Auditing Human Resources Services:
Key Considerations for Hong Kong Auditors
Human resources (HR) services play a vital role in the modern business landscape, providing essential functions such as recruitment, training, and personnel management. As a Hong Kong auditor, understanding the intricacies of auditing companies in this industry, under the Hong Kong Financial Reporting Standards (HKFRS) framework, is critical. In this blog post, we will delve into the key aspects to consider when auditing HR service providers and showcase the remarkable capabilities of our Audit Program 3.0, which can dramatically reduce time costs and generate customized illustrative documentation for audit engagements.
Part 1: Revenue Recognition in Human Resources Services
Accurate revenue recognition is a crucial component when auditing HR service providers. Given the unique characteristics of the industry, it’s essential to understand the specific rules and guidelines surrounding revenue recognition for these businesses. Key factors to consider include:
1. Identifying the contract: Ensure a legally enforceable contract exists between the company and its clients, outlining the rights, obligations, and payment terms for all parties involved.
2. Identifying performance obligations: Analyze the services promised to clients and determine if they constitute separate performance obligations. In the HR industry, this may involve evaluating various components such as recruitment, training, or payroll administration.
3. Determining the transaction price: Examine the contract to identify the total amount the company expects to receive in exchange for fulfilling its performance obligations. Consider any variable consideration, such as performance-based fees or contingent payments, that may affect the transaction price.
4. Allocating the transaction price: Allocate the transaction price to each performance obligation based on the relative standalone selling price.
5. Recognizing revenue: Recognize revenue when the company satisfies a performance obligation by transferring control of a service to the client. For HR service providers, this typically occurs upon completion of a specific project or over time as services are rendered.
Illustrative Example 1: Application of HKFRS 15 - Revenue Recognition
For example, Audit Program 3.0 would include the following audit documentation on the Revenue Recognition in the human resources (HR) services industry when applying HKFRS as follows. This documentation would typically be included in the Engagement Planning Meeting Minutes in Section C of the APM:
“As an experienced auditor, I would like to guide you through the revenue recognition process for a typical mid-sized company engaged in human resources services under Hong Kong Financial Reporting Standards (HKFRS), specifically HKFRS 15 “Revenue from Contracts with Customers.”
1. Identify the contract with a customer
The first step is to identify the contract between the entity and the customer. In the context of human resources services, this might include contracts for recruitment, employee training, payroll management, or other HR-related services. The entity must have a legally enforceable agreement with the customer, and both parties should have approved the contract and be committed to fulfilling their performance obligations.
2. Identify separate performance obligations
The entity must identify all distinct performance obligations within the contract. These are the promises to transfer goods or services to the customer. In the case of HR services, an example of a distinct performance obligation might be the successful placement of a candidate in a job position or the completion of a specific training course.
3. Determine the transaction price
The transaction price is the amount of consideration the entity expects to receive in exchange for transferring the promised goods or services to the customer. This may include fixed fees, variable fees, or a combination of both. For example, a recruitment company might charge a fixed fee for each candidate placed or a percentage of the candidate’s annual salary.
4. Allocate the transaction price to the separate performance obligations
The entity should allocate the transaction price to each performance obligation based on the relative standalone selling prices of the goods or services being provided. If standalone selling prices are not directly observable, the entity can estimate them using appropriate methods such as the adjusted market assessment approach, the expected cost plus a margin approach, or the residual approach.
5. Recognize revenue when (or as) each performance obligation is satisfied
Revenue is recognized when the entity satisfies a performance obligation by transferring control of a good or service to the customer. In the case of HR services, this might occur at different stages, depending on the nature of the service. For example:
– Recruitment services: Revenue could be recognized when the candidate is successfully placed in a job position, and the customer has accepted the candidate. Key documents that could help the accounts team in assessing the revenue recognition criteria include signed placement agreements, candidate acceptance confirmations, and invoices.
– Training services: Revenue might be recognized upon completion of the training course or, in some cases, over time as the training is delivered. Attendance records, course completion certificates, and periodic progress reports could serve as evidence for the accounts team to determine the appropriate revenue recognition.
– Payroll management services: Revenue for payroll management services is typically recognized over time, as the service is provided on an ongoing basis. The accounts team can refer to service agreements, periodic invoices, and time records to determine the appropriate revenue recognition.
In conclusion, a mid-sized company engaged in human resources services should recognize revenue under HKFRS 15 by following the five-step model outlined above. The accounts team should rely on key documents and records specific to the industry to assess the point of revenue recognition and ensure that revenue is recognized in compliance with the applicable financial reporting framework.”
