Advanced Auditing, Assurance and Professional Ethics · Specialised Areas

Audit of Power, Infrastructure and Other Specialised Sectors

Updated 5 October 2026

Sector-specific audit means applying the Standards on Auditing to an industry's unique business model, regulation and accounting. In power and infrastructure, you understand the sector, identify risks such as tariff regulation, long-term contracts, capital work in progress and revenue recognition, then design procedures and report in provision-facts-conclusion form.

Understand Audit of Power, Infrastructure and Other Specialised Sectors

A specialised sector does not have its own set of auditing standards. You still follow the Standards on Auditing (SAs). What changes is the entity and its environment. SA 315 asks you to understand the industry, the regulatory framework and the nature of the business. In a specialised sector, this understanding drives almost every risk you identify.

Power sector. Generation, transmission and distribution companies earn revenue under tariffs that are fixed or approved by a regulatory commission. Revenue depends on regulatory orders, fuel and power purchase costs, and billing and metering systems. Key risks are: revenue recorded on provisional tariffs that may later be revised, unbilled revenue estimates, receivables from state distribution companies that are slow to pay, large plant and equipment with capitalisation and depreciation judgments, and regulatory deferral balances. Regulatory deferral account balances are dealt with under Ind AS 114, which is available only to first-time adopters that recognised such balances under their previous GAAP. For other entities, revenue and any refund liability follow Ind AS 115. Check which of these applies to the entity.

Infrastructure sector. Roads, ports, airports and similar projects are often built and run under long-term concession arrangements with a public authority. Key risks are: classification and accounting of service concession arrangements, revenue recognised over time on construction contracts, estimates of cost to complete, capital work in progress, borrowing costs capitalised, major maintenance obligations, claims and disputes with the authority, and going concern where debt is heavy and cash flows come late.

Other specialised sectors. The same logic applies to sectors such as telecom, oil and gas, mining, real estate, hospitality or healthcare. Ask what is unique: how revenue is earned, what the regulator requires, which estimates are large, and where management has an incentive to push numbers. Many of these areas rest on accounting estimates (SA 540), expert input and IT-driven billing, so link them to those standards.

The exam tests this as application. A case describes a sector, gives a few facts, and asks for risks, procedures or reporting. Your answer must tie each point to the facts given and to the SA that supports it.

Key rules to remember

Audit risk model: Audit risk = RMM × Detection risk, where RMM = Inherent risk × Control risk (or a combined assessment); Risk of material misstatement (RMM) combines inherent risk and control risk. You set the acceptable level of audit risk and derive detection risk from it and your RMM assessment. For a given acceptable audit risk, higher RMM requires lower detection risk, so sector features that raise inherent risk call for more extensive procedures.
Sector understanding (SA 315): Industry + Regulation + Nature of entity + Accounting policies + Objectives and strategies + Performance measures + Internal control (system of internal control); SA 315 (Revised 2019) requires you to understand the entity and its environment, the applicable financial reporting framework, and the entity's system of internal control. Use this as a checklist to extract risks from a case scenario.
Answer structure: Provision → Facts → Conclusion; State the SA or Ind AS requirement, apply it to the case facts, then conclude with the action or report impact.
Accounting estimates (SA 540): Understand the estimate → Assess risk → Respond → Evaluate reasonableness; Applies to cost to complete, unbilled revenue, provisions, useful lives and fair values common in these sectors.

How to solve Audit of Power, Infrastructure and Other Specialised Sectors questions

Use this method for any question on a power, infrastructure or other specialised sector.

1Read the case and underline the sector, the regulatory element and the transaction involved, such as tariff, concession, long-term contract or capital work in progress.
2State the sector features that matter for the audit, as part of understanding the entity and its environment under SA 315.
3Identify the risks of material misstatement, separating those at financial statement level from those at assertion level, and flag any significant risk, such as revenue or a large estimate.
4Name the accounting framework that applies (for example the relevant Ind AS) and the point at which the entity may have gone wrong.
5Design specific procedures for each risk: inspect regulatory orders and contracts, test billing and IT controls, recompute estimates, use an expert, obtain confirmations.
6Consider other SAs the facts trigger: SA 540 for estimates, SA 620 for experts, SA 600 for other auditors, SA 570 for going concern, SA 580 for representations.
7Conclude on the effect on the report: no modification, emphasis of matter, qualified or adverse opinion, or a key audit matter.
8Keep each point short and tied to a fact from the case. Do not list generic audit steps.

Quickest way: Sector, Risk, Procedure, Report

When to use it: Use this when you have limited time, especially in a 2 to 4 mark part or when you must justify an MCQ.

Write the sector feature in one line, such as 'revenue depends on regulator-approved tariff'.
Write the resulting risk in one line, such as 'revenue may be overstated if provisional tariff is later reduced'.
Write two targeted procedures: inspect the regulatory order and test the billing system.
Write the report effect: disclosure, emphasis of matter, or modified opinion if the matter is material and unresolved.

