Auditing Revenue under SA 240: Fraud Risks, Cut-Off and Contract Assets

Identify the revenue assertions exposed to fraud

SA 240 paragraph 26 requires the auditor to start with a presumption of fraud risks in revenue recognition and assess which revenue types, transactions or assertions give rise to them. Treat assessed fraud risks as significant risks and obtain an understanding of relevant controls under paragraph 27. Common risks include premature or fictitious sales, unusual distributor terms, concealed side agreements, omitted or delayed revenue, and biased progress estimates. The presumption is rebuttable; document the reasons under paragraph 47 if concluding it is not applicable in the circumstances. There is no prescribed percentage of engagements that must retain the presumption.

Design procedures under the applicable auditing standards and reporting framework. Ind AS 115 applies where the entity reports under Ind AS and the contract is in scope. An invoice, GST document or collection does not determine when revenue is earned. Determine whether performance is satisfied over time or whether control transfers at a point in time, and examine contractual terms, actual performance and independent evidence. A fraud indicator is a reason to investigate, not a finding of fraud by itself.

Test cut-off in both directions

Direction	Work to do	Assertions
From ledger to delivery or performance	Select transactions recorded around year end. Compare contracts, delivery or activation records, customer acceptance and subsequent returns to the recognition date. Include sales posted in the next period where that helps detect delayed recognition.	Occurrence and cut-off, with accuracy where relevant
From delivery or performance to ledger	Start from a separately tested dispatch or service-completion population on both sides of year end. Trace items to the sales or contract register and ledger; investigate unrecorded or differently dated items.	Completeness and cut-off

A 15-day window before and after year end is one possible starting point, not a requirement. The final 15 days of March are 17–31 March inclusive. Size the sample and period from the assessed risk, shipment and billing cycles and the quality of controls. Check population completeness, cancelled documents, posting dates and subsequent credit notes. Corroborate management explanations; neither a gate pass nor an e-way bill alone proves transfer of control.

Audit over-time revenue and contract balances

• Assess all three tests in Ind AS 115 paragraph 35. Under 35(a), the customer simultaneously receives and consumes the benefits as the entity performs; under 35(b), the customer controls the asset as it is created or enhanced. Under 35(c), the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance to date. A contractual cancellation clause is relevant but enforceability also depends on law and the full facts.
• Select an input or output method that faithfully depicts progress. If using cost-to-cost, verify eligible incurred costs and expected costs to complete. Adjust for inputs that do not depict performance, including specified wasted costs and cases involving uninstalled materials. Compare management estimates with budgets, project data, milestones and subsequent developments, without using hindsight inappropriately.
• Corroborate progress through reliable evidence; an engineer's certificate can help, but is not universally mandatory or conclusive. When using an auditor's expert, apply SA 620 and evaluate competence, capabilities, objectivity and adequacy of work.
• Distinguish a conditional right to consideration (contract asset) from an unconditional receivable, for which only passage of time is required before payment. Where billing or payment precedes performance, assess contract liability presentation. Reconcile subsequent billing and receipts, and investigate delays. Later payment supports the audit but does not by itself prove that revenue belonged in the earlier period. Apply the relevant impairment requirements.

Management override and reporting

SA 240 paragraph 32 requires journal-entry and other adjustment testing, a review of estimates for bias including retrospective review, and consideration of the business rationale of significant unusual transactions. Ask relevant staff about unusual activity; select entries at period end and consider whether testing throughout the period is needed. Analytics can flag round sums such as ₹1 crore or ₹50 lakh, unusual debit accounts, administrators posting entries or entries created after close. Validate the ledger extract and investigate context rather than treating a date gap or amount threshold as a statutory test. Maintain control of confirmation requests under SA 505; select high-risk customers even with zero closing balances where appropriate, and investigate exceptions and non-responses.

When section 143(12) and rule 13 apply and there is reason to believe an offence of fraud by officers or employees individually involves or is expected to involve ₹1 crore or more, follow the Central Government reporting procedure using ADT-4, filed electronically under the amendment effective 14 July 2025. Under the rule, first report to the Board or Audit Committee as applicable immediately and within two days of knowledge, seek its response within 45 days, and forward the report with the response and auditor comments within 15 days of receiving it. If there is no reply within 45 days, forward the report with the prescribed note. For lesser amounts, apply the separate Board or Audit Committee reporting route. Consider other required communications, audit opinion and internal financial controls conclusions separately.

