Auditing Public Relations Services:
Key Considerations for Hong Kong Auditors
Public relations (PR) services are a crucial part of modern business, shaping and managing the communication between organizations and their stakeholders. As a Hong Kong auditor, understanding the intricacies of auditing companies in this industry, under the Hong Kong Financial Reporting Standards (HKFRS) framework, is vital. In this blog post, we will explore the key aspects to consider when auditing PR service providers and highlight the exceptional capabilities of our Audit Program 3.0, which can significantly reduce time costs and generate customized illustrative documentation for audit engagements.
Part 1: Revenue Recognition in Public Relations Services
Accurate revenue recognition is essential when auditing PR service providers. Given the unique characteristics of the industry, it’s crucial 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 PR industry, this may involve evaluating various components such as consulting, media relations, or event management.
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 bonuses or contingent fees, 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 PR 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 Public relations 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:
“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 PR services, this might include contracts for media relations, event management, social media marketing, or other PR-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 PR services, an example of a distinct performance obligation might be a specific media campaign, a press release, or an organized event.
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 PR company might charge a fixed fee for a press release or a variable fee based on the number of media impressions generated by a campaign.
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 PR services, this might occur at different stages, depending on the nature of the service. For example:
– Media campaigns: Revenue could be recognized over time as the campaign progresses or upon completion of the campaign, depending on the specific terms of the contract. Key documents that could help the accounts team in assessing the revenue recognition criteria include campaign plans, progress reports, media monitoring reports, and invoices.
– Press releases: Revenue might be recognized when the press release is published and distributed to the target audience, as this is when the customer obtains control of the service. The accounts team can refer to the published press release, distribution reports, and invoices to determine the appropriate revenue recognition.
– Event management: Revenue for event management services is typically recognized over time, as the service is provided throughout the planning and execution of the event. The accounts team can refer to event plans, progress reports, event budgets, and invoices to determine the appropriate revenue recognition.”
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 PR 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 PR 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 Public Relations Services industry when applying HKFRS as follows. This documentation would typically be included in section C5.1 of the APM:
“Control Activities
1. Approval of Client Contracts (Preventive Control)
Step-by-step walkthrough:
1. The Director reviews and approves all client contracts before they are signed to ensure they contain accurate pricing and payment terms.
2. The Accounts Manager verifies that the contract terms are consistent with the company’s pricing policies and revenue recognition criteria.
3. The Operations Manager reviews the contract terms to confirm the project scope and deliverables.
4. The approved contract is stored in a secure location, and electronic copies are saved in a centralized document management system.
Periodic Progress Reports and Revenue Recognition (Detective Control)
Step-by-step walkthrough:
1. The Operations Manager monitors the progress of PR projects and documents project milestones in periodic progress reports.
2. The Accounts Manager reviews the progress reports to determine the appropriate stage of completion for revenue recognition based on the terms of the client contracts.
3. The Accounts Clerk updates the revenue recognition schedule based on the progress reports and the Accounts Manager’s instructions.
4. The Accounts Manager reviews the updated revenue recognition schedule for accuracy and completeness.
Invoice Generation and Approval (Preventive Control)
Step-by-step walkthrough:
1. The Accounts Clerk prepares client invoices based on the revenue recognition schedule and the terms of the client contracts.
2. The Accounts Manager reviews and approves the invoices for accuracy, ensuring they match the revenue recognition schedule and contract terms.
3. The approved invoices are sent to clients, and electronic copies are saved in the document management system.
Posting Sales Receipts and Reconciliations (Detective Control)
Step-by-step walkthrough:
1. The Accounts Clerk records sales receipts in the accounting system upon receiving payments from clients.
2. The Accounts Manager reviews the sales receipts for accuracy and completeness, ensuring they match the amounts invoiced.
3. The Accounts Manager periodically reconciles the sales receipts with the bank statements to detect any discrepancies or irregularities.
4. The Accounts Manager investigates any identified discrepancies or irregularities and resolves them in a timely manner.
Periodic Review of Financial Statements (Detective Control)
Step-by-step walkthrough:
1. The Accounts Manager prepares the financial statements in accordance with HKFRS.
2. The Director reviews the financial statements for accuracy and compliance with HKFRS, focusing on revenue recognition and sales receipt postings.
3. The Director and Accounts Manager discuss any identified issues or discrepancies and take corrective actions as necessary.
4. The approved financial statements are stored in a secure location, and electronic copies are saved in the document management system.
This audit documentation, prepared in accordance with Hong Kong Standards on Auditing (HKSA) 230 Audit Documentation and HKSA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, provides a detailed description of the internal controls on revenue recognition, sales receipts, and sales posting for a small-sized public relations services company. The documentation outlines the control activities, the individuals responsible for performing each control, the frequency of each control activity, and a step-by-step walkthrough of the process flow for each control.”
Leveraging Audit Program 3.0 for Enhanced Efficiency
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In conclusion, understanding revenue recognition and internal controls is crucial when auditing PR 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.