Common mistakes in Audit of Power, Infrastructure and Other Specialised Sectors

Writing generic audit steps such as 'verify vouchers' without linking them to the sector.
Students memorise standard checklists and skip the case facts.
Fix: Open each point with the sector feature from the case, then give the procedure that responds to it.
Treating sector rules as separate auditing standards.
The chapter title suggests unique rules for each sector.
Fix: Remember that the SAs apply in full. Only the entity's environment, risks and accounting differ.
Ignoring estimates and management judgment in long-term contracts.
Students focus on existence and valuation of assets and forget cost-to-complete and percentage of completion.
Fix: Link revenue on long-term contracts to SA 540. Test the inputs, assumptions and past accuracy of the estimate.
Forgetting going concern in capital-heavy sectors.
The focus stays on revenue and assets.
Fix: Where debt is heavy, projects are delayed or receivables are stuck, bring in SA 570 and examine cash flow forecasts and lender support.
Not using an expert where technical matters are involved.
Students assume the auditor must do all work personally.
Fix: For items such as reserves, engineering progress or actuarial matters, state that you evaluate the expert's competence, capability and objectivity and the work done, as SA 620 requires.
Stopping at risks without saying what happens to the audit report.
The question appears to ask only for audit approach.
Fix: Finish with the reporting consequence: modification if material and unresolved, or disclosure and emphasis if adequately presented.

Worked examples

Example 1

You are the auditor of a power distribution company. Revenue is billed on a tariff approved by the regulator. For the current year the company has recognised full revenue at the applied tariff, although a petition to revise the tariff downward is pending before the regulator. Management says the outcome is uncertain. Identify the audit risk and the procedures you would perform.

Show the solution

Provision: SA 315 requires you to understand the regulatory framework. SA 240 presumes there are risks of fraud in revenue recognition. You may rebut this presumption only in limited circumstances, and nothing in these facts supports rebutting it, so treat revenue as a significant risk. Revenue is based on the regulator-approved tariff and any true-up the regulator orders, and it is accounted for under Ind AS 115. If the tariff order or regulations mean that part of the amount billed may have to be refunded, that amount is consideration the entity expects to refund. It is treated as variable consideration, included in the transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur, and a refund liability is recognised for the amount expected to be refunded. Ind AS 114 (Regulatory Deferral Accounts) applies only to first-time adopters that recognised regulatory deferral balances under their previous GAAP. If the entity is not such a first-time adopter, no regulatory deferral balance is recognised and revenue and any refund liability follow Ind AS 115. SA 540 applies to the estimates involved.
Facts: tariff is regulator-driven and a downward revision is pending. Revenue recognised at the full applied tariff may be overstated if a refund is expected and the Ind AS 115 constraint has not been applied.
Risk: overstatement of revenue and understatement of refund liabilities. Disclosure risk also arises for the uncertainty and, if the entity is a first-time adopter that applies Ind AS 114, for its regulatory deferral balances.
Procedures: obtain the regulatory orders and the petition, and read correspondence with the regulator. Discuss status with legal counsel and the company's regulatory team. Evaluate management's assessment of the likely outcome and the basis of any estimate, including whether the Ind AS 115 constraint on variable consideration was applied and whether a refund liability is needed. Confirm whether the entity is a first-time adopter that recognised regulatory deferral balances under its previous GAAP; if it is not, check that no such balances are recognised. Test billing data and recompute revenue on a sample.
Obtain a written representation from management on the regulatory position under SA 580. Check whether disclosures about the uncertainty are adequate.
Conclusion on reporting: if the constraint was not applied, the amount is material and management has not adjusted revenue, modify the opinion. Express a qualified opinion if the effect is material but not pervasive, and an adverse opinion if it is material and pervasive. If the estimate and disclosure are adequate, consider an emphasis of matter where the matter is fundamental to understanding.

Answer: The main risk is overstated revenue and an understated refund liability because of the pending downward tariff revision. Treat revenue as a significant risk under SA 240, inspect the regulatory documents, and evaluate management's estimate against Ind AS 115, including the constraint on variable consideration and any refund liability. Ind AS 114 applies only to first-time adopters that recognised regulatory deferral balances under previous GAAP; otherwise revenue follows Ind AS 115. Test billing and obtain representations. If a material adjustment is missing, give a qualified opinion when the effect is not pervasive and an adverse opinion when it is pervasive. If the estimate and disclosure are adequate, consider an emphasis of matter.

Example 2

You are auditing an infrastructure company that builds a toll road under a concession from a public authority. The company recognises construction revenue over time based on cost incurred to total estimated cost. Total estimated cost was revised sharply near year end, and a claim against the authority for delay is recorded as income. List the audit concerns and the response.

