Requirement (a) was for six marks, and asked candidates to discuss the statement “Revenue recognition should always be approached as a high risk area of the audit”. Answers here were mixed.
There were some sound answers, which often used simple examples to illustrate the type of situation where revenue recognition is complex or subjective, with construction contracts, hotel deposits and the provision of services being common and pertinent examples.
Many answers also referred to the problems of manipulation of revenue, and again sound answers illustrated the point with a simple example, the most common being pressure on management to maximise revenue or profit.
It was however unsatisfactory that so few answers referred to ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, specifically the fact that ISA 240 requires the auditor to use a presumption that there are risks of fraud in revenue recognition.
Most answers focussed exclusively on the risk factors. Only a minority of answers tried to provide a counter argument that some companies with good controls and simple revenue generating streams as being low risk. It is important in a discussion question to consider both sides of an argument.