How do you audit revenue recognized over time under IFRS 15, and what are the key risks?
An advanced Audit & Assurance question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
First confirm the criteria for over-time recognition are actually met (customer simultaneously receives/consumes benefits, the asset has no alternative use with an enforceable right to payment, etc.) — wrongly applying over-time vs point-in-time is itself a risk. Then audit the measure of progress: for an input method (cost-to-cost), test actual costs incurred, the reliability and updating of total estimated costs, and watch for cost manipulation that flatters percentage complete; for an output method, test the units/milestones evidence. Key risks: management bias in the estimate-to-complete (lowering remaining cost inflates margin and revenue now), uplifts in percentage complete without justification, treatment of variable consideration and contract modifications, and cut-off. Procedures: recompute progress, challenge the cost-to-complete with engineering/operational evidence, perform retrospective review of prior estimates, and test contract terms. It's an estimate-heavy area, so skepticism on the inputs is central.
WHAT INTERVIEWERS LISTEN FOR
- ✓Confirm over-time criteria are met (not point-in-time)
- ✓Test the progress measure (cost-to-cost inputs or output milestones)
- ✓Challenge estimate-to-complete for bias; variable consideration/modifications
- ✓Recompute, get operational evidence, retrospective review, cut-off
COMMON MISTAKES
- ✗Not challenging the cost-to-complete estimate
- ✗Ignoring the over-time vs point-in-time judgement
- ✗No cut-off or modification testing
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