Auditing Event Planning and Management Companies in Hong Kong: Key Considerations and Best Practices
Event planning and management companies are dynamic businesses that require astute auditing practices to ensure compliance with Hong Kong Financial Reporting Standards (HKFRS). In this blog post, we will explore essential aspects to consider when auditing companies in this industry, as well as the powerful capabilities of our Audit Program 3.0, which can help CPA firms reduce time costs and generate customized illustrative documentation for audit engagements.
Part 1: Revenue Recognition for Event Planning and Management Companies
Revenue recognition is a crucial aspect to examine when auditing event planning and management companies. To effectively assess this area, auditors should consider the following factors:
1. Identifying the sources of revenue: Event planning and management companies typically derive revenue from various sources, such as event ticket sales, sponsorship deals, consultancy fees, and equipment rentals. Understand the different sources of revenue and the applicable recognition criteria for each.
2. Timing of revenue recognition: Assess whether revenue is recognized over time or at a specific point in time. For instance, ticket sales may be recognized when the event takes place, while consultancy fees could be recognized over the duration of a contract.
3. Deferred revenue: Verify that revenue is deferred when the company receives payments in advance for services that have not yet been rendered, such as event deposits or prepaid sponsorship agreements.
4. Contract accounting: Review the criteria for recognizing revenue under HKFRS 15, particularly when it comes to contracts with multiple performance obligations, such as event production and equipment rental services.
5. Sales of goods or services: Examine the revenue recognition policies for sales of goods or services, ensuring they align with HKFRS requirements.
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 Event planning and management industry when applying HKFRS as follows. This documentation would typically be included in the Engagement Planning Meeting Minutes in Section C of the APM:
“Revenue Recognition for a Mid-Sized Event Planning and Management Company under Hong Kong Financial Reporting Standards (HKFRS)
This discussion provides a detailed explanation of how a typical mid-sized event planning and management company, with an annual revenue of about $90 million, would recognize revenue under the Hong Kong Financial Reporting Standards (HKFRS). The explanation will cover the determination of the point of revenue recognition, the calculation of revenue, and the relevant documents within the business operations specific to this industry that would help the accounts team know when to recognize revenue.
HKFRS 15 Revenue from Contracts with Customers
Under HKFRS 15, revenue is recognized when the company satisfies a performance obligation by transferring a promised good or service to the customer. In the event planning and management industry, the primary sources of revenue are:
1. Event planning and consulting services
2. Event management services, including on-site coordination and execution
3. Ancillary services, such as equipment rentals, catering, and entertainment booking
The following sections explain how revenue is recognized for each of these categories.
Revenue Recognition for Event Planning and Consulting Services
Point of Revenue Recognition:
The revenue for event planning and consulting services is recognized over time as the services are provided to the client, in accordance with the progress of the event planning process.
How Revenue is Calculated:
1. Determine the total contract value for the event planning and consulting services.
2. Allocate the total contract value to the various stages or milestones of the event planning process, based on the agreed-upon terms in the contract.
3. Recognize revenue for each stage or milestone as it is completed and the related services are provided to the client.
Documents for Revenue Recognition in Event Planning and Consulting Services:
1. Event planning contracts: Details of the agreed-upon services, including the scope of services, contract value, and payment terms.
2. Progress reports: Records of the completion of event planning stages or milestones, including dates and descriptions of the services provided.
3. Invoices and payment records: Documentation of invoicing and receipt of payments from clients.
Revenue Recognition for Event Management Services
Point of Revenue Recognition:
The revenue for event management services, including on-site coordination and execution, is recognized when the event is completed and the related services have been provided to the client.
How Revenue is Calculated:
1. Determine the total contract value for the event management services.
2. Recognize the total contract value as revenue upon completion of the event and the provision of the management services to the client.
Documents for Revenue Recognition in Event Management Services:
1. Event management contracts: Details of the agreed-upon services, including the scope of services, contract value, and payment terms.
2. Event completion reports: Records of the event management services provided, including date, location, and confirmation of service completion.
3. Invoices and payment records: Documentation of invoicing and receipt of payments from clients.
Revenue Recognition for Ancillary Services
Point of Revenue Recognition:
The revenue for ancillary services, such as equipment rentals, catering, and entertainment booking, is recognized when the related goods or services are provided to the client.
How Revenue is Calculated:
1. Determine the total contract value for the ancillary services, based on the agreed-upon terms in the contract.
2. Recognize the total contract value as revenue when the goods or services are provided to the client.
Documents for Revenue Recognition in Ancillary Services:
1. Ancillary service contracts or addendums: Details of the agreed-upon services, including the scope of services, contract value, and payment terms.
2. Service or goods delivery records: Records of the provision of ancillary services or goods to the client, including dates and descriptions of the services or goods provided.
