{"id":4041,"date":"2025-09-05T09:27:38","date_gmt":"2025-09-05T09:27:38","guid":{"rendered":"https:\/\/www.luzenta.com\/blog\/?p=4041"},"modified":"2025-09-05T09:27:38","modified_gmt":"2025-09-05T09:27:38","slug":"understanding-the-audit-of-revenue-from-operations-under-as-9","status":"publish","type":"post","link":"https:\/\/www.luzenta.com\/blog\/understanding-the-audit-of-revenue-from-operations-under-as-9\/","title":{"rendered":"Understanding the Audit of Revenue from Operations under AS 9"},"content":{"rendered":"

Accounting Standard AS 9 \u201cRevenue Recognition\u201d defines revenue as the gross inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and the use by others of enterprise resources yielding interest, royalties, and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables, or other consideration.<\/span><\/p>\n

AS 9 deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties, and dividends.<\/span><\/p>\n

Some key considerations in recognition of revenue in the statement of profit and loss are the timing of recognition of revenue, the amount of revenue, which is generally determined by agreement between the parties involved in the transaction, and uncertainties regarding the determination of the amount or its associated costs that may influence the timing of revenue.<\/span><\/p>\n

Sale of Goods<\/b><\/p>\n

Revenue from the sale of goods is recognized when certain key criteria are satisfied, reflecting the fundamental principles of revenue recognition under accounting standards such as IFRS 15 and Indian Accounting Standards (Ind AS) 115. Specifically, revenue is recognized when the seller has transferred the property in the goods to the buyer for a consideration, which means the ownership rights have passed to the buyer. This transfer must be accompanied by the shifting of significant risks and rewards of ownership from the seller to the buyer, indicating that the buyer assumes the risks associated with ownership, such as loss, damage, or obsolescence of the goods. At the same time, the seller should no longer have effective control of the goods to a degree usually associated with ownership, ensuring that the seller cannot unilaterally direct the use of or access to the goods. Additionally, there should be no significant uncertainty regarding the amount of consideration that will be received from the sale.<\/span><\/p>\n

Generally, the transfer of property in goods is deemed to result in, or at least coincide with, the transfer of significant risks and rewards of ownership to the buyer. This typically occurs at the point of delivery or dispatch of goods, where control passes from the seller to the buyer. However, in certain instances, the transfer of property may not align perfectly with the transfer of significant risks and rewards. Such situations often require careful judgment to determine the appropriate timing for revenue recognition.<\/span><\/p>\n

One common example arises when the delivery of goods is delayed due to the fault of either the buyer or the seller, leading to a divergence between the transfer of property and the transfer of risks and rewards. For instance, if the seller has fulfilled their obligations by dispatching the goods, but the buyer causes a delay in taking delivery, the risk of loss or damage may continue to rest with the buyer, even though legal ownership may have passed earlier. Conversely, if the delay is caused by the seller, the risks may remain with the seller until the goods are delivered. In such cases, the risk and reward assessment becomes crucial, as the party responsible for the delay assumes the risk of any loss or damage that might not have otherwise occurred.<\/span><\/p>\n

Accounting standards stipulate that revenue should be recognized only when significant risks and rewards have transferred to the buyer, even if legal ownership has passed earlier. This principle ensures that revenue is recognized in a manner that reflects the true economic substance of the transaction rather than merely its legal form. Additionally, sellers must consider whether control over the goods has effectively transferred to the buyer, including the ability to direct their use and obtain benefits from them.<\/span><\/p>\n

Sale of Services<\/b><\/p>\n

Revenue from service transactions is generally recognized as the service is performed, following either the proportionate completion method or the completed service contract method. Recognition is done only when there is no significant uncertainty regarding the amount of consideration that will be derived from rendering the service.<\/span><\/p>\n

The proportionate completion method applies in cases where the performance of the service consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method is determined on the basis of contract value, associated costs, number of acts, or some other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period, revenue is recognized on a straight-line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.<\/span><\/p>\n

