REVENUE AND EXPENSES

Revenue

Revenue is the gross inflow of economic benefits or service potentials during
the reporting period when those inflows result in an increase in net assets/
equity, other than increases relating to contributions from owners. Revenue
includes only the gross inflows of economic benefits or service potential received
and receivable by the entity on its own account. Amounts collected as agent of
the government or another government organisation or on behalf of other third
parties are not economic benefits or service potential which flow to the entity,
and do not result in increases in assets or decreases in liabilities. Therefore,
they are excluded from revenue. Similarly, in a custodial or agency relationship,
the gross inflows of economic benefits or service potential include amounts
collected on behalf of the principal and which do not result in increases in net
assets/equity for the entity. The amounts collected on behalf of the principal
are not revenue. Instead, revenue is the amount of any commission received or
receivable for the collection or handling of the gross flows.
The primary issue in accounting for revenue is determining when to recognise
revenue. Revenue is recognised when it is probable that future economic benefits
or service potential will flow to the entity and these benefits can be measured
reliably.
Substantive procedures for the verification of revenue lay more emphasis on
recognition, measurement, classification, timing, and disclosures. Specific
classes of revenue may be verified using substantive procedures more suitable
for it.

Rendering of Services

When the outcome of a transaction involving the rendering of services can be
estimated reliably, revenue associated with the transaction should be
recognised by reference to the stage of completion of the transaction at the
reporting date. Substantive procedures may include the following:
(a) Verify that the amount of revenue is measured reliably;
(b) Verify that it is probable that the economic benefits or service potential
associated with the transaction will flow to the entity;
(c) Verify that the stage of completion of the transaction at the reporting
date is measured reliably; and
(d) Verify that the costs incurred for the transaction and the costs to complete
the transaction is measured reliably.

Sale of Goods

Substantive procedures may include the following:
(a) Verify that the entity has transferred to the purchaser the significant
risks and rewards of ownership of the goods;
(b) Verify that the entity retains neither continuing managerial involvement
to the degree usually associated with ownership nor effective control
over the goods sold;
(c) Verify that the amount of revenue has been measured reliably;
(d) Verify that it is probable that the economic benefits or service potential
associated with the transaction will flow to the entity; and
(e) Verify that the costs incurred or to be incurred in respect of the transaction
can be measured reliably.

Interest, Royalties and Dividends

The following substantive procedures may be used:
(a) Verify that it is probable that the economic benefits or service potential
associated with the transaction does flow to the entity;
(b) Verify that the amount of the revenue has been measured reliably;
(c) Verify that interest has been recognised on a time proportion basis that
takes into account the effective yield on the asset;
(d) Verify that royalties are recognised as they are earned in accordance
with the substance of the relevant agreement; and
(e) Verify that dividends or their equivalents are recognised when the
entity’s right to receive payment is established.

Disclosure

Substantive procedures should include the following:
(a) Confirm consistency and disclosure of the accounting policies adopted
for the recognition of revenue, including the methods adopted to
determine the stage of completion of transactions involving the rendering
of services;
(b) Verify that there is disclosure of the amount of each significant category
of revenue recognised during the period including revenue arising from:
(i) The rendering of services;
(ii) The sale of goods;
(iii) Interest; and
(iv) Royalties.
(c) Verify that there is disclosure of the amount of revenue arising from
exchanges of goods or services included in each significant category of
revenue.

Expenses

Expenses are the economic costs that a business incurs through its operations
to earn revenue. Examples of expense include payments to suppliers, employee
wages, factory leases and depreciation. In accounting,`expense’ has a very
specific meaning. It is an outflow of cash or other valuable assets from a person
or company to another person or company. This outflow of cash is generally
one side of a trade for products or services that have equal or better current or
future value to the buyer than to the seller. Technically, an expense is an event
in which an asset is used up or a liability is incurred. In terms of the accounting
equation, expenses reduce owners’ equity. Expenses are the decreases in
economic benefits during the accounting period in the form of outflows or
depletions of assets or incurring of liabilities that result in decreases in equity,
other than those relating to distribution to equity participants.
Substantive procedures for expenses aim at ensuring that assertions about
expenses in financial statements are correct, properly recorded and properly
disclosed. The following substantive procedures may be applied in the
verification of expenses:
(a) Obtain schedules of all expenses in their various classes;
(b) Obtain specimen signatures of officials mandated to authorise and
approve various classes of expenses;
(c) Select a representative sample from each class of expenses for detail
substantive test;
(d) Verify that each expense is properly authorised and approved including
approval limits for each authorising official;
(e) Verify that expenses are properly classified;
(f) Check calculations and additions for all invoices selected;
(g) Check that value for the expense is received by inspecting delivery
documents or performance reports;
(h) Check entries in expenses register and verify that they are correctly
analysed;
(i) Check posting to the general ledger; and
(j) Trace expense total to the final accounts.

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