Question
QUESTION 2 You are the senior-in-charge of Billboards (Pty) Ltd (Billboard), a company incorporated in June 2022, and you are presently engaged on the 31
QUESTION 2 You are the senior-in-charge of Billboards (Pty) Ltd (Billboard), a company incorporated in June 2022, and you are presently engaged on the 31 March 2023 yearend audit. Billboard generates its revenue from the design, placement, and maintenance of small billboards on lampposts located along freeway roads in South Africas major cities. Most Billboards clients are small businesses.
Contracts entered with clients contain, amongst others, the following terms:
At the commencement of the contract clients pay Billboards a once-off fee for the right to advertise on billboards for a three-year period.
Clients pay fees for the maintenance of the billboards monthly in advance to Billboards. You are aware that Billboards prepares detailed estimates of the maintenance costs for each contract to ensure that the agreed maintenance fee will generate a reasonable profit. Maintenance costs are not incurred evenly over the period of the contract.
Clients are also charged for the design and set-up of their billboards and are invoiced separately for this work on its completion. Billboards financial director has informed you that revenue will be recognized on a stage of completion basis. Maintenance fees for each contract will be recognized based on the ratio of costs incurred to date to the estimated total maintenance costs for the contract, whereas for the once-off fee, revenue will be recognized on a time allotted basis. You are satisfied with this approach. However, in view of the companys profit history and its current financial position, you consider that there is a significant risk that Billboard management may have deliberately overstated the companys profitability by prematurely recognizing revenue.
You have already documented the system of internal controls over the recording of revenue and have satisfactorily tested controls over:
The day-to-day recording of amounts invoiced to clients.
The recording of receipts from clients.
The maintenance of the accounts receivable records; and
The integrity and mathematical accuracy of related reports and schedules.
The audit procedures have enabled you to conclude satisfactorily on all aspects of revenue and accounts receivable, except for the accuracy and cut-off assertions in respect of revenue and the valuation and allocation in respect of deferred revenue reflected in the statement of financial position at 31 March 2023.
Required
Describe the substantive procedures that you would perform to determine whether revenue from the once-off fees and the monthly maintenance fees is accurately recorded in the appropriate financial year (Ignore VAT and other tax implications as well a possible time value of money possible impact). 15 marks.
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