IT and Software Services Audit: Revenue, Utilisation and Unbilled Work

An IT services audit checks that revenue is recognised for work actually delivered, that unbilled and billed-in-advance balances are right, that people cost agrees to the staff who really worked, and that export of services is documented. The product is people's time, so the audit follows time from timesheet to invoice to cash.

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What is distinctive about IT services

• Revenue comes from time-and-material contracts, fixed-price projects, managed services, licences and support, often in the same company.
• Customers are often abroad, so invoices are in foreign currency and exchange differences arise.
• Work in progress is invisible. Unbilled revenue can be large and hard to see.
• People cost is the main cost, and utilisation (billable hours as a share of available hours) drives profit.
• Subcontractors, freelancers and group companies supply part of the delivery.
• Intellectual property, software development cost and cloud spending raise capitalisation questions.
• Group entities often charge each other, which brings transfer pricing into view.

Key risks

1. Revenue ahead of delivery. Fixed-price projects booked at an optimistic percentage of completion.
2. Unbilled revenue that cannot be billed. Work done outside contract scope or on disputed milestones.
3. Timesheet fraud or error. Hours billed that were not worked, or bench staff charged to clients.
4. Revenue cut-off. Month-end invoices, credit notes and milestone acceptances in the wrong period.
5. Foreign currency. Wrong rates and unrealised gains or losses.
6. Export compliance. Receipt of foreign exchange and tax treatment of export of services.
7. Development cost. Internal product development costs capitalised without meeting the standard's tests.
8. Payroll and contractor classification. Statutory dues on staff and on freelancers.

Audit programme in steps

Step 1: Map revenue streams and contract types

Group customers by contract type. For each stream note the billing basis, recognition method, currency and system. Read a sample of master service agreements and statements of work for scope, milestones, acceptance, penalties and termination.

Step 2: Test time-and-material revenue

Pick a sample of invoices. Trace hours billed to approved timesheets, then to the customer's approval where it exists. Check billing rates against the rate card or contract. Compare hours billed per person to attendance, leave and public holidays. Resources billed for more than a normal working month deserve review.

Step 3: Test fixed-price revenue

For Ind AS entities, the five-step approach applies and our Ind AS 115 audit guide gives the tests. For each fixed-price project:

• Recompute percentage of completion from actual cost to date and the latest estimate to complete.
• Compare estimates to project manager updates over several months to see if forecasts keep slipping.
• Read customer correspondence for disputes, change requests and acceptance delays.
• Check for onerous contracts where costs now exceed revenue.

Step 4: Test unbilled and advance balances

List unbilled revenue by customer and age. Match each item to delivery evidence and the next invoice. Old unbilled items need a reason. Review billing in advance and deferred revenue for the part of the year not yet earned. See the order-to-cash checklist.

Step 5: Test revenue cut-off

Examine invoices and credit notes within a short window each side of year end. Confirm service delivery dates and customer acceptance. Test reversal of revenue after year end.

Step 6: Review utilisation and capacity

Compute utilisation by team from timesheets and headcount. Compare to the prior year and to budget. Low utilisation raises questions about bench cost and possible hiding of bench time inside client billing. High billing from few staff may signal timesheet inflation.

Step 7: Test foreign currency and exports

Check that invoices carry the right currency, exchange rate source and date. Match foreign receipts to bank advices and to the export documentation. Review year-end revaluation of receivables and bank balances. Check that your tax treatment of exports follows current GST and foreign exchange rules, and look at any delay in realising proceeds.

Step 8: Test payroll and contractor costs

Agree headcount to payroll and appointment records. Test statutory deductions with the payroll audit checklist. For freelancers and subcontractors, check agreements, invoices, TDS and whether they are classified correctly. Review bonus, stock option and notice-pay accruals.

Step 9: Review development cost and IP

Where product development is capitalised, ask for the evidence on technical feasibility, intention and resources, and test the hours charged to the asset. Costs of research or maintenance should be expensed. See amortisation under Ind AS 38.

Step 10: Review group and related-party charges

Check intercompany service agreements, invoices and settlement. See our related-party procedures. Ask whether transfer pricing documentation exists where the law requires it.

Step 11: Review leases and cloud costs

Office leases usually fall under lease accounting; see the lease testing checklist. Test cloud and licence costs for period allocation and unused commitments.

Common findings

• Percentage of completion based on stale estimates.
• Unbilled revenue more than a year old with no billing plan.
• Hours billed that exceed attendance.
• Revenue booked on the last day without acceptance.
• Exchange rates taken from the wrong date.
• Freelancers paid without TDS or contracts.
• Development cost capitalised with no evidence.

Which Indian rules to check

Name only. Verify current text:

• Ind AS 115 (or the AS framework for smaller entities), Ind AS 21 on foreign currency, Ind AS 38 and Ind AS 116.
• The Companies Act, 2013 and CARO.
• GST law on export of services and the related conditions.
• The Foreign Exchange Management Act and Reserve Bank rules on realisation of export proceeds.
• The Income-tax Act, including TDS and transfer pricing provisions.
• Labour laws for provident fund, ESI and gratuity.

FAQs

What is the main revenue risk?

Fixed-price projects where the forecast cost is out of date.

Why look at utilisation in an audit?

It is a quick analytical test. Revenue per head that does not fit utilisation points to billing issues.

Is unbilled revenue an asset?

Usually yes, if the right to bill exists. If not, it should not be recognised.

Related Articles

• Ind AS 115 revenue recognition audit guide
• Order-to-cash internal audit checklist
• Payroll internal audit checklist
• Lease testing checklist under Ind AS 116

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