Question

Why should auditors assume revenue is misstated? What type of misstatement is typical for revenue? Under what circumstances my revenue be misstated in an atypical manner?

Answer 1

The auditors should assume revenue is misstated,here below are following points,

in which auditors has very large risk of material misstatement, Presumption of revenue recognition as a fraud risk.

mainly the client who prepare financial statements will recognise the revenue even though the amount in actual not received and services are not done, i.e improper way of recognising the revenue.

If the client who assumes their target sales are not reached, then he may generate fictitious sales for reaching the target, improper wayi.e fraudulent way of recognising the revenue, sometimes fictitious cash sales they improperly recognise the revenue , auditor need to be attentative to prevent fraud risk

They shifts the revenue for later period, i.e improper way of choosing for recognising the revenur i.e sometimes premature recognise and some times shifting the revenue recognisition.

revenue may be overstated by doing the above the means of recording the sales, here auditors requires to make rebuttable presumption that improper revenue recognition is a risk of material misstatement of the financial statements due to fraud.

here auditors need to follow revenue risk by assertion that may require special focus when planning the audit.

• existence or occurrence of transaction
• completeness of the transaction
• rights and obligations
• valaution i.e for complex transactions require high degree of judgement
• accuracy
• cut off is very important for all for recognising the revenue belongs in correct period rather than shifting the revenue to the later periods.

here the auditors should considers the quantative and qualitative factors for assesing the risk of materilamisstatement in regading with recognisition of revenue.

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