How would you audit deferred revenue or customer advances for pre-sales in property development?

• A. Record revenue when cash is received, regardless of performance obligations.
• B. Review contract terms, verify amounts with customers, ensure recognition aligns with performance obligations, and test that revenue is not recognized before satisfaction of obligations.
• C. Recognize revenue only at project completion.
• D. Ignore contract terms and rely on customer letters.

Answer: (B)

Revenue from pre-sales in property development must be recognized when the customer gains control of the promised asset and the seller has satisfied the specified performance obligations, not simply when cash is received. Advances from customers create a liability (deferred revenue) until the underlying obligations are met, so the auditor’s task is to verify that recognition aligns with those obligations and the transfer of control. The best approach is to review the contract to identify each performance obligation, determine the transaction price, and verify that any deposits are recorded as deferred revenue until the obligations are satisfied. The auditor should confirm the recorded amounts with customers, test that revenue is not recognized before the obligations are fulfilled, and perform cut-off testing to ensure proper timing and disclosures. Recognizing revenue upon receipt of cash ignores performance obligations; recognizing only at project completion may misstate progress and timing; and ignoring contract terms would undermine the reliability of the financial statements.