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Hi Sir, When examiner say that 30% received in advance and 70% is received on completion and the entity was being audited by predecessor auditors. Is it fair to answer that there is risk of early recognition of revenue. I am bit confused that should we always suspect that previous auditors was not audited properly and entity is not aware of accounting treatment. Is it only romm on opening balance and consistency to be considered. Could pls clarif?
Revenue recognition is PRESUMED to be a significant RoMM except in the simplest of cases (e.g. rental income from a single property) – this comes from ISA 240.
So whenever there is deposit/advance payment the RoMM must be of early recognition – before any performance. However, there could also be risk of understatement (too late recognition) if, in this case, some of the 70% should be recognised before completion. (It would depend on the questions – whether the performance is at a point in time – on completion – or earlier.)
You don’t have to be critical of prior year auditors to comment on the risks associated with opening balances and consistency of accounting treatment – application of ISA 510 (Initial Audit Engagements – Opening Balances) is a REQUIREMENT.
In any case, the auditor has to have sufficient appropriate audit evidence about opening balances and accounting policies – for a recurring audit, that’s on the prior year working papers. For an initial audit, the auditor is required to perform additional audit procedures. The purpose of these is NOT “to see whether the previous auditor did a proper audit”.
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