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Internal Audit Procedures for Revenue Recognition

Dubai is one of the promising commercial trading hubs, as it is a desired destination for entrepreneurs and investors. Thus, the laws and regulations of the land are vitally important to the Dubai government. The government-issued mandated standards have led to a growth in the number of audit firms in Dubai, UAE.

Internal auditing is critical for organizations. By evaluating the effectiveness and reliability of their best practices, they help firms achieve their company goals.

Internal audits are primarily concerned with managing risk and are carried out to evaluate the efficiency of an organization's internal controls, corporate governance, and accounting procedures.

Companies with poor revenue recognition practices can't track their revenue from the very beginning till it is turned into cash. Thus, it is necessary to audit such businesses to ensure that they adhere to the letter of the law on taxes and GAAP best practices.

Continue reading this article to learn about the procedures involved and the revenue recognition audit checklist.

What is Revenue Audit?

A revenue audit is a process that analyzes the information and statistics on a corporation's tax returns to those in its financial reports. Auditors often examine the income tax returns over a year. However, if they notice any discrepancies, they should also review the information from earlier years.

Revenues Audit Objectives

Revenue audit’s primary goals are to make sure that revenue is recognized on time that internal controls are effective, that income is complete, and that compliance levels are met. For the revenue audit, the auditor should do enough factual and control testing. Internal audit in Dubai is intended to improve and advance business activities. The identification of internal controls aids board and management supervision and provides insight into the policies and procedures.

Read More : Why Financial Audit is Important for your Business?.

Audit Procedures for Revenue Recognition

An auditor must be familiar with the requirements of the new revenue recognition standard and how they impact the client's financial reports to determine the risk of substantial inaccurate statements. The five-step procedure for identifying revenue and circumstances that call for significant judgment is described as follows:

1.Determine Contracts with Client

Procedures used by the client should confirm that contracts meet the requirements outlined in the standard. When clients have a reasonable expectation that applying the standard's guidelines to a portfolio of contracts with comparable features won't dramatically alter the implications on the financial statements, they may choose to do so.

One aspect where clients make important decisions is concerning change orders or amendments to contracts. These happen when a contract is amended and both parties agree on the price or the deal's scope. Clients evaluate these revisions and decide whether the alteration or change belongs in the original contract or requires a new contract with the client. Depending on how the change is dealt with, these judgments have an impact on both the amount of liability and the income recognized for the period.

2.Determine Individual Performance Obligations

Contractual agreements that transfer ownership of a good or service to the consumer are referred to as performance obligations. If a client agrees to transfer more than one product or service to a customer under the terms of a contract, the client must specify each claim as a performance obligation if the service or product is distinct or if multiple different products or services are comparable in scope and transfer.

Determining unique performance requirements in complex contracts necessitates more discretion. Customers will have to determine whether there are any signs that a commitment to transfer products or services to a client is distinct from other such promises.

3.Calculate the Transaction Price

The transactional price is the sum of money that a client anticipates paying in exchange for the goods or services they are offered. When determining the transaction price, a customer should take into account the consequences of several variables:

  • Limiting estimates of variable consideration; variable considerations like discounts, rebates, refunds, returns, and bonus payments
  • The payment owed to a customer
  • Non-cash factors
  • The presence of a sizable financial component

While calculating the variable factors that ought to be incorporated in the transaction price and revising those estimations each reporting period, clients may need to use a great deal of judgment.

4.Allocate Transaction Price to Various Performance Commitments

Customers attribute the transaction price to each contractual obligation indicated in the contract on a respective stand-alone selling price basis using the facts from step three. The cost at which a company would offer a consumer a promised good or service is known as the stand-alone selling price.

The observed price of a product or service that the business sells independently in comparable conditions to comparable clients serves as the best indicator of the stand-alone selling price. When there is no stand-alone selling price, the estimate may be based on residual approaches, estimated cost plus margin, or modified market analysis.

Clients use judgment in numerous ways at stage four. Additionally, customers will have to decide how to distribute discounts and variable factors.

5.Recognizing Revenue

The transfer of a promised product or service to the client constitutes the recognition of revenue when or as clients fulfill their performance obligations. The customer is obliged to decide whether a certain performance obligation is completed throughout time or at a specific point in time.

A consumer might not always directly possess the product after control is transferred. Whether a customer gains ownership of a product, clients with bill-and-hold agreements must assess when they have met their performance duty to transfer that product.

Read More : Top Audit Firms in Dubai.

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.