3. Invoices and payment records: Documentation of invoicing and receipt of payments from clients.
By understanding the nature of the event planning and management industry and applying the principles of HKFRS 15, a mid-sized event planning and management company with an annual revenue of about $90 million can ensure accurate and compliant revenue recognition in accordance with the Hong Kong Financial Reporting Standards (HKFRS). This detailed explanation will enable the accounts team to know when to recognize revenue for each type of service provided by the company.”
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 event planning and management companies. 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 requirements.
4. Periodic review and reconciliation: Confirm that revenue transactions are periodically reviewed and reconciled to supporting documentation, such as contracts, invoices, or payment records.
5. Monitoring and review: Examine the company’s process for tracking and updating revenue-related estimates, such as deferred revenue or sponsorship milestones, to ensure accurate recognition.
Understanding the nuances of revenue recognition and internal controls in event planning and management companies 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 Event planning and management industry when applying HKFRS as follows. This documentation would typically be included in section C5.1 of the APM:
“ Control 1: Approval of Event Contracts
Type of Control: Preventive
Position Responsible: Director
Frequency: Each contract
Step-by-Step Walkthrough:
1. The Accounts Clerk prepares an event contract, including the scope of services, contract value, and payment terms, based on the agreement with the client.
2. The Director reviews the contract to ensure it accurately reflects the agreed-upon terms and conditions.
3. The Director approves the contract by signing it.
4. The Accounts Clerk files the approved contract in the company’s document management system.
Control 2: Periodic Review of Revenue Recognition
Type of Control: Detective
Position Responsible: Accounts Manager
Frequency: Monthly
Step-by-Step Walkthrough:
1. The Accounts Manager reviews monthly revenue reports prepared by the Accounts Clerk, ensuring revenue has been recognized in accordance with HKFRS 15 and the company’s revenue recognition policies.
2. The Accounts Manager verifies that revenue is recognized appropriately for each category of services, including event planning and consulting, event management, and ancillary services.
3. The Accounts Manager investigates any discrepancies or deviations from the company’s revenue recognition policies.
4. The Accounts Manager documents the review, including any findings and corrective actions taken, in a monthly revenue recognition review report.
Control 3: Segregation of Duties in Sales Receipts and Posting
Type of Control: Preventive
Position Responsible: Accounts Manager
Frequency: Ongoing
Step-by-Step Walkthrough:
1. The Accounts Clerk prepares invoices for clients based on the approved contracts and provides them to the clients.
2. The Accounts Clerk receives payments from clients and records them in the company’s accounting system.
3. The Accounts Manager reviews and approves the posting of sales receipts in the accounting system, ensuring that payments are accurately recorded and allocated to the appropriate revenue accounts.
4. The Accounts Manager periodically reviews the Accounts Clerk’s access to the accounting system, ensuring that the segregation of duties is maintained.
Control 4: Reconciliation of Client Payments and Bank Deposits
Type of Control: Detective
Position Responsible: Accounts Manager
Frequency: Monthly
Step-by-Step Walkthrough:
1. The Accounts Clerk prepares a monthly report of client payments received, including the dates, amounts, and invoice numbers.
2. The Accounts Manager independently reconciles the client payments report with the company’s bank statements, ensuring that all payments have been accurately recorded and deposited in the bank.
3. The Accounts Manager investigates any discrepancies between the client payments report and the bank statements.
4. The Accounts Manager documents the reconciliation, including any findings and corrective actions taken, in a monthly client payments and bank deposits reconciliation report.
Control 5: Review of Completed Events and Ancillary Services
Type of Control: Detective
Position Responsible: Operations Manager
Frequency: Each event
Step-by-Step Walkthrough:
1. The Operations Manager reviews the completion reports for each event, including the event management services provided and the provision of ancillary services or goods to the client.
2. The Operations Manager verifies that the services and goods provided align with the terms in the event contracts and addendums.
3. The Operations Manager signs off on the completion reports to confirm the satisfactory delivery of services and goods.
4. The Operations Manager provides the signed completion reports to the Accounts Clerk for revenue recognition purposes.
By implementing these internal controls on revenue recognition, sales receipts, and sales posting, the audit client can effectively prevent, detect, and correct misstatements in their financial statements, ensuring compliance with Hong Kong Financial Reporting Standards and Hong Kong Standards on Auditing.”
Leveraging Audit Program 3.0 for Enhanced Efficiency
Now, let’s discuss the transformative capabilities of Audit Program 3.0. This powerful software automates the generation of customized audit programs, risk identification and assessments, and internal control documentation. By selecting the client’s industry and financial reporting framework, Audit Program 3.0 creates tailored working papers that save time and effort while ensuring compliance with AFRC standards.
In conclusion, understanding revenue recognition and internal controls is crucial when auditing event planning and management companies 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.