PCAOB alert calls for auditors to focus on revenue

The PCAOB on Tuesday urged auditors to focus on the board’s standards for auditing revenue.

In Staff Audit Practice Alert No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements, the PCAOB discusses board requirements for auditing revenue that are relevant to significant audit deficiencies found frequently during inspections.

The alert discusses:

• Testing whether revenue was recognized in the correct period.
• Evaluating whether the financial statements include the required disclosures regarding revenue.
• Responding to risks of material misstatement due to fraud associated with revenue.
• Testing and evaluating controls over revenue.
• Applying audit sampling procedures to test revenue.
• Performing substantive analytical procedures to test revenue.
• Testing revenue in companies with multiple locations.

PCAOB Chief Auditor and Director of Professional Standards Martin Baumann said in a news release that engagement partners and senior management team members should focus on those areas throughout the audit. Engagement quality reviewers also should keep those matters in mind, Baumann said.

Baumann encouraged audit firms to revisit their audit methodologies to assure that auditing standards are followed with respect to revenue. He said firms should consider whether additional training of auditing personnel or other steps are needed to assure compliance.

The alert was issued because revenue is an area in which board inspectors have most often identified significant audit deficiencies.

“Revenue is one of the largest accounts in the financial statements, and an important driver of a company’s operating results,” PCAOB Chairman James Doty said in a news release. “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.”

Audit committees may also wish to discuss with auditors their approach to auditing revenue because revenue figures prominently in financial and operating results, according to the PCAOB.

The matters discussed in the alert are likely to be relevant under the new, converged revenue recognition standard issued in May by FASB and the International Accounting Standards Board, according to the PCAOB.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.