---
title: Why Revenue Matters in an Audit | SVA CPA
description: Preparing for an audit? Discover why revenue reporting matters—and the key areas auditors target, from contract compliance to accurate timing of revenue.
---

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# [Why Revenue Matters in an Audit | SVA CPA](https://accountants.sva.com/biz-tips/why-revenue-matters-in-an-audit)

 Written by [Kelly Gustafson, CPA](https://accountants.sva.com/biz-tips/author/kelly-gustafson) | Jan 22, 2019

For many companies, revenue is one of the largest [financial statement](https://accountants.sva.com/biz-tips/financial-statements-demystified-a-guide-for-businesses) accounts. It’s also highly susceptible to financial misstatement.

When it comes to revenue, auditors customarily watch for fictitious transactions and premature recognition ploys. Here’s a look at some examples of critical issues that [auditors](https://accountants.sva.com/biz-tips/how-auditors-assess-risk-when-preparing-financial-statements) may target to prevent and detect improper revenue recognition tactics.

## Contractual Arrangements

Auditors aim to understand the company, its environment and its [internal controls](https://accountants.sva.com/the-importance-of-internal-controls-ebook-download). This includes becoming familiar with key products and services and the contractual terms of the company’s sales transactions.

With this knowledge, the auditor can identify key terms of standardized contracts and evaluate the effects of nonstandard terms. Such information helps the auditor determine the procedures necessary to test whether revenue was properly reported.

For example, in [construction](https://accountants.sva.com/industries/construction-consulting)-type or production-type contracts, audit procedures may be designed to:

1. Test management’s estimated costs to complete projects
2. Test the progress of contracts
3. Evaluate the reasonableness of the company’s application of the percentage-of-completion method of accounting

## Gross vs. Net Revenue

Auditors evaluate whether the company is the principal or agent in a given transaction. This information is needed to evaluate whether the company’s presentation of revenue on a gross basis (as a principal) vs. a net basis (as an agent) complies with applicable standards.

[(Download Video Transcript)](https://accountants.sva.com/hubfs/Video%20FAQ%20Transcripts/Do%20I%20Need%20a%20Compilation%2c%20Review%20or%20Audit.pdf)

## Revenue Cutoffs

Revenue must be reported in the correct accounting period (generally the period in which it’s earned). Cutoff testing procedures should be designed to detect potential misstatements related to timing issues, as well as to obtain sufficient relevant and reliable evidence regarding whether revenue is recorded in the appropriate period.

If the risk of improper accounting cutoffs is related to overstatement or understatement of revenue, the procedures should encompass testing of revenue recorded in the period covered by the financial statements — and in the subsequent period.

A typical cutoff procedure might involve testing sales transactions by comparing sales data for a sufficient period before and after year-end to sales invoices, shipping documentation, or other evidence. Such comparisons help determine whether revenue recognition criteria were met and sales were recorded in the proper period.

## Renewed Attention

Starting in 2018 for public companies and 2019 for other [entities](https://accountants.sva.com/biz-tips/business-entity-types-which-is-best-for-your-business), revenue must be reported using the new principles-based guidance found in Accounting Standards Update (ASU) No. 2014-09, *Revenue from Contracts with Customers*. The updated guidance doesn’t affect the *amount* of revenue companies report over the life of a contract. Rather, it affects the *timing* of revenue recognition.

In light of the new revenue recognition standard, companies should expect revenue to receive renewed attention in the coming [audit](https://accountants.sva.com/services/audit-and-assurance) season. Contact us to help implement the new revenue recognition rules or to discuss how the changes will affect audit fieldwork.

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*© 2018*

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