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Glossary/Fraud and ethics

Revenue recognition fraud presumption

AU-C 240 presumes that improper revenue recognition is a fraud risk in every audit. The auditor may rebut the presumption for specific revenue streams only with documented reasons.

CORAA TeamUpdated November 5, 2026

Definition

AU-C 240 requires the auditor to presume that there are risks of fraud in revenue recognition. The auditor evaluates which types of revenue, transactions or assertions give rise to those risks. If the auditor concludes the presumption does not apply to a given stream, the reasons go into the working papers.

Why it matters in an audit or review

Revenue is a common target because management often has both pressure and room to act, through timing, side agreements, bill-and-hold, channel stuffing or unsupported estimates of variable consideration. The presumption forces the auditor to plan specific procedures for revenue instead of defaulting to a standard program. Rebuttal can be reasonable for simple revenue, such as rental income from a single lessee under a lease, and is hard to defend for complex or judgmental streams.

Example

Illustrative: a company has two revenue streams: a fixed monthly management fee from one related entity, and project revenue recognized over time using cost-to-cost. The auditor rebuts the presumption for the management fee, documenting that it is fixed by contract and agrees to bank receipts. For project revenue, the auditor treats estimated total cost as a significant risk and tests the estimates against vendor commitments and subsequent cost.

Common mistakes

Rebutting the presumption for a whole revenue line because revenue is a small share of the business, without addressing the types of transactions involved.

Sources

  • AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (presumed fraud risk in revenue recognition; documentation of reasons for rebuttal)
  • FASB ASC 606 (revenue from contracts with customers)

Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error

Standards

AU-C 240ASC 606

Related terms

  • Significant risk
    A significant risk is an identified risk of material misstatement that is close to the upper end of the spectrum of inherent risk, so it needs special audit consideration and a tailored response.
  • Management override of controls
    Management override of controls is the risk that management bypasses controls that otherwise work, by posting false entries or biasing estimates, and AU-C 240 treats it as present in every audit.
  • Fraud risk factors
    Fraud risk factors are events or conditions that indicate an incentive or pressure to commit fraud, an opportunity to do it, or an attitude that justifies it. They are red flags, not proof of fraud.
  • Cutoff testing
    Cutoff testing checks that transactions near period end are recorded in the correct period, usually by examining shipping, receiving and invoice dates for items either side of the balance sheet date.

Go deeper

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