Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to the credit of sales revenue. A problem with its control system means that the proper allocation of revenue between ‘sales revenue’ recorded in the profit and loss and the ‘deferred revenue’ account balance in the balance sheet does not always occur.

The auditor is considering conducting additional substantive testing to determine whether the sales transactions have been properly classified.

Required

Explain the type of misstatements in the balance sheet and income statement that the auditor should be expecting if the controls regarding the proper allocation of revenue are not functioning properly.