Key audit matter, revenue recognition, contract manufacturer

[Company name] is a contract manufacturer of [precision-machined components / electronic sub-assemblies] supplied to two original equipment manufacturer customers under long-term supply agreements, and revenue of Rs [amount] crore for the year (previous year: Rs [amount] crore) represents [percentage]% of the Company's turnover. We identified this as a key audit matter because: (a) the two agreements transfer control on different terms — one on delivery to the customer's dock, the other ex-works with a contractual bill-and-hold arrangement under which finished goods are invoiced and held in the Company's own warehouse pending the customer's call-off instruction — which requires management judgement in applying Ind AS 115; (b) both agreements embed retrospective, volume-linked price step-downs recognised as variable consideration, constrained to the amount highly probable not to reverse, which is a significant estimate; (c) [percentage]% of annual revenue by value is invoiced in the last fifteen days of March; and (d) revenue carries the presumed fraud risk under SA 240.

We read both supply agreements and their amendment history and mapped each to the point at which control transfers under Ind AS 115. For the bill-and-hold arrangement, we tested each of the four criteria — a substantive reason for the arrangement, separate identification of the goods as belonging to the customer, the goods being ready for physical transfer, and the Company's inability to use the goods or direct them to another customer — against the customer's call-off correspondence and the physical segregation of goods in the warehouse, for a sample of [n] invoices covering Rs [amount] crore. We independently recomputed the variable consideration constraint from three years of actual price step-down settlement history and compared it with management's constraint. We performed forward and backward cut-off testing on invoices raised in the last and first ten days of the year, agreeing each to despatch documentation, e-way bills and, for the bill-and-hold customer, the call-off instruction. We performed the revenue analytics at C.6 — revenue realised per unit despatched, and the ratio of credit notes issued in April and May to March sales — across both customer accounts. Our procedures did not identify a material misstatement in the revenue recognised under either contract.