Audit Practice Alert provides guidance for FASB’s revenue standard

The PCAOB on Oct. 5, 2017, published Staff Audit Practice Alert (APA) No. 15, Matters Related to Auditing Revenue From Contracts With Customers, to help auditors examine their clients’ implementation of the FASB’s standard for revenue recognition.

PCAOB Chief Auditor Martin Baumann said in a statement that the staff has been monitoring implementation of the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), and has heard from a number of observers and market participants, including the board’s Standing Advisory Group (SAG), that interpretive guidance for auditing revenue would be useful. The FASB issued the standard in May 2014, and it is scheduled to go into effect in 2018.

“For many companies, revenue is one of the largest accounts in the financial statements and is an important driver of operating results,” APA 15 said. “In audits performed in accordance with PCAOB standards, revenue typically is a significant account, often involving significant risks that warrant special audit consideration.”

ASU No. 2014-09 is expected to usher in major changes for reporting revenue as it would erase about 180 pieces of individual, industry-specific revenue guidance in U.S. GAAP and provide a single, principles-based, five-step process by which all businesses must calculate the top line in their income statements. It also requires new disclosures, such as qualitative and quantitative information about revenue recognized from contracts with customers and significant judgments and changes in judgments.

“As companies implement the new revenue standard, they may need to change their systems, processes, and controls, or to develop new ones,” the PCAOB said. “Done poorly, such changes could pose heightened risks of material misstatement, including fraud risks.”

The audit regulator said its 20-page staff guidance highlights board requirements and other considerations for audits, including a verification of management’s transition disclosures in the notes to the financial statements and transition adjustments.

The SEC’s Staff Accounting Bulletin (SAB) No. 74, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, (SAB Topic 11.M), requires companies to disclose in their financial statement footnotes their expectations for how a new accounting standard will affect their financial results.

If management omits or provides incomplete or inaccurate disclosures, the auditor is required to evaluate the effect on the financial statements, APA 15 said.

The practice alert also discusses internal controls over financial reporting. “Changes to company processes for the implementation of the new revenue standard can affect one or more components of internal control,” APA 15 said. “For example, the auditor is required to obtain an understanding of the company's control environment, including the policies and actions of management, the board of directors, and the audit committee concerning the company's control environment.”

In addition, the staff alert deals with identification and assessment of fraud risks; evaluation of whether revenue is recognized in compliance with the applicable financial reporting framework; and evaluation of whether the financial statements include the required disclosures regarding revenue.

The board added that it will continue to monitor auditing of revenue as part of its oversight activities.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: US GAAP — Revenue Recognition, also on Checkpoint.

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