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Auditing New Revenue Rule: “Like a First-Year Audit"

Tammy Whitehouse | July 22, 2014

Just as companies are starting to determine how to account for revenue under a new accounting standard, auditors are starting to consider new audit techniques that will be required.

The Public Company Accounting Oversight Board assembled its Standing Advisory Group recently to begin thinking through how the audit of revenue recognition will need to change based on the new accounting requirements. The Financial Accounting Standards Board and the International Accounting Standards Board adopted a brand new standard that will overhaul the recognition of revenue for all companies, taking effect in 2017. The PCAOB says it is considering whether to develop guidance, amend its existing standards, or issue a new standard on auditing revenue.

santarelli-philip-updatedBecause the accounting standard requires new uses of judgment, the audit naturally will involve some new judgments as well, says Phil Santarelli, a partner with audit firm ParenteBeard and a member of the recent PCAOB panel. “As an auditor, the way I see it, it will be almost like a first-year audit for someone who might be an existing client,” he says. “Not necessarily in all industries, but for many industries there’s going to be a lot more judgment involved. Whether a contract exists, what the performance obligations are within a contract, whether they are discrete or not as defined in the standard, determining the transaction price particularly if variable consideration is involved. All of that will mean registrants will potentially have to develop new controls and new processes and procedures.”

spivey-alison-updatedAuditors will be on guard to look for signs of fraud, said Alison Spivey, a partner with EY, during the panel discussion. “As auditors we’re required to consider specifically the risk of fraud as relates to revenue recognition,” says Alison Spivey, a partner with EY. “There is natural question that comes up with respect to anytime there are additional judgments or estimates put into the financial reporting process and that is does that introduce an additional element or concern about fraud risk, about the risk of possible management manipulation of some of these estimations close to the end of a reporting period or in situations when they might be trying to achieve a particular earnings target.”

Santarelli says he expects auditors to devote considerable time, particularly with smaller companies, considering deficiencies in internal controls. “I think there’s going to be a lot more discussion about deficiencies,” he said. “I think very likely to occur. Because of the environment that smaller entities operate in, no doubt in my mind there will be deficiencies.”

PCAOB Chief Auditor Marty Baumann said the board likely will discuss the issue extensively in the coming months and years as companies prepare to adopt the standard.