FASB ASC Topic 606 Framework for Auditing Contracts, Revenue Recognition
Public and private companies that enter contacts with customers to transfer goods or services or non-financial assets should carefully follow FASB ASC Topic 606, Revenue from Contracts with Customers.
Rather than focusing on the satisfaction of obligations, auditors must be compliant with the transfer of control by following a five-step framework.
1. Identify contracts with customers.
2. Identify contractual performance obligations.
3. Determine a price for transactions.
4. Allocate a price to obligations.
5. Recognize revenue when a company satisfies performance obligations.
The three common auditing errors are Risk Assessment, Substantive Testing, and Documentation.
Auditors must obtain the contracts and assess risks.
Auditors must also apply and understand AU-C Section 540 before testing estimates. Lastly, auditors must read and interpret AU-C Section 230, Audit Documentation, in which they are allowed outside experienced audio to understand the procedures performed, results, and conclusion of their work.