Part 2: Understanding the Design and Implementation of Internal Controls within the Revenue Recognition Business Process
Evaluating the design and implementation of internal controls related to revenue recognition is vital when auditing HR service providers. Key areas to assess include:
1. Segregation of duties: Assess whether there is an appropriate division of responsibilities among employees involved in the revenue recognition process to minimize the risk of errors or fraud.
2. Authorization and approval: Verify that contracts, pricing changes, and discounts are authorized and approved by the appropriate personnel.
3. Revenue recognition policies and procedures: Review the company’s policies and procedures for recognizing revenue to ensure they comply with HKFRS 15 requirements.
4. Periodic review and reconciliation: Confirm that revenue transactions are periodically reviewed and reconciled to supporting documentation, such as contracts and invoices.
5. Monitoring and review of variable consideration: Examine the company’s process for reviewing and updating estimates related to variable consideration, which may affect revenue recognition.
Understanding the intricacies of revenue recognition and internal controls in HR service providers can help auditors provide valuable insights and support to their clients.
Illustrative Example 2: System Notes on Internal Controls in Revenue Business Process
For example, Audit Program 3.0 would include the following illustrative audit documentation when understanding the internal controls in the revenue business process of a client operating in the a Human Resources Services industry when applying HKFRS as follows. This documentation would typically be included in section C5.1 of the APM:
“Control 1: Client Agreements Approval (Preventive Control)
Person Responsible: Director
Frequency: As needed
1. The Director reviews and approves all client agreements before they are signed.
2. The Director ensures that the agreements include the terms and conditions for the provision of HR services, including fees, payment terms, and other relevant details.
3. The Director communicates the approved agreements to the Accounts Manager and Operations Manager.
Control 2: Periodic Review of Revenue Recognition Policies (Preventive Control)
Person Responsible: Accounts Manager
Frequency: Annually or as needed
1. The Accounts Manager reviews the company’s revenue recognition policies to ensure they are aligned with HKAS 18 and other relevant standards.
2. The Accounts Manager updates the policies as needed to reflect any changes in accounting standards or business practices.
3. The Accounts Manager communicates any updates to the revenue recognition policies to the Accounts Clerk and relevant staff.
Control 3: Review of Supporting Documentation for Revenue Recognition (Detective Control)
Person Responsible: Accounts Manager
Frequency: Monthly
1. The Accounts Manager reviews the supporting documentation for revenue recognition, including client agreements, progress reports, invoices, and attendance records.
2. The Accounts Manager verifies that the revenue recognized is consistent with the terms and conditions specified in the client agreements and that the stage of completion has been correctly assessed.
3. The Accounts Manager identifies any discrepancies or errors in revenue recognition and instructs the Accounts Clerk to make the necessary adjustments.
Control 4: Separation of Duties in Sales Receipts and Sales Posting (Preventive Control)
Persons Responsible: Accounts Clerk and Accounts Manager
Frequency: Ongoing
1. The Accounts Clerk is responsible for preparing and issuing invoices to clients for services rendered, based on the approved client agreements and supporting documentation.
2. The Accounts Clerk records payments received from clients in the company’s accounting system and prepares a daily cash receipt report.
3. The Accounts Manager reviews the daily cash receipt report and verifies the accuracy of the sales postings in the accounting system.
4. The Accounts Manager investigates any discrepancies or unusual transactions and takes appropriate action, such as correcting errors or escalating concerns to the Director.
Control 5: Reconciliation of Sales Receipts to Bank Deposits (Detective Control)
Person Responsible: Accounts Manager
Frequency: Monthly
1. The Accounts Manager obtains the company’s bank statements and reconciles the sales receipts recorded in the accounting system to the bank deposits.
2. The Accounts Manager investigates any discrepancies or unreconciled items and takes appropriate action, such as correcting errors or following up with clients on outstanding payments.
3. The Accounts Manager documents the reconciliation process and any adjustments made, ensuring a clear audit trail.
These internal controls, when effectively designed and operated, can help prevent, detect, and correct misstatements in the financial statements related to revenue recognition, sales receipts, and sales posting for a small-sized entity providing human resources services under HKFRS.”
Leveraging Audit Program 3.0 for Enhanced Efficiency
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In conclusion, understanding revenue recognition and internal controls is crucial when auditing HR service providers adopting HKFRS. By leveraging the power of Audit Program 3.0, Hong Kong auditors can streamline their work, enhance efficiency, and elevate audit quality to new heights. Experience the transformative impact of Audit Program 3.0 on your practice and watch your client relationships thrive.