Scenario: An auditor is auditing the revenue cycle of a software company (Issuer). The company recognizes revenue from multi-year software licenses. The auditor identifies a risk that revenue might be recognized upfront rather than ratably over the license term. <br/><br/>Which of the following controls would BEST address this risk?

Answer options:

Sales managers review monthly sales reports for accuracy.

The IT system automatically amortizes revenue based on the contract start and end dates entered, and the system configuration is tested periodically.

The CFO signs off on all contracts over $1 million.

The company maintains a manual spreadsheet reconciling billings to revenue.

How to approach this question

Match the Risk (Calculation/Timing) to the Control (Automated Calculation).

Full Answer

B.The IT system automatically amortizes revenue based on the contract start and end dates entered, and the system configuration is tested periodically.✓ Correct

For risks involving complex calculations or systematic processing (like ratable revenue recognition), automated application controls are generally most effective. The control ensures the system logic forces the correct accounting treatment.

Common mistakes

Relying on manual review for complex systematic calculations.

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