For example, an annual maintenance contract for equipment requires the service provider to inspect and clean the equipment every quarter. In this case, the annual charges received from the customer are recognized as revenue quarterly; that is, 25 percent of the maintenance fees charged is recognized as revenue in each quarter.<\/span><\/p>\n

The completed service contract method is followed, where either the performance consists of the execution of a single act or services are performed in multiple acts, but the services yet to be performed are so significant about the transaction taken as a whole that performance cannot be deemed completed until those acts are executed. Revenue is recognized when the final act takes place and the service becomes chargeable.<\/span><\/p>\n

For example, a contract requires the entity to install wooden benches at various parks across a city. The contract stipulates that consideration shall be payable only upon installation of all benches,, and the consideration is a lump sum for the entire contract. Completion of services will be acknowledged only when all benches are installed. In this case, revenue will be recognized upon completion of the contract, when all benches have been installed.<\/span><\/p>\n

Revenue Arising from Use by Others of Enterprise Resources<\/b><\/p>\n

This category includes interest, royalties, and dividends. Revenue should be recognized only when there is no significant uncertainty as to measurability or collectability. Interest is recognized on a time proportion basis,, taking into account the amount outstanding and the applicable rate. Royalties are recognized on an accrual basis by the terms of the relevant agreement. Dividends from investments in shares are recognized when the owner\u2019s right to receive payment is established.<\/span><\/p>\n

Uncertainties in Revenue Recognition<\/b><\/p>\n

AS 9 guides the effect of uncertainties on the recognition of revenue. Recognition principles require that revenue must be measurable and that at the time of sale or rendering of the service, it would not be unreasonable to expect ultimate collection.<\/span><\/p>\n

There may be situations where it is not possible to assess the ultimate collection with reasonable certainty at the time of raising a claim, such as insurance claims or price escalation claims. In such cases, revenue recognition is postponed to the extent of the uncertainty involved. It may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made.<\/span><\/p>\n

Where there is no uncertainty about ultimate collection, revenue is recognized at the time of sale or rendering of service, even if the customer makes payment in installments.<\/span><\/p>\n

When consideration receivable for the sale of goods, rendering of services, or from the use of enterprise resources is not determinable within reasonable limits, recognition of revenue is postponed. Revenue is then recognized in the period in which no uncertainties exist.<\/span><\/p>\n

Uncertainty relating to collectability may arise after the time of sale or service rendering, for example, when a customer becomes insolvent. In such cases, AS 9 states it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the revenue originally recorded. For instance, a provision for doubtful trade receivables may be recorded.<\/span><\/p>\n

AS 9 also provides illustrations for revenue recognition in various situations such as bill and hold sales, delivery subject to conditions, approval sales, guaranteed sales, consignment sales, and principal-agent relationships.<\/span><\/p>\n

Audit of Revenue from Operations as per AS 9<\/b><\/p>\n

Audit of Revenue<\/b><\/p>\n

The objective of the auditor in carrying out the audit of revenue is to validate certain assertions about recorded revenue. These assertions include existence, completeness, accuracy, presentation, and disclosure.<\/span><\/p>\n

Existence means that recorded revenue represents goods shipped or services rendered during the period and that there is no overstatement of revenue. For example, in the case of the sale of goods, risks and rewards have been transferred to the buyer.<\/span><\/p>\n

Completeness means that all sales made during the period have been recorded and that there is no understatement of revenue. There should be no instances where a sale has been completed, risks and rewards have been transferred, but the sale has not been recognized.<\/span><\/p>\n

Accuracy means all revenue transactions have been recorded correctly according to the agreed terms, prices, and quantities.<\/span><\/p>\n

Presentation and disclosure require that the required disclosures as per applicable accounting standards, including AS 9, and relevant laws have been appropriately made in the financial statements.<\/span><\/p>\n

Potential Risks of Material Misstatements in Revenue<\/b><\/p>\n

It is common for management to attempt to accelerate revenue recognition to present better financial performance. Businesses are often judged by reported revenue levels, and higher revenue may increase valuation and investor interest. Conversely, declining revenue can reduce valuation. These incentives may lead management to exploit gray areas of revenue recognition to inflate revenue figures.<\/span><\/p>\n

