Revenue Recognition

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At what point in time to recognise revenue as per IAS 18

Transcript of Revenue Recognition

Guidance1812 Revenue RecognitionDate Issued/Date of last review:August 2010Literature:ISA 500, ISA 240, DAAM 2815Effective date of literature:ISA 500 (periods starting on or after 15 December 2009)ISA 240 (periods starting on or after 15 December 2009)GUIDANCE

Presumed significant risk - Revenue recognition

"When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks. Paragraph 47 specifies the documentation required where the auditor concludes that the presumption is not applicable in the circumstances of the engagement and, accordingly, has not identified revenue recognition as a risk of material misstatement due to fraud. [ISA 240.26]If the auditor has concluded that the presumption that there is a risk of material misstatement due to fraud related to revenue recognition is not applicable in the circumstances of the engagement, the auditor shall include in the audit documentation the reasons for that conclusion. [ISA 240.47]

"The auditor shall treat those assessed risks of material misstatement due to fraud as significant risks and accordingly, to the extent not already done so, the auditor shall obtain an understanding of the entitys related controls, including control activities, relevant to such risks." [ISA 240.27]

ISA240 creates a responsibility on auditors to presume a fraud risk exists around revenue recognition at the outset of each engagement and to consider these risks before designing tests to address the risks of material misstatement. Our understanding of the process to identify and record revenue transactions, the revenue recognition policies and risks of material misstatement around revenue recognition, is documented in .

This work paper highlights each revenue stream, the significant fraud risks related to each revenue stream, and where appropriate allows for a rebuttal of the presumption that revenue is a significant risk. Revenue streams that are not significant and are not expected to be significant, are excluded, as these are not risk areas where fraud could cause material misstatement. This however must be documented clearly with supporting arguments (refer 'Pinpointing' tab).

Risks of fraud - Revenue Recognition

The "Application and Other Explanatory Material" to ISA 240 provides the following guidance:

A28. Material misstatement due to fraudulent financial reporting relating to revenue recognition often results from an overstatement of revenues through, for example, premature revenue recognition or recording fictitious revenues. It may result also from an understatement of revenues through, for example, improperly shifting revenues to a later period. A29. The risks of fraud in revenue recognition may be greater in some entities than others. For example, there may be pressures or incentives on management to commit fraudulent financial reporting through inappropriate revenue recognition in the case of listed entities when, for example, performance is measured in terms of year over year revenue growth or profit. Similarly, for example, there may be greater risks of fraud in revenue recognition in the case of entities that generate a substantial portion of revenues through cash sales. A30. The presumption that there are risks of fraud in revenue recognition may be rebutted. For example, the auditor may conclude that there is no risk of material misstatement due to fraud relating to revenue recognition in the case where a there is a single type of simple revenue transaction, for example, leasehold revenue from a single unit rental property. Steps in work paper completion

1) Conduct the relevant discussions with engagement team, management and those charged with governance.1. Discussions2) Perform preliminary analytical review procedures to identify risks relating to revenue recognition.2. Prelim AR3) Obtain an understanding of the relevant accounting policies and processes to account for revenue.3. Understanding4) Pinpoint risks identified to relevant revenue stream, type of transaction and assertion.4. Pinpointing

Revenue recognitionPreparer: CG 28/03/2012Reviewer: AK 26/04/2012

1812: &P/&N

Econet Wireless Global Limited Group - 28 February 2012 Period End: 28/02/2012&D &T

1. DiscussionsDISCUSSIONS WITH ENGAGEMENT TEAM, MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE

Engagement team

The ISA's require that the engagement partner and other key engagement team members discuss the susceptibility of the entitys financial statements to material misstatement and the application of the applicable financial reporting framework to the entitys facts and circumstances. [ISA 240.15].

Key considerations and questions that the practitioner can include into these discussions include:These discussions should ordinarily take place during the Planning Meeting.ProceduresDetailsComments1. Has the entity experienced any errors in the past with recognising revenue? Based on our knowledge and understanding of the entity, errors in revenue has been identified. Example of errors identified in prior years were as follows:> error in posting income to other revenue instead of accrued purchases> errors in recognition of deferred revenue The above errors are not considered intentional and in addition, they are not considered material and were unlikely to result in a material mistatement of the financial statements.2. Does the industry the entity operates in have any experience of revenue recognition problems? The Telecommunications industry has experienced issues in revenue recognition. In June 2010, the IASB1 and the FASB2 published an exposure draft ("ED")on revenue from contracts with customers, which comprises proposals to replace existing guidance under both IFRSs and US GAAP. The ED proposes a single principles-based model under which an entity would recognise revenue as it satisfies the performance obligations in contracts with customers. A performance obligation would be satisfied when control of the promised goods or services is transferred to the customer. The revenue recognition problems has prompted the IASB and FASB to publish an exposure draft. Revenue recognition has been identified as a significant risk and adequate audit procedures has been designed in .3. Are the terms of the entitys sales contracts simple or complicated? As per our knowledge and understanding of the entity, the sales contracts are complicated as it is based on international carrier agreements. Revenue recognition has been identified as a significant risk and adequate audit procedures has been designed in .4. Is the entitys accounting policy appropriate for the types of revenue generated by the entity, and is it in accordance with the relevant accounting framework (or other authoritative guidance)? The accounting policies has been reviewed as part of our tie-in of the notes. The accounting policies has been reviewed as part of our tie-in of the notes. The acocunting policy appears to be inline with IFRS.5. Are there any particular pressures or opportunities for management to manipulate revenue? Econet has intentions of listing on the London Stock exhange and this created pressure on management to manilpulate revenue. As a result of the potential listing, the audit has been classified as greater than normal. Revenue has been identified as a significant risk and adequate audit procedures has been designed in .6. How easy would it be for management to manipulate revenue, and how would they do it? The following manipulation could occur:> certain tariffs loaded on the system are not in accordance with the agreed tariffs> inappropriate / premature / incomplete recognition of revenue> not recording the revenue in terms of IFRS for each significant revenue stream> interconnect revenue (Zimbabwe): invalid of revenue post non payment by other operators, inaccuracy of the receivables balance and the allowability of the tax deduction> incompleteness of switch data We have identified these as significant risks and adequate audit procedures has been designed in .7. Which assertions and / or types of revenue are more likely to be at risk of manipulation of revenue recognition? Occurrence, cut-off, classification, completeness and accuracyWe have identified these as significant risks and adequate audit procedures has been designed in .8. Any other relevant matters.None noted.None noted.

Management

The auditors responsibilities relating to fraud in an audit of financial statements require that the practitioner make inquiries of management [ISA 240.17-.19].

Make inquiries of management regarding:Form "Perform Fraud Inquiries" is recommended as a best practice template and discussion tool.ProceduresDetailsCommentst/m1. Managements assessment of the risk that the financial statements may be materially misstated due to fraud, including the nature, extent, and frequency of such assessments. [ISA 240.17(a)]Low risk as it is not considered likely to occur at a head office level.Please refer to where discussions held with management (Lesley Mills - Head of Group Financial Reporting) has been documented.2. Managements process for identifying and responding to the risks of fraud in the entity, including any specific risks of fraud that management has identified or that have been brought to its attention, or classes of transactions, account balances, or disclosures for which a risk of fraud is likely to exist. [ISA 240.17(b)]Maintenance of regular review and adherence to authorization limits / processes as per chart of authority.Please refer to where discussions held with management (Lesley Mills - Head of Group Financial Reporting) has been documented.3. Mana