# Audit of Revenue — Sale of Products and Services

Revenue is the most pervasive area of audit and the most common subject of fraud. Substantive audit procedures are mandatory, not optional.

## Foundational Step — Build Sales Expectations

The auditor must perform Substantive Analytical Procedures (SAP) including:

Sales trend analysis across months/quarters.
Comparison with prior accounting period.
Category-wise sales analysis (by product line, region, customer segment).
Building an independent sales expectation and comparing it with the client's records.

To do this, the auditor must understand:

Sales prices of products/services across the year.
Monthly average sales price per product/service.
Discount policy.

## Audit Procedures by Assertion

### 1. Occurrence (revenue not overstated)

Check if a single sales invoice is recorded twice or if a cancelled invoice is still booked.
Test check invoices against entries in the sales journal.
Obtain confirmation from customers to ensure genuineness.
Check for fictitious customers and sales.
Look for shipments without customer consent, especially at year-end (channel stuffing).
Check whether unearned revenue has been recorded as earned.
Check whether there is substantial uncertainty about collectability.

### 2. Completeness (revenue not understated)

Perform cut-off procedures — revenues belong in the period in which risks and rewards transfer to the buyer, NOT the invoice date.
Cut-off errors typically arise when companies recognise revenue based on invoice date.
Verify credit notes issued after the accounting period — may reverse current-year revenue.
Trace from shipping documents to the sales journal.
Check whether quantity is appearing in the sales register.
Review GST returns and reconcile with revenue reported in P&L.

### 3. Measurement

Trace a few transactions from inception to completion (Examination in Depth).
For export sales, verify compliance with AS 11 (foreign exchange).
Understand client's operations and related GAAP issues.
Compare rate of sales with related parties — review for collectability, authorisation, and arm's length pricing.

Worked example

### Example 1

Example — Cut-off error: Goods are shipped to a customer on 28 March (FOB shipping point). Invoice is raised on 5 April. The risks transferred on 28 March, so revenue belongs to the year ended 31 March. If the company recognises this revenue in April based on invoice date, current-year revenue is understated. The auditor must propose an adjustment.

### Example 2

Example — Channel stuffing detection: Sales in March are 40% higher than the monthly average. The auditor performs a sample test: 30% of March invoices are followed by sales returns in April. This signals year-end channel stuffing — sales are inflated by shipments customers did not order. The auditor must propose reversal.

### Example 3

Example — GST reconciliation: Revenue per P&L is Rs 50 crore. Outward supplies per GSTR-1 are Rs 53 crore. Variance of Rs 3 crore must be reconciled — could be supplies that are not revenue under accounting GAAP (e.g., financial services, certain reimbursements) or unrecorded revenue. The auditor builds a written reconciliation.

⚠️ Common exam mistakes

Recognising revenue on invoice date instead of date of transfer of risks and rewards.
Skipping cut-off testing — the single most common revenue audit failure.
Not reconciling P&L revenue with GST returns.
Failing to test for channel stuffing and unusual year-end spikes.
Not verifying related-party sales for arm's length pricing.

Bare-Act text AS 9 / Ind AS 115 · AS 9 / Ind AS 115 — Revenue Recognition / Revenue from Contracts with Customers · click to expand

Revenue is recognised when it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. In a sale of goods, revenue should be recognised when the seller has transferred to the buyer the significant risks and rewards of ownership and the seller retains neither continuing managerial involvement nor effective control over the goods sold.

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