Revenue Recognition Under ASC 606: Where Growing Companies Trip Up in an Audit
Why revenue is the hardest part of the audit
Revenue is the most scrutinized number in your financial statements. Auditing standards go so far as to presume that revenue recognition carries a risk of fraud, which means auditors will always test it hard — cut-off, contracts, and policy. It’s also the area where growing companies most often get it wrong, usually not from bad intent but from applying an intuitive “we invoiced it, so it’s revenue” rule instead of the actual standard.
The standard: ASC 606’s five-step model
Under FASB ASC 606 — the revenue recognition standard that’s applied to private companies since 2019 — revenue is recognized as you transfer promised goods or services to a customer, in the amount you expect to be entitled to. The standard lays out five steps:
- Identify the contract with the customer.
- Identify the performance obligations — the distinct promises in that contract.
- Determine the transaction price — including variable consideration like discounts, rebates, or refunds.
- Allocate the transaction price to each performance obligation.
- Recognize revenue as (or when) each performance obligation is satisfied.
The key idea: revenue follows delivery of the promise, not the invoice and not the cash.
Where growing companies trip up
The same handful of errors show up again and again:
- Recognizing on invoice or payment, rather than as obligations are satisfied — a real problem for subscriptions, implementation services, and anything delivered over time.
- Bundled deals treated as one line. A contract with software, onboarding, and support is often multiple performance obligations that should be separated and allocated.
- Ignoring variable consideration. Discounts, rebates, service credits, and refund rights change the transaction price and often should be estimated up front.
- Weak cut-off. The most common audit adjustment of all: revenue booked in December for something delivered in January (or vice versa). Clean cut-off is where audits are won or lost.
- Upfront fees and nonrefundable payments recognized immediately when they should be spread over the service period.
Getting ready before fieldwork
You don’t need to be a technical accountant to be ready — you need three things in order: a written revenue recognition policy that reflects the five-step model and how it applies to your contracts; consistent application of that policy across deals; and clean cut-off supported by evidence that ties revenue to delivery. If a deferred-revenue schedule reconciles to your contracts and your cut-off holds up, the revenue portion of your audit gets dramatically shorter.
The continuous view
Revenue errors compound quietly across a year and then all surface at once in the audit. Monitoring revenue cut-off, credit notes, and unusual discounts as they happen — instead of reconstructing them at year-end — keeps the number defensible all year and removes the single biggest source of audit adjustments.