Case Study: Revenue Cycle Controls Audit for an IT Services Company
Connecting contract evidence, delivery milestones and revenue recognition through a structured control framework
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The business had 45 active contracts but lacked a consistent monthly mechanism connecting contract terms, delivery evidence, revenue recognised, invoices and collections.
- •Time-and-material contracts relied on monthly timesheets, but submitted hours were not consistently reconciled with invoiced hours.
- •Milestone revenue was recognised when project managers declared milestones complete rather than when client acceptance had been obtained.
- •Percentage-of-completion estimates for fixed-price contracts were determined by project managers without independent finance verification.
Northrop Execution Architecture & Methodology
Executive Mandate Overview
An IT services and consulting company generated Rs 28 crore of annual revenue across 45 active contracts. Revenue was recognised through time-and-material, milestone-based and fixed-price arrangements, but the controls connecting contract performance to accounting entries were inconsistent.
The engagement focused on establishing whether recognised revenue was supported by evidence and whether the company's revenue cycle controls aligned with Ind AS 115.
Contract-to-Revenue Mapping
Northrop mapped every active contract from its commercial terms through revenue recognition, invoicing, collections and outstanding deliverables.
The exercise identified eight contracts where recognised revenue exceeded the documented stage of completion, resulting in Rs 1.4 crore of premature recognition.
Testing Time-and-Material and Milestone Revenue
For time-and-material contracts, submitted timesheets were compared with invoiced hours. Five contracts showed aggregate billing variances comprising Rs 18 lakh of over-invoicing and Rs 12 lakh of under-invoicing.
For milestone contracts, Northrop identified instances where revenue had been recognised based on internal project-manager declarations without corresponding client sign-off.
Ind AS 115 Assessment
Each revenue model was assessed against the five core areas of Ind AS 115: contract identification, performance obligations, transaction price, allocation and recognition as obligations are satisfied.
Two contracts required performance obligations to be separated, affecting the timing of approximately Rs 35 lakh of revenue recognition.
Verifiable Institutional Outcomes & Value Realized
- Revenue recognised ahead of the evidenced stage of completion was deferred to the periods in which the earning event could be supported.
- Reported current-year revenue reduced from Rs 28 crore to Rs 26.6 crore after correcting the timing of recognition.
- Timesheet-to-invoice reconciliation identified Rs 18 lakh of over-invoicing and Rs 12 lakh of under-invoicing across five contracts
- Two contracts required revised performance-obligation treatment, affecting the timing of approximately Rs 35 lakh of revenue recognition.
Pratham Sharma
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