Auditing and Ethics · Audit of Items of Financial Statements

Audit of Revenue and Income

Updated 4 October 2026 · Fact-checked

Audit of revenue means gathering evidence that income reported is real, complete, recorded in the right period, correctly measured and properly disclosed. You vouch sales to orders, dispatch records and invoices, test cut-off near year-end, check recognition against AS 9 (non-Ind AS entities) or Ind AS 115 (Ind AS entities), and link each procedure to an assertion.

Understand Audit of Revenue and Income

Revenue is usually the biggest number in the statement of profit and loss. It also drives profit, bonuses and tax. So management may be tempted to overstate it. That is why SA 240 presumes a fraud risk in revenue recognition unless you rebut it with reasons.

Think of the revenue cycle as a chain: customer order, credit approval, dispatch of goods or performance of service, invoice, accounting entry, and cash collection. A good audit follows documents along this chain in two directions. From the ledger back to documents tests occurrence (is it real?). From documents forward to the ledger tests completeness (is anything missed?).

The main risks are overstatement (fictitious sales, bill-and-hold without genuine transfer, early recognition, sales returns not recorded) and, less often, understatement (sales suppressed to cut tax). You also look at cut-off: sales belong to the period in which the sale terms say risks and rewards (or control) pass. That is usually on delivery or dispatch, depending on terms such as ex-works or FOB destination. The dispatch date is evidence of that point. It is not the rule itself.

The framework you apply depends on the entity:

AS 9 applies to non-Ind AS entities. For sale of goods, recognition depends on whether the significant risks and rewards of ownership have passed to the buyer, the seller keeps no effective control over the goods, and the amount can be measured with collection reasonably certain. Risks and rewards is an indicator under AS 9 only.
Ind AS 115 applies to Ind AS entities. It uses a five-step model: identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognise revenue when (or as) each obligation is satisfied, that is, when control transfers to the customer.

For services, revenue follows performance, by proportionate completion or completed service method under AS 9, or over time or at a point in time under Ind AS 115. Revenue excludes taxes collected on behalf of the government such as GST, and is shown net of trade discounts.

Finally, tie each test to an assertion: occurrence, completeness, accuracy, cut-off, classification and presentation. In the exam, naming the assertion with the procedure is what earns marks.

Key rules to remember

Occurrence test direction: Ledger/sales register → order, dispatch note, invoice; Tests that recorded sales are real. Guards against overstatement.
Completeness test direction: Dispatch notes / goods outward records → invoice → sales ledger; Tests that all genuine sales are recorded. Guards against understatement.
Cut-off check: Sales recorded in period = sales where risks and rewards (AS 9) or control (Ind AS 115) passed under the sale terms on or before the year-end date; Delivery or dispatch is usually the point, depending on terms such as FOB destination or ex-works. Dispatch date is evidence, not the rule. Check the last few days before and first few days after year-end, including returns and credit notes.
Net revenue: Revenue = Gross invoice value (incl. GST) − GST collected − trade discounts − returns; GST collected for the government is not the entity's income. Schedule III requires disclosure of revenue from operations, which excludes GST.
Fraud presumption: SA 240: significant risk of fraud in revenue recognition is presumed; The auditor may rebut it only with documented reasons.

How to solve Audit of Revenue and Income questions

Use this order for any question on auditing revenue or income, whether it asks for procedures, vouching or an issue in a scenario.

1Identify the type of income: sale of goods, services, interest, dividend, royalty, commission or other income.
2State the risk: overstatement, understatement, wrong period or wrong classification, and note SA 240 fraud presumption.
3List documents to vouch: customer order, sales invoice, dispatch note or delivery challan, e-way bill, GST returns, proof of delivery, cash or bank receipt.
4Perform cut-off and sequence checks: invoice and dispatch note numbers, entries around year-end, and sales returns after year-end.
5Check recognition and measurement against the applicable framework: AS 9 (risks and rewards as an indicator, performance of service, collectability) for non-Ind AS entities, or Ind AS 115 (five-step model, performance obligations, transfer of control) for Ind AS entities. Also check discounts.
6Apply analytical procedures: compare with last year, budgets, margins and month-wise trends, and investigate unusual variations.
7Link each procedure to an assertion and conclude on adjustments, disclosure and reporting.

Quickest way: Direction, Cut-off, Recognition (DCR) under time pressure

When to use it: Use for 4 to 6 mark written answers and for scenario MCQs asking which procedure addresses which concern.

MCQ: if the concern is fictitious sales, pick tests from ledger back to documents. If the concern is omitted sales, pick tests from dispatch records to ledger.
MCQ: if the question mentions year-end dates, goods in transit or returns after year-end, the answer is cut-off.
MCQ: eliminate options that rely only on management representation. They are weak evidence.
Written: write three headings, Vouching, Cut-off, Recognition and analytical review, with two points each.
Written: tag each point with the assertion in brackets.
Written: end with one line on the conclusion, such as adjustment or modified opinion if material misstatement remains uncorrected.