Seven worked scenarios

1. Software cut-off: In an ₹85 crore business, 25 invoices totalling ₹8.50 crore were sampled. One ₹1.20 crore invoice was posted on 29 March 2024; the key went out on 4 April and substantive acceptance occurred on 12 April. Assume a distinct right-to-use licence that could not be used before availability and that the acceptance term was substantive. Remove ₹1.20 crore from FY 2023–24 revenue and recognise it in the later period when control transfers. Assess the enforceable billing right separately: an unconditional receivable may coexist with a contract liability if billing preceded performance. Do not infer management intent from timing alone.
2. Contract progress: Assume a ₹200 crore, 36-month contract qualifies for over-time recognition and a cost-to-cost method faithfully measures performance. Management uses ₹96 crore incurred and ₹160 crore total cost: 60% progress, ₹120 crore cumulative revenue, ₹35 crore conditional contract asset after ₹85 crore billed, and ₹40 crore originally estimated total gross profit (20%). Revised costs to complete of ₹94 crore give ₹190 crore total and 50.5263% progress. Using unrounded amounts, cumulative revenue is ₹101.0526 crore and the contract asset is ₹16.0526 crore, assuming the ₹85 crore was unconditionally billed, no advance or other adjustment, and a conditional right to the remainder. The decrease is ₹18.9474 crore; with current cost unchanged this is also the cumulative pre-tax profit reduction. Distinguish a current estimate update from an earlier error.
3. Distributor side letters: A business sells through 40 distributors. The last ten days' daily run rate is 340% above the normal rate (4.4 times). Confirm terms directly with selected distributors and examine later returns, payments and side letters. A balance of ₹15 lakh versus ₹1.85 crore in the ledger differs by ₹1.70 crore. If evidence shows ₹6.20 crore recorded across six distributors relates to consignment stock still controlled by the supplier, reverse that revenue and assess inventory and receivable entries. For a genuine transfer with a right of return, apply B20–B27 (expected revenue, refund liability and recovery asset); a return right alone does not prevent control transfer. Evaluate statutory fraud reporting independently.
4. Bill-and-hold: An invoice for 10,000 TVs totals ₹22 crore, or ₹22,000 each. Apply B81: substantive reason for the arrangement, separate identification as the customer's goods, readiness for transfer, and no ability to use the goods or redirect them. Assume the vendor requested the hold for its own targets, inventory was pooled, and units could be redirected, even though the goods were ready. The conditions fail. Reverse ₹22 crore of prematurely recognised revenue if fully recorded and assess inventory, billing and any remaining custody service separately.
5. Hardware, installation and subscription: Assume all three are distinct. The ₹1,20,000 transaction price equals total standalone prices: ₹60,000 hardware, ₹20,000 installation and ₹40,000 for 12 months' service. Allocation is 50%, 16⅔% and 33⅓%. Recognise hardware on transfer, installation as or when its own performance obligation is satisfied, and the service over the term if that depicts performance. The average monthly service revenue is ₹3,333.33; handle final rounding. Across 5,000 identical packages with the whole subscription billed and no service yet provided, ₹20 crore relates to the subscription contract liability. If installation is also unperformed, assess an additional ₹10 crore attributable to that obligation on these assumptions.
6. E-way bill exceptions: Of ₹110 crore of reported sales, 42 invoices of ₹4.85 crore have no matching e-way bills. Compare consignment values, transport mode, routes, dates, records and rule 138 exceptions, including non-motorised conveyances. A motorised local vehicle is not exempt solely because it is small or local. Missing e-way bills do not establish fictitious sales. If independent evidence confirms no underlying sale or performance for all 42 invoices, ₹4.85 crore is the potential revenue reversal before separate tax and balance adjustments.
7. Holding company rebuttal: A holding company's only income is dividends from a wholly owned subsidiary. In standalone accounts confirm the applicable framework, the established right to payment, recognition timing, board or member approvals and independent evidence. Consider related-party influence and any period-end incentive. This fact pattern may support a reasoned rebuttal, but a single income stream or receipt of cash does not prove it. Document the conclusion and keep management override procedures.

Frequently asked questions

Is management's explanation enough for cut-off?

Corroborate it with sufficient appropriate evidence. Depending on the transaction, useful evidence can include contract terms, system and transport records, customer acceptance and independent confirmation.

How are delay damages treated?

If they affect consideration promised under the customer contract, assess variable consideration and the constraint under Ind AS 115. Include only the amount for which it is highly probable that no significant reversal of cumulative recognised revenue will occur when the uncertainty resolves. The treatment of an unrelated obligation can differ.

Does a trial always prevent revenue?

Where the customer is not committed to pay until acceptance or expiry of a trial, the Ind AS 115 guidance generally defers transfer of control. Distinguish that from an acceptance formality where the entity can objectively demonstrate compliance with agreed specifications.

How can teams use analytics?

Use verified data to compare dispatch, invoicing, contract progress, subsequent receipts and unusual journals. Retain the evidence, exceptions, conclusions and approvals. The auditor remains responsible for the assessment and report.

Sources

• ICAI: SA 240, Auditor Responsibilities Relating to Fraud
• ICAI: SA 505, External Confirmations
• ICAI: SA 620, Using the Work of an Auditor’s Expert
• ICAI: Standards on Auditing and related standards
• MCA: Ind AS 115, Revenue from Contracts with Customers
• MCA: Companies (Audit and Auditors) Amendment Rules, 2015, rule 13
• Gazette: G.S.R. 359(E), electronic ADT-4 from 14 July 2025
• Companies Act, 2013: section 143
• CBIC: CGST Rules, including rule 138
• CGST Rules: rule 138 text