Show the solution

Provision: a toll road built and operated under a concession falls under Appendix D of Ind AS 115 (Service Concession Arrangements), if the grantor controls or regulates what services the operator must provide and at what price, and controls through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure at the end of the term. Under Appendix D, the operator recognises construction revenue over time under Ind AS 115. The consideration it receives or is entitled to receive is recognised as a financial asset, to the extent of an unconditional contractual right to receive cash from the authority, or as an intangible asset, to the extent it receives a right to charge users. It can be a combination of both. SA 540 requires you to assess the risk of the estimate and evaluate management's assumptions. SA 315 requires understanding of the contract terms. A claim against the customer is accounted for under Ind AS 115, not as a separate item of income. If the authority has approved the change in price or scope, it is a contract modification. If the amount is still unapproved or in dispute, it is variable consideration. Variable consideration is included in the transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur. The Ind AS 37 test of virtual certainty applies to contingent assets, not to this claim.
Facts: revenue depends on the stage of completion, which depends on the cost-to-complete estimate. The estimate changed late in the year. A claim has been booked as income before the authority's acceptance.
Risk: management bias in the estimate can inflate revenue and profit. The concession may have been wrongly classified, for example as an intangible asset where the authority gives a guaranteed payment (this should be a financial asset), or as a financial asset where the return depends on user tolls (this should be an intangible asset). This would misstate the asset and the related revenue. A claim included in the transaction price before it is approved, and without meeting the Ind AS 115 constraint, is an overstatement risk. Booking it as separate income also misclassifies it, as it forms part of contract revenue.
Procedures on classification: read the concession agreement for who controls the services and pricing, the residual interest, any guaranteed payments or minimum traffic support from the authority, and the right to charge users. Test management's conclusion that Appendix D applies and that the consideration is a financial asset, an intangible asset or both. Check that construction revenue is measured at the fair value of the consideration and is recognised over time.
Procedures on the estimate: compare budgeted costs with actual costs of earlier periods, review engineer's progress certificates, and recompute the percentage of completion. Ask why the estimate changed and test the support.
Procedures on the claim: read the contract terms on delay and compensation, the claim documents and the authority's response, and consider legal opinion. Assess whether it is an approved contract modification or variable consideration, and whether management's conclusion that a significant reversal is not expected is supported. If it is not highly probable that a significant reversal will not occur, the claim should not be included in revenue, and disclosure should be considered.
Consider an expert such as an engineer for physical progress under SA 620, and evaluate their competence, capability and objectivity.
Conclude: if the claim is included in revenue without adequate basis, or the concession is misclassified, and the effect is material, the financial statements are misstated. Request adjustment. If management refuses, issue a qualified opinion when the effect is material but not pervasive, and an adverse opinion when it is material and pervasive.

Answer: The concerns are the classification of the concession, bias in the cost-to-complete estimate and premature inclusion of a delay claim in revenue. The toll road falls under Appendix D of Ind AS 115, under which construction revenue is recognised over time and the consideration is a financial asset, an intangible asset or both; test management's classification against the concession terms. Test the estimate against contracts, past accuracy and engineer certificates. Test the claim under Ind AS 115, as a contract modification or as variable consideration, which is included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur. The Ind AS 37 virtually certain test is for contingent assets and does not apply here. If management does not correct a material misstatement, give a qualified opinion when it is not pervasive and an adverse opinion when it is pervasive.

Exam tips

Begin every answer with one line on the sector feature. Examiners reward application to the case over memorised lists.
Use the exact SA references that fit the facts: SA 315, SA 540, SA 620, SA 570, SA 600 and SA 580 cover most sector cases.
For MCQs on case scenarios, look for the word that signals the risk, such as 'provisional', 'estimate', 'claim', 'concession' or 'related party', and match it to the SA.
End each written answer with the reporting consequence. A one-line conclusion often carries marks.
Do not quote section numbers or regulator rules unless you are certain of them. A clear principle is safer than a wrong citation.

Practice questions from Specialised Areas

Audit of Power, Infrastructure and Other Specialised Sectors: frequently asked questions

Are there separate standards for auditing power or infrastructure companies?

No. The Standards on Auditing apply to every audit. What differs is the entity's environment, regulation and accounting, which shape the risks you identify and the procedures you design.

What are the biggest audit risks in the power sector?

Revenue under regulator-approved tariffs, unbilled revenue estimates, collectability of receivables from distribution companies, and capitalisation of plant and equipment are the usual focus. Regulatory orders and billing systems need close testing.

Why is going concern important in infrastructure audits?

These projects use heavy debt and have long gestation periods. Delays, cost overruns or stuck receivables can strain cash flows, so you assess management's forecasts and lender support under SA 570.

How should I answer a sector-specific case question in the exam?

State the sector feature, identify the risk, give targeted procedures tied to the facts, and end with the effect on the auditor's report. Keep to the provision-facts-conclusion form.