Standard on Auditing SA 240 \u201cThe Auditor\u2019s Responsibilities Relating to Fraud in an Audit of Financial Statements\u201d presumes that risks of fraud exist in revenue recognition. Auditors are required to evaluate which types of revenue transactions or assertions present risks of material misstatement due to fraud.<\/span><\/p>\n

Fictitious revenues involve recording sales of goods or services that did not occur. This may involve fake customers or legitimate customers where invoices are prepared without actual delivery or service. Sometimes invoices are artificially inflated. These fictitious sales typically inflate trade receivables, which are eventually written off after no collections are made. Auditors should be alert for long overdue receivables as a warning sign.<\/span><\/p>\n

Common misstatements include manipulation of sales to meet targets or linked incentives such as commissions or bonuses. This may be achieved by channel stuffing or recording fictitious sales for shipments that never occurred.<\/span><\/p>\n

Revenue may also be incorrectly recorded due to complex sales terms or recognizing revenue despite non-fulfillment of conditions. Examples include delivery subject to conditions such as installation or inspection, sales on approval, consignment sales, or principal-agent relationships where sales are recognized even though the supposed buyer is only an agent.<\/span><\/p>\n

Revenue from services may be recognized upfront instead of over the period services are rendered. For example, admission or registration fees may be recognized immediately, but tuition fees should be recognized over the instruction period.<\/span><\/p>\n

Companies may also fail to derecognize sales returns, resulting in overstated sales and receivables. Early recognition of sales that occurred after the period-end, or hidden side letters giving customers irrevocable return rights, also led to overstatement.<\/span><\/p>\n

This is not an exhaustive list, but auditors must evaluate risks based on the entity\u2019s facts and circumstances.<\/span><\/p>\n

Audit Procedures for Revenue<\/b><\/p>\n

Auditors begin by obtaining an understanding of the entity\u2019s products and services, ensuring that the business activities align with the Memorandum of Association.<\/span><\/p>\n

The sales process should be understood, including whether sales are direct or through intermediaries like dealers, distributors, or consignment agents.<\/span><\/p>\n

The auditor should review the entity\u2019s accounting policy for revenue recognition to confirm it complies with generally accepted accounting principles and AS 9.<\/span><\/p>\n

Pricing policies, credit terms, and sales return policies must be reviewed to ensure consistency and proper application.<\/span><\/p>\n

Long-term contracts, warranty contracts, significant orders spanning the year-end, inventory dispatched but not invoiced, and sales invoiced but not delivered should be carefully examined.<\/span><\/p>\n

Where sales include deferred elements, such as maintenance or support services, appropriate deferral of revenue is required.<\/span><\/p>\n

For a sample of recorded sales, the auditor verifies sales orders, invoices, and delivery or dispatch notes to confirm proper recording and price application.<\/span><\/p>\n

Dispatch notes should be cross-checked with invoices to ensure all dispatched goods are invoiced. Unusual delays between dispatch and invoicing should be investigated.<\/span><\/p>\n

In \u2018bill and hold\u2019 sales, the auditor ensures AS 9 recognition criteria are met before sales recognition.<\/span><\/p>\n

For goods sent on approval, revenue should be recognized only when the buyer formally accepts the goods, performs an act adopting the transaction, or when the rejection period has elapsed.<\/span><\/p>\n

For sales to intermediaries, auditors must confirm that revenue is recognized only after significant risks and rewards of ownership have passed. If the intermediary is an agent in substance, revenue should only be recognized when goods are sold to the final customer.<\/span><\/p>\n

In consignment sales, the auditor verifies the consignment agreement, checks that sales summaries from consignment agents are regularly received and recorded, and that expenses are recorded per the agreement.<\/span><\/p>\n

Discount policies and authorizations should be reviewed, including any authorizations for price or discount changes and any system alterations affecting pricing or billing.<\/span><\/p>\n

In industries with significant cash sales, such as retail, auditors verify the reconciliation process of sales with cash collections, which ideally should occur daily. Cash deposits should be timely. Daily cash reconciliation should be reviewed for accuracy and completeness.<\/span><\/p>\n

