After the testing of internal controls, the audit partner for XYZ Engineering and Design determined that controls relating to revenue recognition in this audit engagement were quite weak and could not be relied upon.

XYZ provides engineering and design services under contract to a number of clients. It primarily bills based on timesheets completed by engineers but also bills extra hours for engineers who are travelling out of town for client work. As well, any travel expenses are billed with an administrative charge of 10% in addition to the actual expense. The audit partner wants increased substantive testing for completeness since expenses are often recognized a month before being billed. With a lot of out of town work scheduled for December, she is concerned about matching expenses and revenues.

Analytical procedures performed at the planning stage had indicated increased sales with no associated increase in expenses, though discussion with the client's VP Finance revealed that this was due to finishing several long term contracts many of which had holdbacks on progress billings. Under IFRS 15, these holdbacks could not be recognized until the holdback period had expired.

1. With respect to the key assertions related to sales, identify two of the major challenges in this audit. Be as precise as possible.
2. The original plan called for dual direction testing starting with the sales invoice. With the identified weakness in internal control, and thinking about the audit trail for sales and receivables, will this still generate sufficient evidence over completeness? If not, briefly describe how you would modify the test program.

Answer rating: 100% (QA)

a The partner detected a completeness problem as a result of billings done after services were deliv... View the full answer