecognition.com/content/articles/9031, (October, 14 2010) Maire Loughran, WHAT TO LOOK FOR WHEN YOU AUDIT REVENUE https://www.dummies.com/business/accounting/auditing/what-to-look-for-when-you-audit-revenue/, (October, 14 2010)