Export sales require verification that sales are recorded using exchange rates compliant with AS 11.<\/span><\/p>\n

For sales to related parties, prices charged should be compared with those offered to third parties to ensure arm\u2019s length transactions.<\/span><\/p>\n

Sales returns require verification of the entity\u2019s policy, inward return notes, inspection reports, and the correct issuance of credit notes.<\/span><\/p>\n

Reconciliation of revenue as per the statement of profit and loss with tax filingss, such as GST returns, should be performed.<\/span><\/p>\n

Cut-off Procedures<\/b><\/p>\n

Cut-off procedures ensure revenues are recorded in the correct accounting period. Auditors verify that goods delivered have been invoiced, goods invoiced but not delivered are excluded from closing stocks, and all rejected goods are properly removed from sales.<\/span><\/p>\n

Samples of invoices should be selected around the year-end, and their dates cross-checked with dispatch notes and sales records to confirm proper period recognition.<\/span><\/p>\n

Subsequent credit notes or invoice cancellations after year-end should be reviewed to determine if adjustments are required in the audited year.<\/span><\/p>\n

Sales returns after year-end should be reviewed to ensure necessary adjustments are recorded, especially in cases of channel stuffing or other revenue manipulation.<\/span><\/p>\n

Use of External Data Sources in Revenue Audit<\/b><\/p>\n

With the increasing availability of data on government portals and digital records, auditors can leverage external data sources to obtain a higher level of assurance in auditing revenue.<\/span><\/p>\n

E-Way Bill Reconciliation<\/b><\/p>\n

The Electronic Way Bill (e-Way Bill) is a digital compliance mechanism whereby the person causing movement of goods uploads relevant details before commencement of transport and generates an e-Way Bill on the government portal.<\/span><\/p>\n

Auditors can reconcile the revenue booked as per the client\u2019s records against the e-Way Bill register to test the timing and accuracy of revenue recognition, especially for cut-off testing.<\/span><\/p>\n

The auditor requires the following datasets for reconciliation: the e-Way Bill register obtained from the government portal and the sales register with delivery dates from the client\u2019s books. Mapping delivery dates in the sales register with the e-Way Bill dates helps identify any sales not recorded in the correct period.<\/span><\/p>\n

This test assures both completeness and existence assertions in revenue.<\/span><\/p>\n

Electronic Bank Realisation Certificate (e-BRC) and Bulk e-BRC Details<\/b><\/p>\n

An Electronic Bank Realisation Certificate (e-BRC) is an important digital certificate for export businesses. It is issued by banks to confirm receipt of payment from buyers against the export of goods or services.<\/span><\/p>\n

The Directorate General of Foreign Trade (DGFT) has released an e-BRC portal providing a single point of access to information and services related to e-BRCs.<\/span><\/p>\n

For audit purposes, the auditor will require the importer-exporter code (IEC), the sales register, and e-BRC details.<\/span><\/p>\n

Using the e-BRC portal, auditors can access export realisation details and reconcile them with the client\u2019s export revenue recorded in the books. The portal allows viewing recent records and requesting bulk data for the entire year with client authorization.<\/span><\/p>\n

This reconciliation helps confirm the completeness and accuracy of export revenue and compliance with foreign exchange regulations.<\/span><\/p>\n

Reporting Requirements<\/b><\/p>\n

The auditor\u2019s report may need to cover specific clauses related to revenue transactions. Under the Companies (Auditor\u2019s Report) Order, the relevant clause includes whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in tax assessments, and whether such previously unrecorded income has been properly recorded in the books during the year.<\/span><\/p>\n

The auditor should confirm that revenue transactions are complete, accurate, and properly disclosed by applicable laws and accounting standards.<\/span><\/p>\n

Disclosure Requirements under Schedule III and AS 9<\/b><\/p>\n

Schedule III of the Companies Act, 2013 prescribes disclosure requirements for revenue in the financial statements.<\/span><\/p>\n

For companies other than finance companies, revenue from operations should be disclosed separately in the notes under the following heads:<\/span><\/p>\n