Area of focus Risk of fraud in revenue recognition
Refer to pages 40 to 47 (Risk management/Principal risks and uncertainties), pages 70 to 75 (Audit & Risk Committee report), note 1 (Accounting policies and presentation) and note 2 (Segmental analysis). We focused on this area because while the majority of the Group’s revenue is generated from non-complex revenue recognition, an element is made up of a number of complex revenue recognition policies, which require the Directors to exercise judgement and therefore revenue could be subject to material misstatement, whether due to fraud or error. This specifically includes judgement over whether revenue has been earned, can be recognised and the subsequent value at which to recognise this revenue. These complexities and judgements include, but are not limited to: • risk and revenue sharing partnerships (RRSPs) in GKN Aerospace where GKN is entitled to a set percentage of revenue per completed aircraft as contractually agreed with the programme partner, which requires the Directors to exercise judgement as to how much revenue to recognise reflecting the quantum of products despatched by the engine manufacturer and the difference in pricing of original engine manufacturer parts and spare parts at the year-end; • pricing of non-contractually agreed elements of revenue, including rebates and ongoing pricing discussions, which requires a level of judgement to be applied by the Directors over how much revenue to recognise; and • the unbundling of complex contracts and multiple element arrangements, which requires the Directors to exercise judgement over the appropriateness of the accounting treatment for each individual part of the contract or arrangement. In addition, we also focused on this area because the GKN short-term variable remuneration scheme (STVRS) of the Directors and senior management is significantly driven by financial measures including revenue, which we concluded gave a greater risk of manipulation of judgements around revenue recognition to ensure that STVRS targets are achieved.
How our audit addressed the area of focus