Common mistakes in Audit of Revenue and Income

Mixing up the direction of testing for occurrence and completeness.
Both involve tracing documents, so students do not note where the test starts.
Fix: Remember: start at the ledger to test occurrence; start at the source documents to test completeness.
Writing only 'check invoices' as the vouching procedure.
Students treat vouching as one step instead of a chain of documents.
Fix: Name the chain: order, dispatch note, invoice, delivery proof, and receipt, and compare quantity, price, date and customer.
Ignoring cut-off or treating it as an inventory-only topic.
Cut-off is taught first under inventories.
Fix: Always include sales cut-off: examine dispatch and invoice dates around year-end against the delivery terms, and credit notes after year-end.
Including GST collected as part of revenue.
Students look at gross invoice value, which includes GST.
Fix: GST charged is collected on behalf of the government. Revenue is measured excluding it.
Applying only the old risks and rewards test, or one standard to every entity.
Students remember AS 9 and forget that Ind AS entities follow Ind AS 115.
Fix: Say AS 9 applies to non-Ind AS entities and Ind AS 115 applies to Ind AS entities. For Ind AS 115, mention the five-step model, performance obligations and transfer of control.
Forgetting the fraud risk in revenue.
Students focus on routine vouching and skip risk assessment.
Fix: State that SA 240 presumes fraud risk in revenue and mention extra procedures such as confirmations and testing journal entries.
Not linking procedures to assertions.
The question wording does not always say 'assertions'.
Fix: Add the assertion name against each procedure in a bracket. It costs five seconds and shows understanding.

Worked examples

Example 1

You are auditing a manufacturing company. Sales have increased sharply in the last week of March. List the audit procedures you would perform to verify that revenue is recorded in the correct period.

Show the solution

Concern: possible early recognition of sales, which would overstate current year revenue. This is a cut-off risk and a fraud risk under SA 240.
Select sales invoices raised in the last few days before year-end and trace each to the dispatch note, gate pass, e-way bill and proof of delivery. Check the delivery terms and confirm that risks and rewards (or control) passed on or before year-end.
Check sales terms for bill-and-hold, consignment or sale-or-return arrangements, where recognition may not be appropriate.
Select dispatch notes for the first few days after year-end and confirm that no sale of earlier dates is wrongly pushed into next year.
Examine sales returns and credit notes issued after year-end and trace those relating to March sales to ensure the sales are reversed.
Compare month-wise sales and gross margins with the previous year. Investigate the March spike with management and obtain explanations with evidence.
Consider confirmation from major customers for March balances.

Answer: The auditor tests cut-off by matching invoices with dispatch and delivery evidence on both sides of the year-end, against the sale terms, and by reviewing post year-end returns and analytical trends. Any early recognition is proposed for adjustment. The assertion tested is cut-off, along with occurrence.

Example 2

Explain how you would vouch revenue from services for an IT consulting company, and name the assertions addressed.

Show the solution

Understand the contract: scope, billing basis (fixed price or time and material), milestones and payment terms.
Vouch to the contract and work-order, timesheets or milestone completion certificates approved by the client. This supports occurrence and accuracy.
Verify the invoice amount against rates and hours, and check that GST is separately charged and excluded from revenue. This supports accuracy and classification.
For fixed-price contracts spanning year-end, check the method used to measure performance, such as proportion of work completed, and recompute the revenue recognised. This supports cut-off and accuracy.
Test for unbilled revenue and advance billings: confirm work done but not invoiced is recognised, and amounts billed for work not yet done are deferred. This supports completeness and cut-off.
Trace receipts to bank statements and check subsequent receipts, and review disclosure of revenue and any related party income. This supports occurrence and presentation.

Answer: Revenue from services is vouched to contracts, timesheets or milestone approvals, invoices and receipts, with recomputation of work completed at year-end. These procedures address occurrence, accuracy, completeness, cut-off and presentation.

Exam tips

Whenever a scenario shows a sudden rise in sales near year-end, write cut-off and fraud risk together.
Use headings like Vouching, Cut-off, Recognition and Analytical procedures. They make your answer easy to mark.
Show both directions of testing if the question asks for completeness and occurrence.
For income items such as interest or dividend, add a recomputation step: rate × principal × time, or dividend declared × shares held.
Keep MCQs quick. Look for key words: fictitious, omitted, year-end, returns and pick the matching test.

Practice questions from Audit of Items of Financial Statements

Audit of Revenue and Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Revenue and Income: frequently asked questions

What is the difference between vouching and verification in revenue audit?

Vouching examines documents that support recorded transactions, such as invoices and dispatch notes. Verification is wider and covers existence, ownership and valuation of items. For revenue, vouching is the main method, supported by analytical review and cut-off tests.

Why does SA 240 presume fraud risk in revenue?

Revenue drives profit and performance measures, so there is pressure to overstate it. The auditor treats revenue recognition as a presumed fraud risk and may rebut it only with reasons that are documented.

Which standard do I use to check revenue recognition, AS 9 or Ind AS 115?

Use AS 9 for non-Ind AS entities. Recognition there rests on risks and rewards passing, with measurement and collectability. Use Ind AS 115 for Ind AS entities. It follows a five-step model and recognises revenue when control transfers as each performance obligation is satisfied.

Which assertions apply to revenue?

The main ones are occurrence, completeness, accuracy, cut-off, classification and presentation. In the exam, link each procedure you list with the assertion it supports.

How do I test completeness of sales?

Start from independent records such as dispatch notes, goods outward registers or contracts and trace them to invoices and the sales ledger. Also check the sequence of invoice numbers for gaps and review credit notes and returns.