Deferred revenue, also known as unearned revenue, refers to the amount received by an entity in advance for goods or services that have not yet been delivered. It is recognized as a liability in the balance sheet until the goods or services are delivered.
In accordance with International Financial Reporting Standards (IFRS), deferred revenue is recognized as revenue when the entity has fulfilled its obligation to deliver the goods or services.
Audit Risks
- Misclassification of transactions: There is a risk that deferred revenue may be recorded as revenue instead of a liability, leading to overstated revenue and understated liabilities.
- Timing of recognition of revenue: There is a risk that deferred revenue may be recognized too soon or too late, which can lead to incorrect financial statements.
- Cut-off issues: There is a risk that transactions recorded in the wrong period may lead to incorrect deferred revenue balances.
- Improper calculation of deferred revenue: There is a risk that deferred revenue may be calculated incorrectly, leading to incorrect financial statements.
- Unsupported deferred revenue: There is a risk that deferred revenue may be unsupported by proper documentation, leading to incorrect financial statements.
- Unfulfilled obligation: There is a risk that the entity may not fulfill its obligation to deliver the goods or services, leading to incorrect financial statements.
- Inadequate controls over deferred revenue: There is a risk that the entity may not have adequate controls in place to ensure that deferred revenue is recorded and recognized correctly.
Audit Assertions
- Existence: The deferred revenue balance exists and is accurate.
- Completeness: All deferred revenue transactions have been recorded and are included in the financial statements.
- Accuracy: The deferred revenue balance is accurate and has been calculated correctly.
- Cut-off: Deferred revenue transactions have been recorded in the correct period.
- Valuation: The deferred revenue balance is valued at the correct amount.
- Rights and obligations: The entity has the right to receive the deferred revenue and the obligation to deliver the goods or services.
Walkthrough Testing
- Review of the entity’s revenue recognition policy to ensure it is in accordance with IFRS.
- Review of the documentation supporting deferred revenue transactions to ensure they are supported by proper documentation.
- Test a sample of deferred revenue transactions to ensure they have been recorded and recognized correctly.
- Review the calculation of deferred revenue to ensure it has been calculated correctly.
Test of Control
- Review of the entity’s internal controls over deferred revenue to ensure they are adequate and operating effectively.
- Testing of the entity’s controls over deferred revenue transactions to ensure that transactions are recorded and recognized correctly.
Substantive Audit Procedures
- Review the deferred revenue balance to ensure it is accurately reflected in the financial statements.
- Test a sample of deferred revenue transactions to ensure they have been recorded and recognized correctly.
- Test the calculation of deferred revenue to ensure it has been calculated correctly.
- Test of the entity’s obligation to deliver the goods or services to ensure it has been fulfilled.
- Test the entity’s right to receive the deferred revenue to ensure it exists.
- Comparison of the deferred revenue balance with prior periods to identify any unusual changes.
- Inquiry of management about any significant changes in deferred revenue.
These audit procedures, along with other substantive audit procedures, should be performed to provide reasonable assurance that the deferred revenue